Morgan Stanley raises Hon Precision target price to NT$10,008, reiterates Overweight

Overview

This report is Morgan Stanley's company research and earnings review on Hon Precision (7769.TW). The core conclusion is that Hon Precision, as the leading AI/HPC test handler supplier, will benefit from higher demand for AI GPU, CPU, CPO, and SLT testing. The company's newly acquired plant is expected to start releasing capacity in 4Q26, supporting management's 50% capacity expansion CAGR target for 2026-2028.

Core views

Morgan Stanley believes Hon Precision's investment case has strengthened further: first, longer test times and more testing steps for AI/HPC chips increase the value of handlers and ATC equipment; second, mass production of CPO ASIC switches and the introduction of optoelectronic co-testing will bring incremental orders; third, the company has more than 70% share in AI/HPC handlers and still has room for structural share gains; and fourth, better-than-expected 1Q26 results, improved gross margin, and a better product mix are driving upward revisions to medium-term earnings forecasts.

Analysis framework

The report analyzes the company using 1Q26 results, management's capacity guidance, industry research, customer project progress, handler market sizing, and a residual income valuation model. The valuation section uses a residual income model and benchmarks growth rates, payout ratios, and cost of capital assumptions against Greater China testing-interface peers.

Methodology notes

• Valuation methodsResidual income model

  Residual income model

  Morgan Stanley uses a residual income model to derive the target price, believing it better captures Hon Precision's long-term value; key assumptions include a 9.8% cost of equity, a 65% payout ratio, a 15% mid-cycle growth rate, and a 4.0% terminal growth rate.

• earnings_forecastMorgan Stanley ModelWare

  Earnings forecast model

  The report updates revenue, gross margin, operating profit, net profit, and EPS forecasts under the Morgan Stanley ModelWare framework, and compares them with Refinitiv consensus data.

• industry_analysisTAM_and_market_share_analysis

  Market sizing and share analysis

  The report estimates that handlers' share of the global WFE market will expand as AI testing demand rises, and expects Hon Precision's overall handler share to increase to about 40%-42% by 2027.

Asset mapping & comparison

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

• Hon Precision (7769.TW)

  Core coverage name, benefiting from higher demand for AI/HPC handlers, CPO FT handlers, and SLT handlers.

  Strengths

  More than 70% share in AI/HPC handlers; new plant supports capacity expansion; active progress in CPO Insertion 4E and ASIC SLT orders; product specifications are moving toward dual-temp, tri-temp, and high-power ATC upgrades.

  Weaknesses

  R&D spending caused 1Q26 operating margin to come in below Morgan Stanley's and market expectations; growth depends on the pace of AI/HPC customer projects and continued specification upgrades.

  Comparison

  The report says Hon Precision and Chroma have different roles in CPO testing, handling Insertion 4E and Insertion 4O respectively, so they do not compete directly in the same subsegment; among handler suppliers, Hon Precision leads peers such as Cohu, Chroma, Changchuan Technology, and JHT Semiconductor.

  Risks

  Slower-than-expected CPO adoption; slower-than-expected adoption of tri-temp ATC+handler; customer bargaining power compressing gross margins; renewed competition concerns in GPU or CPO FT handlers; failure to win key customer projects.

• AI/HPC test handler market

  One of Hon Precision's main growth drivers.

  Strengths

  Longer testing times for AI GPUs, CPUs, and HPC chips drive demand for handlers and increase per-chip test value.

  Weaknesses

  Market growth depends heavily on continued demand for AI servers and advanced packaging.

  Comparison

  Hon Precision has more than 70% share in the AI/HPC handler market, significantly ahead of other handler suppliers.

  Risks

  If AI/HPC demand slows or customers reduce test intensity, handler TAM and the company's share gain path could come under pressure.

• CPO testing equipment

  A potential new growth curve, especially for Insertion 4E optoelectronic co-testing.

  Strengths

  The report says Hon Precision is the only handler supplier for Insertion 4E testing, with equipment expected to be released in 4Q26 and ramp in 2027.

  Weaknesses

  Revenue in 2025-2026 will still be dominated by pure electrical testing, and optoelectronic co-testing revenue ramp-up will have to wait until 2027.

  Comparison

  The report does not see Chroma and Hon Precision as direct competitors in the same CPO testing segment.

  Risks

  Slower CPO introduction or changes in customer technology routes could delay revenue recognition.

Key data

• Target priceNT$10,008Raised from NT$5,000, with the report reiterating an Overweight rating.
• Current share priceNT$6,870Closing price on May 12, 2026.
• Upside to target price46%Up/downside to price target disclosed in the table.
• 1Q26 EPSNT$25.7Up 13% qoq and 62% yoy, 15% above Morgan Stanley's forecast and 13% above market expectations.
• 1Q26 revenueNT$10.725bnUp 16% qoq and 81% yoy, 6% above Morgan Stanley's forecast, mainly driven by AI and HPC growth.
• 1Q26 gross margin56.2%Up 3.9 percentage points qoq and 1.7 percentage points above Morgan Stanley's forecast.
• 2026-2028 capacity expansion CAGR50%The new plant is expected to begin releasing capacity in 4Q26.
• AI/HPC handler market shareMore than 70%The report says Hon Precision is the clear leader in the AI/HPC handler market.
• Overall handler market share targetabout 40%-42% by 2027eThe text says overall share rises from about 30% in 2024-2025 to about 40% in 2027e, while the chart shows about 42% in 2027e.
• 2025-2028e revenue CAGR72%Driven by next-generation AI GPUs, the CPO multiplier effect, and more testing steps.
• 2025-2028e earnings CAGR75%The report expects operating leverage to drive earnings growth.
• 2026/2027/2028 EPS estimate revisions11% / 15% / 21%Reflects 1Q26 results, capacity guidance, and product mix improvement.

Impact & implications

The report's impact on Hon Precision is positive: the target price was sharply raised, earnings estimates were revised up, and the Overweight rating was maintained, indicating that the sell side believes AI/HPC testing equipment demand has structural growth potential. For the supply chain, rising demand for AI GPUs, Google CPU Axion 2, CPO switches, SLT, and tri-temp handlers may strengthen capex flexibility in advanced packaging and test equipment.

Risks

• Slower-than-expected CPO adoption, delaying ramp revenue into 2027.
• Slower-than-expected adoption of tri-temp ATC+handler solutions, weakening the thesis of higher test value.
• Stronger customer bargaining power could push gross margins below the report's bear-case level of 40%.
• If concerns about GPU and CPO FT handler competition re-emerge, valuation multiples could come under pressure.
• If ASIC SLT or key GPU customer projects are not won, it would hurt the share expansion assumption.
• Delays in the new plant's setup, equipment release, or capacity ramp could affect the 50% capacity expansion CAGR target for 2026-2028.
• Higher R&D spending may temporarily weigh on operating margins.

What to watch

• Progress on the setup of the newly acquired plant near Daya, Taichung, and whether capacity release in 4Q26 proceeds on schedule.
• Order conversion after CPO ASIC switch mass production in 3Q26, as well as the equipment release in 4Q26 and shipment pace in 2027 for Insertion 4E.
• Shipments of dual-temp FT handlers and tri-temp SLT to OSAT customers in Taiwan and Korea in 3Q26.
• Penetration progress in leading GPU customers' SLT processes, and additional details disclosed by management next quarter.
• The ramp intensity of Google CPU Axion 2 in 2027, and validation progress for the >10KW spec upgrade of Google's 2nm TPU.
• Whether gross margin can continue to improve with a better product mix, and the impact of R&D expenses on operating margin.
• Whether Hon Precision's overall handler market share can rise from about 30% to about 40%-42% by 2027e.