Iluvatar CoreX Semiconductor Co., Ltd. (09903) Report Interpretation

Overview

This earnings update assesses whether Iluvatar CoreX's 1H26 gross-margin shortfall undermines its investment case. Morgan Stanley concludes that the margin weakness is a near-term strategic trade-off to win major cloud service provider supply-chain positions, and it keeps its Overweight rating and HK$688 target price.

Core views

Morgan Stanley maintains Overweight after Iluvatar CoreX reported 1H26 revenue of Rmb946mn, up 192% year on year but slightly below its Rmb976mn estimate. AI-GPU shipments, including Tiangai 150 and Zhikai series chips, remained robust. Net profit attributable to shareholders reached Rmb106mn, turning profitable from a loss a year earlier, although the report attributes this largely to Rmb760mn of fair-value gains on equity investments rather than operating profitability. The principal disappointment was a 17.2% 1H26 gross margin, materially below Morgan Stanley's expectation. The report identifies a Rmb171mn gross loss in the semiconductor-components segment as the main driver. Based on its industry checks, Morgan Stanley believes the loss resulted from strategically low server-memory pricing intended to establish a partnership with a major CSP customer. It also notes Rmb72mn of impairment losses, which it believes mainly represented write-downs of legacy products. The institution therefore characterizes the margin miss as near-term pain rather than structural weakness. Morgan Stanley's underlying thesis is that deeper CSP software and ecosystem integration with Iluvatar products should improve their fit with real-world token-production environments. In its view, that technical alignment can establish the foundation for sustained long-term order wins. The low-margin supply-chain entry is thus presented as a deliberate trade-off to penetrate major CSP supply chains, rather than evidence that AI-GPU demand or the company's competitive position has broken down. The report also flags inventory and prepayments exceeding Rmb3.9bn in 1H26. Morgan Stanley interprets the build-up as proactive wafer procurement and HBM stockpiling ahead of expected Tiangai 300 GPU shipments in 2027. It believes this inventory preparation supports accelerated revenue growth next year, though the eventual benefit depends on the expected order ramp materializing. Its estimates show a large growth and profitability ramp: revenue of Rmb3,251mn in 2026e, Rmb8,244mn in 2027e and Rmb12,271mn in 2028e; ModelWare net income of negative Rmb232mn in 2026e, Rmb1,637mn in 2027e and Rmb2,920mn in 2028e. EPS is forecast at negative Rmb0.91 in 2026e, Rmb6.44 in 2027e and Rmb11.48 in 2028e. Morgan Stanley notes a meaningful earnings shortfall versus consensus and a modest reduction in next-12-month consensus EPS, but leaves its core thesis unchanged.

Analysis framework

Morgan Stanley compares reported revenue, shipments, gross margin and profit with its estimates, then uses industry checks to interpret the causes of the margin miss. It links pricing, software integration and supply-chain positioning to future CSP orders, and assesses the inventory build against the planned 2027 Tiangai 300 shipment cycle. Its valuation assumptions use a cost of equity, payout ratio, medium-term growth and terminal-growth inputs.

Methodology notes

• Valuation methodsDDM (Dividend Discount Model)

  Dividend-discount valuation assumptions

  The report specifies a cost of equity, long-term payout ratio, medium-term growth rate and perpetual terminal growth rate, inputs consistent with valuing future shareholder distributions.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  CSP supply-chain penetration and component procurement

  The analysis connects strategic server-memory pricing, CSP software integration, wafer and HBM procurement, and future GPU shipments to expected order conversion and revenue growth.

Asset mapping & comparison

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

• Iluvatar CoreX Semiconductor Co., Ltd. (9903.HK)

  Primary covered company; Morgan Stanley views low-margin CSP supply-chain entry as supporting longer-term AI-GPU order potential.

  Strengths

  Robust 1H26 AI-GPU shipments; anticipated better CSP software and ecosystem integration; procurement preparation for Tiangai 300 shipments.

  Weaknesses

  1H26 gross margin of 17.2% was well below estimate, with a Rmb171mn gross loss in semiconductor components.

  Comparison

  The report describes 1H26 gross margin as below peer levels.

  Risks

  Order ramp below expectations, sanctions escalation and intensifying competition.

Key data

• 1H26 revenueRmb946mnUp 192% year on year; slightly below Morgan Stanley's Rmb976mn estimate.
• 1H26 gross margin17.2%Well below Morgan Stanley's estimate.
• Semiconductor-components gross lossRmb171mnMorgan Stanley attributes it to strategic low pricing of server-memory products for a major CSP partnership.
• Impairment lossesRmb72mnBelieved mainly to reflect write-downs of legacy products.
• Net profit attributable to shareholdersRmb106mnTurned profitable year on year, largely driven by Rmb760mn of fair-value gains from equity investments.
• Inventory and prepaymentsMore than Rmb3.9bnInterpreted as wafer procurement and HBM stockpiling ahead of 2027 Tiangai 300 shipments.
• 2027e revenueRmb8,244mnMorgan Stanley estimate, versus Rmb3,251mn for 2026e.
• 2027e EPSRmb6.44Morgan Stanley estimate; 2026e EPS is negative Rmb0.91.

Impact & implications

Morgan Stanley believes the 1H26 margin weakness should be viewed in the context of building CSP relationships and product integration. If these efforts translate into order wins and Tiangai 300 shipments in 2027, the report expects an acceleration in revenue and a return to substantial profitability; it nevertheless notes a meaningful current earnings shortfall and modest consensus-EPS revision lower.

Risks

• Order ramp below expectations.
• Escalation of sanctions.
• Intensifying competition.

What to watch

• Stronger-than-expected CSP orders.
• The pace of CUDA replacement with Iluvatar's software.
• Expansion of overseas and domestic capacity.
• Progress toward Tiangai 300 GPU shipments in 2027 and the associated inventory conversion.