China's AI chip leaders earn 6.6 billion yuan as inventory and prepayments grow 14.5 billion

China's AI chip leaders earn 6.6 billion yuan as inventory and prepayments grow 14.5 billion

Cambricon and Hygon report nine month revenue growth of 107 and 58 percent. Hygon's operating cash flow is minus 2.4 billion yuan. Cambricon turned 6 percent of its profit into cash.

Cambricon turned 6 percent of its nine month profit into cash. Hygon's operating cash flow was negative. At 108 and 110 times third quarter profit annualised, the market needs cash, and inventory and prepayments are absorbing it.

Four Chinese AI chip designers have lost 43 percent of their value since 30 June. The two biggest have just reported profit growth of 131 and 45 percent. The fall is sector wide, and cash conversion decides who can recover from it.

The selloff began before earnings

The 43 percent is the average fall of Cambricon, Hygon, Moore Threads and MetaX, all listed on Shanghai's STAR Market. It uses unadjusted Shanghai Stock Exchange closes from 30 June to 26 October. Cambricon is down 39.3 percent, Hygon 46.5, Moore Threads 47.2 and MetaX 39.6.

Earnings did not trigger the fall. The basket peaked on 9 July and now sits 46 percent below that high. The drop began before any third quarter report. Cambricon rose 3.8 percent on 26 October after its report.

The whole supply chain fell with it, so no single report explains the move. SMIC is down 35.3 percent, Montage 46.0 and Hua Hong 53.0, against 9.7 for the SSE Composite.

Profit and operating cash flow

Cambricon's report, dated 23 October, shows nine month net profit of 3.71 billion yuan. Operating cash flow was only 0.23 billion, or 6 percent of that profit.

The third quarter looks worse. Cambricon earned 1.40 billion on revenue of 3.53 billion, up 104 percent, yet its operating cash flow was minus 84 million.

Hygon's report of 20 October shows nine month profit of 2.85 billion yuan. Its operating cash flow is minus 2.44 billion, a fall of 208 percent on the year.

Hygon's revenue rose 58 percent to 14.95 billion, inside the range it announced in advance on 16 October. Sales are not the weak point.

Where the cash went

Growth is what consumes the cash at both companies. Cambricon's nine month revenue was 9.53 billion yuan, up 107 percent. Its total assets rose 66 percent to 22.36 billion since December. Each extra yuan of sales has to be built, stocked and paid for before the customer settles.

Cambricon's inventory more than doubled, from 4.9 billion yuan at the end of 2025 to 11.7 billion at 30 September. Prepayments to suppliers rose from 0.7 billion to 3.0 billion. Cambricon's own 24 October notice books a 502 million yuan inventory write-down for nine months, against 87 million of asset write-downs a year earlier. Its reason: stockpiled raw materials aged.

Bills payable funded most of that build. They jumped from 0.35 billion to 4.97 billion.

Hygon's inventory rose from 6.4 billion to 8.9 billion, and its prepayments from 2.9 billion to 5.9 billion. Its contract liabilities, the money customers pay ahead of delivery, fell from 2.0 billion to 12 million. Customers who once helped fund production now put in almost nothing.

Hygon also pays its suppliers faster than it borrows from them. Accounts payable fell from 1.11 billion yuan to 0.96 billion, so suppliers fund none of its build. Cambricon's suppliers fund a great deal of it through bills.

Hygon's receivables add a second drain beside the fall in customer prepayments. They rose from 4.0 billion to 6.0 billion yuan.

Gross inventory plus prepayments rose 14.5 billion yuan since 31 December. That is 9.02 billion at Cambricon and 5.51 billion at Hygon.

Bills and payables funded 5.68 billion of Cambricon's rise and none of Hygon's, where payables fell. Net of both, the build is 3.34 billion yuan at Cambricon, 0.90 times its nine month profit. At Hygon it is 5.67 billion, 1.99 times.

Profit less the net build leaves 0.37 billion at Cambricon and minus 2.82 billion at Hygon. Reported cash flow is 0.23 billion and minus 2.44 billion, within 0.4 billion of those figures.

Cambricon is collecting what it sells. Cash received from sales was 10.67 billion yuan in nine months, against 5.04 billion a year earlier. The cash then went into stock and suppliers.

Margins and the cash buffer

Pricing power is not the problem. Cambricon's nine month gross margin is 56.5 percent, up from 55.3 percent a year earlier. Hygon's is 56.6 percent, on 14.95 billion yuan of revenue and 6.49 billion of costs.

Building inventory in a supply constrained market can be rational. The question is who funds it.

Cambricon's cash fell from 1.32 billion yuan to 0.56 billion, and it paid 653 million in dividends and interest. It still holds 3.81 billion of trading financial assets, so the buffer is thinning, not gone.

Whoever holds Cambricon's 4.97 billion of bills payable is lending to a company with 0.56 billion of cash. At Hygon, supplier prepayments of 5.9 billion sit beside an operating cash outflow of 2.44 billion.

Valuations and the next cash test

The valuations leave little room for slow conversion. A multiple of more than 100 times earnings prices in profit that arrives as cash within a few quarters.

At 968 yuan on 628.29 million shares, Cambricon is worth about 608 billion yuan, or 108 times third quarter profit annualised. Hygon, at 198 yuan on 2.32 billion shares, is worth about 460 billion. That is 110 times its third quarter profit annualised and 121 times nine month profit annualised.

Hygon's chairman, Li Jun, proposed a buyback on 16 October. The filing sets the size at 500 million to 800 million yuan from the company's own funds. The shares are for staff share plans, and the board must approve.

Against a 2.44 billion cash outflow, that is small. It signals management confidence without fixing cash conversion.

Hygon still held 7.68 billion in cash at 30 September, down from 8.87 billion at the end of 2025. That covers the nine month outflow about three times.

The full year 2026 reports, due by 30 April 2027, will show whether Cambricon's inventory and prepayments of 14.7 billion yuan turned into cash. That is 11.66 billion of inventory plus 3.04 billion of prepayments at 30 September.

Full year operating cash flow above half of full year profit would end the discount argument. A balance still near 14.7 billion would mean the build is permanent working capital, and the market will keep paying for cash.