Thermal solutions: another record quarter expected in 2Q26

Overview

This report focuses on the thermal solutions supply chain within Greater China technology hardware, covering Asia Vital Components, Auras Technology, and Fositek. The report argues that strong 1Q26 revenue results, product-mix improvement, and economies of scale should support better margins, with 2Q26 growth momentum expected to continue.

Core views

The core view is that demand for AI server cooling remains on an upward trend. Asia Vital Components is benefiting from the ramp-up in shipments of GB300 server rack cold plate modules and the launch of new flagship ASIC GPU platforms by major cloud customers; server revenue mix rose from 53% in 4Q25 to over 60% in 1Q26. Fositek is supported by a smooth ramp-up in GB300-related shipments, leaving room for margin upside in 1Q26. Auras is benefiting from improved output at new capacity in Thailand; liquid cooling contribution rose from 51% in 4Q25 to 55% in 1Q26, server revenue mix increased from 72% to 76%, and margin recovery plus a share-price rebound could be near-term catalysts.

Analysis framework

The report uses monthly revenue tracking, comparisons of company revenue against Morgan Stanley estimates, product-mix changes, shifts in server and liquid-cooling mix, capacity ramp-up progress, and industry checks to assess 2Q26 performance trends, and supports the valuation framework with a multi-stage residual income model.

Methodology notes

• Valuation methodsMulti-stage residual income model

  Residual Income valuation model

  The report states that the covered companies are valued using a multi-stage residual income model consistent with the technology hardware coverage universe, with core assumptions including a 10% cost of equity, an intermediate growth rate of about 12.5%-14%, and a terminal growth rate of 3%.

• Rating systemMorgan Stanley relative rating system

  Overweight / Equal-weight / Underweight

  Overweight means the risk-adjusted total return over the next 12-18 months is expected to exceed the average among the analyst's industry coverage; Equal-weight means it is expected to be roughly in line.

• Industry viewIndustry View In-Line

  Relative performance versus benchmark

  In-Line means the analyst expects performance over the next 12-18 months for the industry coverage universe to be roughly in line with the relevant broad market benchmark.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Asia Vital Components Co. Ltd. (3017.TW)

  Beneficiary of AI server cooling and cold plate modules

  Strengths

  March revenue hit a record high; GB300 server rack cold plate module shipments are ramping up; server revenue mix rose to above 60% in 1Q26; product-mix improvement should help margins expand.

  Weaknesses

  March revenue was 6% below Morgan Stanley's estimate, indicating that shipment cut-off timing may cause short-term volatility.

  Comparison

  Compared with 4Q25, server-related contribution rose from 53% to above 60% in 1Q26, making the mix improvement more pronounced.

  Risks

  Slower-than-expected data center cooling upgrades, a slowdown in 5G deployment, weaker-than-expected demand or share gains in PC/NB, and intensifying industry competition.

• Fositek Corp (6805.TW)

  Beneficiary of GB300-related shipments and the server rail/cooling chain

  Strengths

  March revenue hit a record high and was 7% above Morgan Stanley's estimate; GB300-related shipments are ramping up smoothly; product mix and economies of scale could lift 1Q26 margins.

  Weaknesses

  The report provides less detailed company-level revenue breakdown than for the other names.

  Comparison

  March revenue growth of 92% YoY matched Auras, but revenue scale was smaller than Auras and Asia Vital Components.

  Risks

  Slower-than-expected server/data center liquid-cooling penetration, slower-than-expected foldable smartphone penetration, and stronger-than-expected industry competition.

• Auras Technology Co Ltd (3324.TWO)

  Beneficiary of liquid cooling and server thermal capacity ramp-up

  Strengths

  March revenue hit a record high and was 14% above Morgan Stanley's estimate; improved output from new capacity in Thailand; liquid-cooling contribution rose to 55%; server revenue mix rose to 76%; operating leverage should help margins recover.

  Weaknesses

  The rating remains Equal-weight, indicating less certainty of relative upside than the Overweight names.

  Comparison

  March revenue grew 53% MoM, the fastest among the three disclosed companies; after recent share-price weakness, there may be room for a short-term rebound.

  Risks

  Slower-than-expected upgrades in data center cooling design, intensifying pricing pressure in the industry, and a slowdown in the PC or VGA/graphics card market.

Key data

• Asia Vital Components March revenueNT$18,017mn; +29% MoM; +112% YoYRecord high, but 6% below Morgan Stanley's estimate; the gap was mainly due to shipment cut-off timing.
• Asia Vital Components server-related revenue mix>60% in 1Q26 vs. 53% in 4Q25A shift in mix toward servers is favorable for margin expansion.
• Fositek March revenueNT$1,600mn; +35% MoM; +92% YoYRecord high, 7% above Morgan Stanley's estimate; mainly supported by a smooth ramp-up in GB300-related shipments.
• Auras March revenueNT$3,329mn; +53% MoM; +92% YoYRecord high, 14% above Morgan Stanley's estimate; improved output from new capacity in Thailand was the main driver.
• Auras liquid cooling contribution55% in 1Q26 vs. 51% in 4Q25A higher liquid-cooling mix pushed server revenue share up to 76%.
• 2Q26 revenue outlookAt least +10% QoQ for all three companiesThe launch of GB300 server racks and new AI ASIC projects are the key drivers.
• Valuation assumptions10% cost of equity; 12.5%-14% intermediate growth rate; 3% terminal growth rateThe intermediate growth rate varies slightly across the covered companies.

Impact & implications

If 2Q26 revenue remains strong and margins improve on product mix and economies of scale, market earnings expectations could be revised up in the near term. For investment implications, the AI server cooling chain still offers fundamental catalysts; the Overweight names, Asia Vital Components and Fositek, should benefit more directly. Auras remains Equal-weight, but after recent share-price weakness, it could see a short-term rebound as margins recover and Thai capacity ramps up.

Risks

• Slower-than-expected cooling upgrades for data center servers and switches.
• A slowdown in 5G network deployment momentum.
• Weaker-than-expected demand in PC/NB, VGA, or graphics card markets.
• Intensifying industry competition or heavier pricing pressure.
• Slower-than-expected increases in liquid-cooling penetration in servers and data centers.
• Slower-than-expected foldable smartphone penetration.
• Morgan Stanley has or may have business relationships with the covered companies, and investors should be aware of potential conflicts of interest.

What to watch

• Whether the three thermal companies can each achieve at least 10% sequential revenue growth in 2Q26.
• The ramp-up pace of GB300 server rack-related shipments.
• The launch cadence of new AI ASIC projects and demand from major cloud customers.
• Whether Asia Vital Components' server revenue mix keeps rising.
• Changes in Auras' Thai capacity output, liquid-cooling contribution, and server revenue mix.
• Whether Fositek's 1Q26 margins improve on product mix and economies of scale.
• Whether market earnings expectations are revised up in the near term.