Cambricon’s third-quarter price increases lift profits; inventory expansion supports expectations of higher volume in 2027
Third-quarter revenue met Morgan Stanley’s expectations, while the profit beat came mainly from price increases for the MLU580 and MLU590. Inventory rose 41% quarter on quarter, which the bank sees as preparation for a subsequent ramp-up, though slower revenue recognition for the MLU690 and rising memory procurement costs also pose constraints.
Original source：Morgan StanleyFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley maintains its Overweight rating on Cambricon, citing improved profitability from price increases and continued inventory buildup, but growth in 2027 still depends on the pace of the product ramp-up and supply capacity.
Revenue met expectations, so why was profit better?
Cambricon reported third-quarter 2026 revenue of RMB 3.5 billion, in line with Morgan Stanley’s prior forecast. Revenue recognition for the MLU690 series was slower than the bank expected. The key constraint on revenue remains the pace at which new products convert into current-period revenue.
The profit beat came from improved gross margin. Third-quarter gross margin was 58.7%, up 2.6 percentage points quarter on quarter and above the bank’s forecast of 54%, mainly because of price increases for the MLU580 and MLU590, the main products shipped during the quarter.
The higher gross margin drove third-quarter net profit to RMB 1.4 billion, up 8% quarter on quarter and 147% year on year, exceeding the bank’s forecast. The direct driver of this improvement in earnings was therefore product selling prices, rather than revenue exceeding expectations.
How does the sharp inventory increase connect to future shipments?
At the end of the third quarter of 2026, Cambricon’s inventory reached RMB 11.7 billion, up 41% quarter on quarter. Morgan Stanley interprets this as continued inventory buildup for a future product ramp-up and, on that basis, has greater confidence in its assessment of earnings visibility for 2027.
This reasoning requires the inventory buildup to translate into shipments and revenue. The currently slower recognition of MLU690 revenue shows a timing difference between inventory preparation and revenue realization; the two should be monitored separately.
The inventory buildup also faces changing costs: HBM3e prices have risen, increasing the cost of newly purchased memory. The third-quarter gross margin improvement from higher prices for older products coexists with rising new procurement costs, and the latter constrains future profitability.
Prepayments at the end of the third quarter were RMB 3 billion, broadly stable compared with RMB 2.9 billion at the end of the second quarter. The more pronounced change this quarter was in inventory, rather than a further sharp expansion in prepayments.
Why does Morgan Stanley maintain its Overweight rating, and what conditions must hold?
Morgan Stanley maintains its Overweight rating with a target price of RMB 1,700 per share. Its assessment is supported by stronger-than-expected pricing and gross margin, inventory that continues to increase for future shipments, and improved earnings visibility from the product ramp-up in 2027.
Downside factors listed by the bank include capacity and yield constraints, customer concentration, and a slower pace of technological iteration. These relate respectively to whether products can be supplied as planned, whether order sources are stable, and the pace of new-product development; they are important conditions for turning inventory buildup into growth.
The target price uses a residual income model, with key assumptions including a cost of equity of 8.4%, a medium-term growth rate of 16%, and a perpetual growth rate of 6%. The valuation therefore depends both on near-term earnings improvement and on sustained growth over a longer period.
