Cambricon Technology: Supply Chain Inflection and AI Localization Tailwind Drive Upgrade to Rmb2,000

Core Thesis

Cambricon's 1Q26 results confirm accelerating domestic AI demand and, more importantly, a faster-than-expected supply chain transition to SMIC for the MLU580, which will become the mainstream shipping product from 2H26. We raise our price target to Rmb2,000 (18% upside) and reiterate Overweight, driven by improved volume visibility and a clear roadmap to MLU690 in 4Q26. Revenue surged 160% YoY in 1Q26 to Rmb2.88bn, with prepayments rising 155% QoQ to Rmb1.9bn, signaling robust order momentum. China's AI accelerator TAM is projected to reach US$67bn by 2030 (23% CAGR from 2024), with domestic self-sufficiency rising from 41% in 2025 to 86% by 2030, creating a large window for Cambricon as the second-largest domestic supplier after Huawei Ascend.

Investment implication: The market has not fully priced in the structural improvement in supply reliability from SMIC's ramp, which de-risks future revenue delivery and accelerates Cambricon's ability to capture share in the booming localized AI chip market.

What the Market May Be Underpricing

The shift of MLU580 production to SMIC, with tape-out completed and volume shipments starting in 3Q26, marks a pivotal reduction in dependency on overseas fabrication. This was not widely expected to occur this quickly. Simultaneously, the MLU590 (fabricated overseas) is concluding deliveries, while next-gen MLU690 is on track for 4Q26. The combination of a mainstream product (MLU580) now domestic-sourced and a clear next-gen roadmap substantially improves earnings visibility for 2027–28. The 1Q26 prepayment surge is a tangible leading indicator of customer commitment.

Investment implication: The market may still apply a risk discount for supply chain uncertainty; as MLU580 ramps and MLU690 ships, that discount should narrow, supporting re-rating.

Evidence Chain

• 1Q26 results: Revenue Rmb2.88bn (+160% YoY, +53% QoQ), gross margin 54.3%, operating margin 41.4%. Stock limit-up 20% on April 30.
• Supply chain: SMIC-manufactured MLU580 tape-out completed, entering production; volume shipments expected 3Q26. MLU690 sampling 4Q26 with ~2.2x performance improvement.
• Demand: Prepayments Rmb1.9bn (+155% QoQ). ByteDance (Volcano Engine) monthly tokens surged to ~2.1 trillion, driving inference demand. Nvidia 5090D prices in China continue to rise, indicating tight supply.
• Market sizing: China AI chip TAM US$67bn by 2030; domestic chip TCO 30–60% lower than Nvidia's China variants, with comparable per-token cost.
• Earnings revisions: Revenue forecasts raised 3% for 2026, 16% each for 2027–28; EPS up 8%/15%/11% respectively. Gross margin assumptions increased to ~49–51% on better mix and scale.

Investment implication: The convergence of strong demand, improving supply, and cost competitiveness supports sustained revenue growth (99% CAGR 2025–28) and margin expansion, justifying a premium valuation.

Key Risks

• Capacity and yield constraints at SMIC for advanced nodes could delay MLU580 ramp or limit volume.
• Customer concentration – major CSPs account for a large share; order discontinuity would materially impact revenue.
• Competition intensifies – Huawei Ascend, MetaX, and others are also targeting the same market, with early signs of price pressure.
• Valuation risk – stock trades at 116x 2026e P/E and 44x 2026e P/S; any disappointment in volume or margins could lead to multiple compression.

Valuation and Trading Implications

We derive our Rmb2,000 price target from a residual income model with 8.4% cost of equity (beta 1.06, Rf 2%, ERP 6%), intermediate growth 16%, terminal growth 6%, and a higher dividend payout ratio (57%) reflecting robust cash generation. Bull/bear cases: Rmb3,778 / Rmb1,008 (implying 83x/22x 2026e P/S).

The stock's elevated absolute multiples are justified by a 94% EPS CAGR and 99% revenue CAGR over 2025–28, improving supply visibility, and strong positioning in a market that will see local content double. Key catalysts: MLU580 volume production confirmation, MLU690 launch at WAIC 2026, and sustained CSP capex growth.

Investment implication: Investors should accumulate on any supply-chain-related weakness; the risk-reward remains favorable given the structural tailwind of AI localization and improving execution visibility.

Appendix: Key Financial Estimates