Morgan Stanley: Confidence in Memory Cycle Strengthens; Advantest is Top Pick

Overview

These notes summarize Morgan Stanley analysts' latest observations on the Japan Semiconductor Production Equipment (SPE) sector following attendance at the Taipei AI Summit and Computex. The report highlights that while overall market enthusiasm for SPE has cooled somewhat compared to late 2025 and early 2026, confidence in the sustainability of the memory cycle has strengthened significantly. The report identifies Agentic AI and Co-Packaged Optics (CPO) as two major future technological drivers and provides specific fundamental assessments and expectation gap analyses for key names including Kokusai Electric, Advantest, Lasertec, and Tokyo Electron.

Core views

Market Sentiment & Cycle Assessment: Compared to three months ago, investor pessimism regarding the memory cycle has largely dissipated. With spot prices recovering, the market broadly expects memory shortages to persist for 2-3 years. While overall SPE investment sentiment is balanced, front-end wafer fabrication equipment makers will continue to benefit from robust advanced logic investment. AI-Driven Memory Demand: Agentic AI is driving a structural expansion in DRAM demand. Supply chain verification indicates the next-generation Vera CPU can accommodate 1.5TB of LPDDR5X, triple that of the Grace CPU. Based on volume estimates, the Vera CPU alone could consume over 10% of total global DRAM bit demand in 2025 (approx. 4-6 million GB), translating to wafer capacity demand of roughly 100k-200k wafers/month. CPO as the Next Technological Bottleneck: As data transmission rates evolve toward 400G/lane, copper cable transmission distance will shrink to 1.25 meters, insufficient for inter-rack connections, highlighting the 'Copper Wall' effect. CPO is viewed as a critical technical solution for post-2027-2028. Competitor Teradyne forecasts the CPO testing TAM to grow from $100mn in 2026 to $300-700mn in 2028, exceeding $1bn thereafter, bringing significant incremental volume to equipment makers like Advantest. Key Company Feedback: Kokusai Electric's current full-year F3/27 sales guidance is ¥280bn; however, considering lead times extending to 8 months and unaccounted demand from emerging Chinese customers, the report sees potential for H2 earnings to be revised up to flat or higher, with NAND recovery boosting profitability of high-value-added ALD equipment. Advantest, as the Top Pick, maintains solid advantages in AI GPU testing; while CPO testing is not a near-term catalyst, long-term KGD reliability testing demand remains strong. For Lasertec, the report believes market optimism for A200 HiT is excessive and maintains a cautious stance, though acknowledging its monopoly in Actinic inspection equipment. Regarding Tokyo Electron, if a 5-9% price hike materializes, F3/28 operating margin could improve further from 33% toward the mid-term target of 35%.

Analysis framework

The report employs an 'Industry Conference + Supply Chain Cross-Verification' analytical framework. It first gathers first-hand technology trends (e.g., Vera CPU specs, CPO Copper Wall effect) via the Taipei AI Summit and Computex, then combines upstream/downstream supply chain intelligence (e.g., Marvell's roadmap, Teradyne's market forecasts) for quantitative estimation, translating macro tech narratives into specific equipment demand volumes. Simultaneously, it leverages investor meeting feedback to identify market expectation gaps, such as contrasting Kokusai's conservative guidance with signals of extended lead times, to deduce potential upward revision opportunities.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Memory Cycle & Spot Price Signals

  The report judges the entry into an upcycle phase by observing the halt and rebound in memory chip spot prices combined with shifts in investor sentiment. This is a typical leading indicator analysis method in the semiconductor equipment industry, where spot prices often precede inflection points in capex and equipment orders.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  AI Compute Spec Breakdown

  Multiplies the per-unit memory capacity of the new-gen CPU (Vera) (1.5TB) by estimated shipment volumes to directly convert into upstream DRAM bit demand and fab capacity pull (kwpm). This method concretizes abstract 'AI demand' into verifiable equipment procurement volumes.

• Valuation MethodologyPE/PEG valuation

  Historical P/E Center Anchoring

  Applies a target valuation of slightly above 20x F3/28E P/E for Advantest, referencing the historical average forward P/E since the acceleration of AI semiconductor demand in 2023. This reflects the logic of pricing based on the company's own historical valuation range rather than industry averages during a structural growth period.

Asset mapping & comparison

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

• Advantest (6857.T)

  Top Pick, benefiting from solid AI GPU testing demand and long-term CPO testing increment

  Strengths

  Complete competitive advantage in AI GPU testing; strong demand for CPO KGD reliability testing; earnings estimates likely to see continued upward revisions

  Weaknesses

  CPO does not constitute a major catalyst in the short term

  Comparison

  Higher certainty compared to Lasertec's excessive expectations; no concerns about absolute 100-0 monopoly similar to GPU testing space

  Risks

  Stagnation in AI semiconductor investment; loss of market share in GenAI SoC and HBM testing

• Kokusai Electric (6525.T)

  Beneficiary, upside potential in earnings guidance, NAND recovery boosts profitability

  Strengths

  Lead time extension to 8 months implies robust demand; increments from emerging Chinese customers and DRAM makers not fully reflected; rising mix of high-value-added mini-batch ALD equipment

  Weaknesses

  Official company guidance is conservative (H2 QoQ -17%)

  Comparison

  Although viewed as a NAND concept stock, DRAM exposure has increased significantly in recent years, resulting in a more balanced business structure

  Risks

  NAND market recovery falls short of expectations; policy risks in the China market

• Lasertec (6920.T)

  Cautious view, market expectations for A200 HiT are too high

  Strengths

  Maintains dominant position in Actinic inspection equipment; competitive threats weakening

  Weaknesses

  Investor bullish expectations for A200 HiT considered excessive; North American customers currently do not require additional mask shop investment

  Comparison

  Faces higher pressure to deliver on expectations compared to Advantest's positive catalysts

  Risks

  Delays in new technology adoption; deterioration in competitive landscape exceeds expectations

• Tokyo Electron (8035.T)

  Beneficiary, pricing power unlocks profit elasticity

  Strengths

  Latest financial results dispel negative impressions; possibility of 5-9% price hike not fully priced in; room for further OP Margin improvement

  Risks

  Price hike magnitude falls short of expectations; downstream capex slowdown

Key data

• Vera CPU Share of DRAM Demand>10%Projected share of total global DRAM bit demand in 2025 attributable to Vera CPU alone, corresponding to 4-6 million GB
• CPO Testing TAM Forecast (2028E)$300-700mnForecast by competitor Teradyne; $100mn in 2026, exceeding $1bn post-2028
• Kokusai F3/27 Sales Guidance¥280bnCompany's current target; report suggests potential upside to ¥300bn if H2 achieves flat growth
• Tokyo Electron OP Margin (F3/28E)~33%+4ppt YoY; could approach 35% mid-term target if price hikes are implemented
• Copper Cable Transmission Distance (400G/lane)1.25mEffective transmission distance for copper cables at 400G speeds adopted around 2028; below rack height (2m), creating rigid demand for CPO substitution

Impact & implications

The report suggests that the stabilization of the memory cycle coupled with new AI demand implies structural growth momentum for the Japan semiconductor equipment sector over the next 2-3 years. For investors, focus should shift from pure cyclical trading to incremental opportunities driven by technological iteration, particularly in CPO testing and high-end memory equipment. Advantest commands a higher premium due to its moat in AI testing and long-term CPO potential; while second-tier names like Kokusai Electric offer elasticity based on expectation gap repair. Meanwhile, caution is warranted against valuation correction risks for certain stocks (e.g., Lasertec) due to overly full market expectations.

Risks

• Stagnation or underperformance in AI semiconductor investment growth
• Loss of market share in GenAI SoC testers and HBM testers
• Memory cycle recovery sustainability weaker than market expectations
• Disruption of Chinese customer demand due to geopolitical factors

What to watch

• Guidance revisions during Kokusai Electric F3/27 Q1 (Apr-Jun) earnings release
• Pace of consensus EPS upward revisions for Advantest and progress on CPO testing orders
• Memory chip spot price trends and inventory level changes
• Actual magnitude of Tokyo Electron price hikes and their impact on margins