Morgan Stanley has flagged three semiconductor-sector companies in Greater China as top selections based on projections for AI-related demand and increasing uptake of advanced test equipment. The firm relied on residual income valuation frameworks to derive price targets and incorporated long-term value creation assumptions into each model.
Valuation approach
The bank applied residual income models to each company, specifying a cost of equity and a set of payout and growth assumptions to reach its target values. These inputs reflect Morgan Stanley's scenario view of how demand for edge AI, system-level testing, and co-packaged optics could influence future earnings and valuation multiples.
1. Winway Technology Co Ltd (6515.TW)
- Model inputs: cost of equity 9.14%, assumed payout ratio 80%, medium-term growth 16.4%, terminal growth 4.5%.
- Upside scenarios: Greater-than-expected adoption of hypersockets and MEMS probe cards; earlier or stronger introduction of system-level test and burn-in sockets; stronger-than-expected edge AI demand.
- Downside scenarios: Slower uptake of hypersockets and MEMS probe cards; delays in system-level test and burn-in socket rollouts; limited or absent edge AI demand over the near- to medium-term.
2. MPI Corporation (6223.TWO)
- Model inputs: cost of equity 9.78%, assumed payout ratio 75%, medium-term growth 15%, terminal growth 4.0%.
- Valuation implications: The price target implies roughly 44 times estimated 2027 earnings and 24 times estimated 2028 earnings. Morgan Stanley expects the company's valuation to rise in step with earnings expansion.
- Upside scenarios: Stronger-than-expected AI demand; market share gains versus peers; faster or successful development of co-packaged optics that create new testing opportunities.
- Downside scenarios: Weaker-than-expected AI demand; slower market share gains; delays in co-packaged optics development reducing anticipated testing demand.
3. Hon Precision (7769.TW)
- Model inputs: cost of equity 9.8%, assumed payout ratio 62%, medium-term growth 10%, terminal growth 3.0%.
- Valuation implications: The target corresponds to about 43 times estimated 2026 earnings, 26 times estimated 2027 earnings, and 16 times estimated 2028 earnings.
- Upside scenarios: Stronger AI demand than expected; expansion of market share; accelerated co-packaged optics development that creates additional testing needs.
- Downside scenarios: Slower AI-driven demand growth; loss of market share to competitors; delays in co-packaged optics development diminishing expected testing requirements.
Takeaway
Morgan Stanley's selections for Greater China semiconductor exposure center on companies tied to test and socket technologies as well as firms positioned to capture demand growth driven by AI and co-packaged optics trends. Each recommendation is underpinned by explicit valuation inputs and paired upside and downside scenarios reflecting adoption timing and AI demand strength.