Accelerating DRAM procurement spending in 2H; maintain Overweight

Overview

Morgan Stanley maintains a positive view on GigaDevice Semiconductor Beijing Inc following its 2Q earnings review. Actual results were broadly consistent with prior guidance, while improved demand and pricing for memory products supported rapid revenue and profit growth. The report focuses on the acceleration of DRAM procurement in 2H and supply assurance from CXMT's continued capacity expansion.

Core views

The report believes continued DDR4 price increases will support the company in completing its full-year Rmb5.7bn procurement budget from CXMT, resulting in a significant increase in 2H procurement spending versus 1H. At the product level, DDR4 and SLC NAND revenue both achieved strong QoQ growth in 2Q, while NOR Flash and MCU revenue also delivered significant YoY growth in 1H. The company expects moderate improvement in memory and MCU prices, but costs will also rise gradually, causing gross margin to gradually stabilize at a relatively steady level.

Analysis framework

Assessment is based on deviations of actual 2Q results from expectations, revenue trends across product lines, related-party procurement budgets, and changes in memory prices; the target price is valued using a residual income model.

Methodology notes

• Valuation methodsResidual income model

  Estimates equity value by discounting future residual income.

  The target price base case uses a residual income model, with key assumptions including a 9.4% cost of equity, a 40% payout ratio, an 11.3% medium-term growth rate, and a 2.5% terminal growth rate.

• Earnings AnalysisEarnings Surprise Analysis

  Compares actual results with analyst expectations or prior guidance.

  2Q revenue was 1% above Morgan Stanley's expectations, while EPS was 1% below expectations; overall results were assessed as broadly in line with expectations.

Asset mapping & comparison

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

• 603986.SS

  Underlying company's common stock

  Strengths

  Strong growth in DRAM and SLC NAND revenue; improving NOR Flash conditions; expected to receive continuously expanding capacity support from CXMT.

  Weaknesses

  Gross-margin improvement may be constrained by gradually rising costs; the business is sensitive to the memory cycle and changes in product mix.

  Comparison

  Rated Overweight within Morgan Stanley's semiconductor coverage; analysts expect its risk-adjusted total return over the next 12 to 18 months to exceed the coverage-universe average.

  Risks

  Downcycle caused by weaker NOR demand, insufficient chip-design competitiveness increasing exposure to mid- and high-density NOR, and DRAM development falling short of expectations.

Key data

• 2Q revenueRmb7.4bnUp 76% QoQ and 229% YoY, 1% above expectations.
• 2Q EPSRmb7.7Up 269% QoQ and 1399% YoY, 1% below expectations.
• 1H CXMT related-party transactionsRmb2.0bnThe full-year procurement budget is Rmb5.7bn.
• Implied 2H procurement growthApproximately 85% growth versus 1HCalculated based on completion of the full-year procurement budget, supported by rising DDR4 prices.
• Target priceRmb750.00Based on a residual income model.
• Current share priceRmb436.74Closing price on August 18, 2026.
• Expected upside72%Relative to the closing price on the report date.

Impact & implications

If the DRAM procurement budget is executed as planned and DDR4 prices remain on an upward trajectory, GigaDevice's memory business scale and earnings outlook are likely to continue improving. Over the long term, increasing capacity support from CXMT and potential similar long-term arrangements with key customers may help enhance supply-chain stability; however, whether pricing improvements can offset rising costs will affect gross-margin delivery.

Risks

• NOR demand is weaker than expected and enters a downcycle.
• Insufficient chip-design competitiveness increases exposure to mid- and high-density NOR products.
• DRAM business development or procurement execution progresses more slowly than expected.
• Memory and MCU costs rise faster than selling-price improvements, pressuring gross margins.
• Related-party procurement and CXMT capacity support fail to materialize as expected.

What to watch

• DDR4 price trends and their support for procurement-budget execution.
• Whether 2H procurement from CXMT reaches the implied approximately 85% QoQ growth.
• The pace of CXMT capacity support over the coming years.
• Revenue growth and product-mix changes for DDR4, SLC NAND, NOR Flash, and MCU.
• The extent of memory and MCU price increases relative to cost increases, and progress in gross-margin stabilization.
• Whether the company reaches similar long-term arrangements with key customers.