Bernstein - Cambricon (688256 CH): Q3 revenue misses expectations but gross ma… · @2030FY_X · TwKit

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Bernstein - Cambricon (688256 CH): Q3 revenue misses expectations but gross margin improves; inventory, prepayments, and accounts receivable climb across the board QoQ Core conclusion: Revenue growth significantly below full-year expectations, but margin expansion and inventory/receivables accumulation reveal a contradictory landscape of "strong demand, constrained delivery" Cambricon released its Q3 report, achieving Q3 revenue of RMB 3.531 billion and net profit attributable to shareholders of RMB 1.404 billion. Although revenue still recorded high YoY growth of 104.5%, it only grew 13.5% QoQ, significantly below our and the market's previous linear extrapolation expectations for full-year revenue of RMB 1.615 billion / RMB 1.711 billion, constituting a substantial miss. We believe HBM supply shortages, manufacturing capacity bottlenecks, and delayed revenue recognition are the core drags. However, gross margin improved by 259 bps QoQ to 58.7%, coupled with a simultaneous substantial accumulation of inventory, prepayments, and accounts receivable, indicating that downstream AI computing demand remains robust, and bottlenecks are concentrated on the supply side rather than the demand side. The key divergence in the current market is whether the pile-up of inventory and receivables is a signal of "proactive stocking + front-loaded delivery" or a warning of "slowing revenue recognition pace + rising collection risks." ------ 1. Revenue performance: QoQ growth misses expectations, supply bottlenecks are the main cause Q3 revenue was RMB 3.531 billion, up 104.5% YoY and 13.5% QoQ. After the Q2 miss, the market pushed some revenue recognition expectations to Q3, but the actual growth rate this quarter still fell significantly short of optimistic expectations. We believe that even if underlying AI chip demand remains strong, insufficient HBM availability and other supply chain bottlenecks will still substantially constrain earnings realization. Furthermore, investors may still be underestimating the time cycle required for CSP (cloud service provider) orders to translate into revenue recognition, which creates room for revenue to be further shifted to subsequent quarters. 2. Gross margin: Expands 259 bps QoQ to 58.7%, pricing power significantly enhanced Gross margin has expanded for multiple consecutive quarters, reaching a high of 58.7% in Q3. We interpret this as: against a backdrop of constrained supply, domestic AI fabless vendors have gained stronger pricing power and profitability on the back of strong demand. Although the company did not disclose details on product mix and manufacturing costs, the margin improvement provides a more positive assessment perspective for overall earnings quality than the revenue miss itself. 3. Working capital signals: Inventory, prepayments, and accounts receivable climb across the board, requiring a nuanced view • Inventory: Reached RMB 11.66 billion at the end of Q3, surging 41.4% QoQ (RMB 8.25 billion at the end of Q2), reflecting that the pace of procurement and production stocking is significantly faster than the pace of revenue recognition. It should be noted that inventory includes raw materials and work-in-progress, so it cannot be directly equated to the number of finished chips waiting to be recognized. • Prepayments: Supplier prepayments increased 4.5% QoQ to RMB 3.04 billion, further confirming that the company is paying in advance to lock in upstream capacity and key materials (such as HBM). • Accounts receivable: Surged from RMB 252 million at the end of Q2 to RMB 957 million, a QoQ increase of 279.8%. This change requires close tracking of the collection pace. Although Q3 achieved a net profit attributable to shareholders of RMB 1.404 billion, operating cash flow was a net outflow of RMB 84 million; the significant divergence between earnings and cash flow warrants caution. 4. Income statement overview: Profitability comprehensively beats full-year expectations, but expense side drags down OPM • Gross profit: Q3 gross profit was RMB 2.072 billion, up 121.3% YoY and 18.7% QoQ, both growing faster than revenue. • Operating profit margin (OPM): 39.8%, expanding significantly by 700 bps YoY, but narrowing by 152 bps QoQ, reflecting a seasonal or structural increase on the expense side (R&D, sales, etc.). • Net profit margin (NPM): 39.8%, expanding by 694 bps YoY, but narrowing by 196 bps QoQ. • Basic EPS: RMB 2.23, up 146.1% YoY and 7.8% QoQ. 5. Full-year outlook and valuation framework: Maintain Outperform, price target RMB 1,340 We maintain our Outperform rating on Cambricon with a price target of RMB 1,340, implying an upside of approximately 44% from the current closing price of RMB 932.20. For our valuation methodology, we apply a 91.5x P/E multiple to our 2027E EPS of RMB 14.52, corresponding to a Q4 2027 valuation window. The current stock price corresponds to 2025A/2026E/2027E P/E ratios of 284.6x / 124.4x / 64.2x, respectively, reflecting that the market has fully priced in high growth, but fluctuations in the pace of earnings release will amplify short-term valuation volatility. 6. Key risks Downside risks: • Commercialization failure of next-generation AI chips or inability to secure sufficient domestic advanced node capacity, which could lead to a significant valuation pullback; • Intensified competition from emerging domestic AI chip suppliers, presenting a risk of market share loss for Cambricon; • Given that Cambricon is on the Entity List, the US and its Western allies may continue to impose stricter sanctions. ------ Summary Cambricon presented a complex picture in Q3 of "a revenue miss but improved earnings quality, with both inventory and receivables rising." The superficial revenue slowdown reflects supply-side constraints (HBM, manufacturing capacity) and revenue recognition lags more than weakening demand. The continuous expansion of gross margin and the substantial increase in prepayments indirectly validate the company's core position in the wave of domestic substitution for AI computing power. However, the explosive growth in accounts receivable and negative operating cash flow mean that in the next phase, the market will focus on the conversion efficiency of "inventory -> revenue -> cash." Under the valuation framework of 91.5x 2027E P/E, any marginal signal of supply-side improvement could become a catalyst for upward share price revisions, but escalating sanctions and a deteriorating competitive landscape remain tail risks that cannot be ignored.

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