Cambricon: Overweight on AI Chip Dominance as Domestic CSP Buildout Accelerates and Supply Chain Shifts to SMIC

Cambricon Technology (688256.SS) is rated Overweight with a base case price target of Rmb1,342.28 (post 10-for-5 stock split). Bull case stands at Rmb2,536.79, bear case at Rmb676.21. The thesis rests on three pillars: deep integration with Chinese CSPs driving strong order visibility, domestic supply chain transition to SMIC, and an aggressive product roadmap (MLU690 in 4Q26 with ~2.2x performance uplift). Elevated P/E and P/S multiples are justified by a 99% revenue CAGR (2025-28) and improving supply reliability.

Core Thesis

Cambricon’s product-market fit in AI training and inference is proven through mass deployment of MLU590 in CSP workloads. Order visibility is high as domestic AI infrastructure scales. Production shift to SMIC, while yield-constrained near-term, is expected to improve through 2026, reducing reliance on external foundries. The next-generation MLU690 (4Q26) should sustain technology leadership. Revenue is projected to grow from Rmb16.2bn in 2026E to Rmb23.7bn in 2027E, with gross margin stabilizing at 51-49% as die-size optimization offsets price pressure.

Evidence Chain

• CSP engagement: MLU590 is widely deployed in SAD (Smart AI Deployment) workloads, underpinning recurring orders. 100% of revenue is from Mainland China, with top CSPs as primary customers.
• Supply chain transition: Production is shifting to SMIC. Yields remain a near-term challenge, but gradual improvement is expected through 2026. This move reduces geopolitical risk and aligns with domestic substitution policy.
• Product roadmap: MLU690 is scheduled for 4Q26, targeting a ~2.2x performance uplift over current generation. This should reinforce Cambricon’s competitive edge against domestic peers.
• Financial trajectory: Morgan Stanley estimates 2026E EPS of Rmb11.8, 2027E Rmb17.4, 2028E Rmb23.8. Revenue CAGR of 99% over 2025-28 assumes sustained CSP spending. Gross profit YoY growth decelerates from 438% in 2025 to 31.6% in 2028, reflecting normalization.
• Valuation: Base case 41x 2026E P/S. Bull case 77x P/S assumes >130% revenue CAGR and gross margin >55%. Bear case 20x P/S assumes <60% revenue CAGR and gross margin <40%.

Key Risks

• Capacity and yield constraints: Production at SMIC may face persistent yield issues, delaying product launches or increasing unit costs. Gross margin could fall below 40% in 2026-27 if yields do not improve.
• Customer concentration: Over-reliance on a few large CSPs. Failure to secure continuous mass orders from top-tier clients would severely disrupt revenue visibility.
• Technology iteration speed: Slower-than-expected MLU690 development or performance inferior to competitors could erode market share. Semiconductor localization efforts by other Chinese chipmakers (e.g., Huawei, Iluvatar) pose competitive threat.
• Geopolitical escalation: Further US export restrictions on advanced nodes or EDA tools could disrupt SMIC production and limit Cambricon’s ability to source leading-edge capacity.

Valuation & Trading Implications

Current price of Rmb1,362.41 (May 20, 2026) sits slightly above the base case target. The risk-reward skew is positive given the bull case offers 86% upside, while the bear case implies 50% downside. Key catalysts include quarterly order announcements from CSPs, yield updates from SMIC, and MLU690 tape-out news. Investors should watch for any signs of order concentration or yield stagnation, which could push the stock toward the bear case. The stock’s 88% consensus Overweight rating reflects broad optimism, but the high multiple leaves limited room for execution errors. We recommend building positions on any yield-related weakness.

Appendix: Key Estimates & Valuation Matrix