Morgan Stanley upgrades ratings for Unimicron Technology and South Asia Circuits, optimistic about the AI-driven upward cycle of ABF substrates

Investing.com - Morgan Stanley has upgraded the ratings of Xinxing Electronics (TW:3037) and Nanya Technology to Overweight, stating that the AI-driven ABF substrate upcycle will continue until the end of this century, driving growth and profit margin improvements across the entire sector.

The broker said that ABF substrates are in the early stages of a structural demand shift. By 2030, AI-related applications such as GPUs, ASICs, and network chips are expected to account for about 75% of the end-market, compared to only about 10% in 2015.

Track every rating and target price change on InvestingPro

Nippon Zeon’s multilayer film (ABF) is the de facto standard interlayer insulation material for high-performance semiconductor substrates. ABF holds over 90% of the global market share and is a key material for manufacturing advanced semiconductor substrates such as CPUs, GPUs, XPUs, and FPGAs.

Demand related to PCs, which accounted for about 70% of the market in 2015, is expected to decline to around 15% by 2030.

Morgan Stanley forecasts that the ABF substrate market will grow at a compound annual growth rate (CAGR) of 16.1% from 2025 to 2030, compared to a 9% growth rate over the past five years.

The firm expects the industry to enter a supply shortage starting in 2027, with recent material cost increases driving prices higher and creating further pricing pressure.

The company now expects significant profit expansion from 2025 to 2028, with Xinxing Electronics projected to have a CAGR of 105% and Nanya Technology 113%. The firm has raised Xinxing Electronics’ target price from NT$120.75 to NT$500 and Nanya Technology’s from NT$165 to NT$515, representing upside potentials of 36% and 24%, respectively.

Morgan Stanley stated that this cycle differs from past PC-driven volatility cycles, which were more volatile and consumer-led. The firm believes that AI-related demand offers longer visibility, potentially supporting valuation multiple expansion. The current valuation reflects recent price increases but has not fully incorporated the growth in AI-driven shipments and the supply tightening expected from 2027.

The broker maintains an Overweight rating on Samsung Electro-Mechanics but keeps a Neutral rating on YF Electric, citing more optimistic outlooks after significant price increases.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.