Alchip Technologies (3661.TW): Earning a bigger slice

Maintain Buy with a higher TP of TWD6,600, implying 133% upside. Alchip's 3Q26 revenue reached a record high (+241% q-q), driven by the N3 accelerator (Trainium 3) ramp-up. GM, however, fell to 18% (from 34.8% in 2Q), missing our estimate of 20.1% and management's ~20% guidance, due to larger-than-expected Trainium 3 mix, wafer/substrate shortage weighing on other high-margin production businesses, and delayed NRE recognition. Management now guides triple-digit y-y growth in 2027 for both total revenue and the N3 project. We believe the N3 upside comes from higher customer allocation for Alchip, not from higher total volume of the project. The second customer is new to Alchip, with production revenue planned to start in 2Q27 and ~USD1bn of revenue expected at a reasonable margin. On N2 (Trainium 4, we believe), Alchip is the sole physical design supplier, and only the customer and Alchip can place wafer orders with TSMC. We raise 2027-28F revenue to reflect the higher guidance, but rem