SCC: Third-quarter margins hit a record high as expansion and inventory buildup add to funding pressure
Citi sees room for an upward revision to SCC’s full-year earnings expectations: an improved AI PCB product mix and a recovery in BT substrates are driving faster profit growth. But receivables and inventory tie up cash, expansion relies mainly on new borrowing, and the fourth quarter also faces rising raw material prices and expenses.
Original source：Citi ResearchFirst published on Unhidea：Original source date：
Key takeaway
The margin improvement reinforces Citi’s view that SCC is in an earnings upcycle, but cash collection, financing progress and cost pass-through will determine the funding pressure associated with growth and near-term profit performance.
Why do third-quarter results support higher full-year expectations?
Third-quarter net profit in 2026 was 1.88 billion yuan, up 94% year on year. Net profit excluding non-recurring items rose 103% year on year, with growth accelerating further from 75% in the first quarter and 78% in the second.
Net profit for the first three quarters was 4.13 billion yuan, in the upper half of the company’s forecast range of 4.05 billion–4.15 billion yuan, and accounted for 73% of Citi’s full-year forecast. As Citi’s forecast is slightly above the Visible Alpha market consensus, the bank sees room for further upward revisions to the full-year consensus.
What is accelerating profit growth, and which costs are offsetting it?
A higher share of AI PCBs, together with a recovery in BT substrate prices and capacity utilization, lifted gross margin from 29.2% in the first quarter to 34.9% in the third. With the additional effect of operating leverage, net margin rose from 12.9% to 17.9%, exceeding the second-quarter record of 16.1%.
Improved operations are also absorbing additional burdens: financial expenses for the first three quarters rose from 33 million yuan a year earlier to 299 million yuan, mainly due to exchange rates. Lower government grants and tax incentives reduced other income by 43% year on year. Together, the two reduced pre-tax profit by about 450 million yuan year on year.
Increases in receivables and inventory also coincided with higher impairment charges: credit and asset impairment charges for the first three quarters rose from 307 million yuan a year earlier to 521 million yuan. Administrative expenses increased 65% year on year, partly due to share-based compensation.
Why did profit growth not produce more operating cash?
Net profit for the first three quarters rose 78% year on year, while operating cash flow fell 15% to 1.96 billion yuan. Over the same period, accounts receivable rose 73% from the end of 2025 to 9.06 billion yuan, and inventory increased 89% to 9.7 billion yuan. The company attributed the increases to more orders and materials stocking; the growth also tied up working capital.
Construction of new plants in Wuxi, Nantong and Guangzhou raised capital expenditure payments for the first three quarters from 2.35 billion yuan a year earlier to 7.61 billion yuan, well above operating cash flow. Bank borrowings increased from 2.69 billion yuan at the end of 2025 to 8.39 billion yuan, with new loans becoming the main funding source for expansion.
The 4.37 billion yuan private placement passed the Shenzhen Stock Exchange’s review on 14 October and still awaits registration with the China Securities Regulatory Commission. Citi expects the cash position to improve once it is completed; current funding arrangements still rely on borrowing.
Can fourth-quarter profits remain at third-quarter levels?
Citi’s full-year model implies fourth-quarter net profit will fall by about 19% from the third quarter. It factors in higher expenses including sales commissions and leaves room for margin pressure from rising material prices. The report cites KBL as saying that thin glass-fabric prices have risen 15% since October, while cost pass-through for non-AI PCBs is relatively weak.
The ramp-up of FC-BGA substrates is another key variable: management guides for revenue above 600 million yuan in 2026, with about 200 million yuan in the first half, implying a substantial acceleration is needed in the second half. Guangzhou Phase II is scheduled to start in the fourth quarter and ramp up over about 18 months; the Wuxi PCB plant targets production in the second half of 2027. Both will contribute limited revenue in this year’s fourth quarter.
What underpins Citi’s 465 yuan target price?
Citi reiterated its buy rating. Its 465 yuan target price corresponds to 41 times forecast earnings for 2027, a premium of about 20%–30% to the industry average. The case rests on the AI PCB upcycle, a recovery in BT substrate margins and the bank’s forecast of a three-year compound annual growth rate in earnings per share of 44% through 2028.
The valuation also depends on demand and the realization of profits at new plants. Citi’s main constraints include weaker-than-expected AI server demand, low margins at the new Wuxi BT substrate plant and a greater-than-expected increase in copper-clad laminate costs.
