According to a research report released by CLSA, China's semiconductor industry continued to be driven by AI demand and the ongoing localization trend in the third quarter of this year. Companies in AI PCB, wafer foundry, equipment, and AI computing chip segments saw steady order growth, high capacity utilization rates, and continuous earnings improvement. However, persistent tightness in upstream component supply and lengthening lead times dragged on short-term delivery progress.
The bank expects that entering the fourth quarter and 2027, upstream supply constraints will gradually ease, which would support revenue growth for companies. It favors stocks with strong fundamentals, high AI exposure, clear earnings visibility, and potential for domestic substitution.
Among the various segments, CLSA believes the fundamentals of PCB/copper-clad laminate are the strongest, benefiting from accelerating AI PCB shipments as well as cost pass-through for traditional mainstream products, product mix optimization, and capacity ramp-up. Third-quarter profitability is expected to improve significantly. For wafer foundry, demand for AI-related chips, the return of overseas orders, and domestic manufacturing continue to drive capacity utilization at high levels, with average selling prices rising quarter over quarter. However, new capacity investment and increased depreciation for advanced processes will constrain margin improvement.
On individual stocks, CLSA expects SMIC (00981) to continue its positive outlook amid strong demand, with third-quarter growth mainly driven by pricing, product mix adjustments, and improved production yields. HUA HONG GRACE (01347) guided third-quarter revenue of US$770 million to US$780 million, with an order backlog roughly 1.5 to 2 times existing capacity. Its average selling price is expected to rise another 10% to 15% by the end of 2026, with further price increases next year. CLSA forecasts that NOVOSENSE (02676) will see third-quarter revenue rise 72% to 84% year on year to RMB1.45 billion to RMB1.55 billion, benefiting from downstream recovery and volume ramp-up of AI server power-related products. The price increase effect is expected to materialize in the fourth quarter and 2027.