Morgan Stanley has singled out makers of optical components as the most attractive names within Greater China's technology hardware sector, ranking Largan Precision and Genius Electronic Optical at the head of its list based on residual income model valuations.
The bank focused its review on firms that stand to gain from sustained demand for high-end smartphones and from the rollout of new optical technologies across mobile devices. Morgan Stanley applied a residual income framework to estimate intrinsic value and to assess upside tied to technology adoption and handset dynamics.
Largan Precision (3008.TW) - Top ranked
Morgan Stanley places Largan Precision at the top of its sector picks. The bank used a residual income model with a cost of equity set at 8.5%, and assumed a net profit compound annual growth rate (CAGR) of 7% for the period from 2026 through 2036, followed by a terminal growth rate of 3%.
Key upside scenarios for Largan cited by the bank include stronger-than-expected demand for high-end smartphones as well as a faster-than-anticipated adoption of 1G6P technology and periscope lens systems. These technology pathways are identified as potential drivers for higher volumes and better pricing for premium optical modules.
Conversely, Morgan Stanley highlights downside risks for Largan that could erode value. The bank points to intensifying competition that might pressure average selling prices and gross margins, and to the possibility of weaker demand for premium smartphone models, both of which would weigh on profitability and valuation.
Genius Electronic Optical Co. Ltd. (3406.TW) - Second ranked
Genius Electronic Optical was ranked second in the bank's analysis. Morgan Stanley again applied a residual income model using an 8.5% cost of equity, which it derived from a 3% risk-free rate, a beta of 1.0, and a 5.5% equity risk premium. The bank projects a medium-term net profit CAGR of 4%, with a 3% terminal growth rate.
The firm identifies several potential upside catalysts for Genius. These include market share gains in supplying iPhone components, stronger-than-expected demand tied to Apple’s mixed reality products, and higher shipment volumes for virtual reality and mixed reality devices. These outcomes would lift component demand and could support improved results for optical suppliers.
On the downside, Morgan Stanley cautions that delays in Apple’s mixed reality product launches or losses of market share in iPhone component supply would serve as tangible risks to the stock's upside case.
Context and implications
Morgan Stanley's work centers on valuation outcomes derived from residual income models and highlights how shifts in handset demand and the speed of technology adoption in optics can materially affect earnings trajectories for suppliers. The bank's conclusions signal where it expects potential earnings leverage - notably in premium smartphone segments and nascent mixed reality device markets - while also underscoring how competitive dynamics and product timing could reverse those gains.