May MCU spot prices remain weak; industry recovery is still L-shaped

Overview

This report is Morgan Stanley's event commentary on the Greater China technology semiconductors industry, focused on May MCU spot price changes. The report notes that 32-bit MCU spot prices for STMicro and GigaDevice both declined materially m/m, indicating that even though some vendors attempted to raise contract prices, end-demand has not fully recovered. The industry view remains Attractive, but near-term prices and gross margins are still under pressure.

Core views

The report's core view is that the MCU industry is still in a mild and relatively weak recovery phase, and the drop in spot prices shows that demand elasticity remains insufficient. Server and drone demand are relatively strong, but not enough to drive a broad-based recovery. Morgan Stanley believes that unless memory prices decline meaningfully or edge AI demand becomes a clear catalyst, the MCU recovery is more likely to be L-shaped. On individual names, the report prefers large MCU vendors such as GigaDevice and WiFi MCU vendors such as Espressif, while remaining cautious on Nuvoton and waiting for gross margin improvement.

Analysis framework

The report mainly assesses industry conditions by tracking MCU spot prices, contract prices, end-demand trends across sectors, mature-node foundry price trends, and relative company competitiveness. Price tracking focuses on STMicro and GigaDevice 32-bit MCU spot prices; demand assessment focuses on servers, drones, automotive, BMC, and edge AI applications; the valuation section uses a residual income model and discloses key assumptions such as cost of equity, payout ratio, mid-cycle growth rate, and perpetual growth rate.

Methodology notes

• Valuation methodsResidual income model

  Residual income model

  The report uses a residual income model to estimate base-case value for the relevant companies' target prices, based on assumptions such as cost of equity, beta, risk-free rate, equity risk premium, payout ratio, mid-cycle growth rate, and perpetual growth rate.

• industry_viewmorgan_stanley_industry_view

  Industry view rating

  Morgan Stanley's industry view ratings include Attractive, In-Line, and Cautious. The report's view on Greater China technology semiconductors is Attractive, indicating that the analyst expects the industry to be attractive relative to the relevant broad market benchmark over the next 12-18 months.

• stock_ratingmorgan_stanley_relative_rating

  Relative rating system

  Morgan Stanley uses relative ratings such as Overweight, Equal-weight, Not-Rated, and Underweight to measure a stock's risk-adjusted total return versus the covered universe over the next 12-18 months.

Asset mapping & comparison

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

• GigaDevice Semiconductor Beijing Inc (603986.SS)

  A large MCU and storage-related semiconductor company; one of the report's preferred names

  Strengths

  Its scale as an MCU vendor should help it benefit from domestic substitution and long-term edge AI opportunities; rated O in the disclosure table.

  Weaknesses

  May 32-bit MCU spot prices fell 11% m/m, indicating clear near-term price pressure; if mature-node foundries raise prices, gross margins may come under pressure.

  Comparison

  Compared with Nuvoton, the report is more constructive on GigaDevice; versus smaller MCU vendors, large vendors are more favored in the long-term opportunity set.

  Risks

  The MCU upswing ends earlier than expected, pricing erosion intensifies, China's MCU localization progresses more slowly than expected, new customer expansion underperforms, and competition compresses margins.

• Espressif Systems (688018.SS)

  A WiFi MCU vendor and one of the report's preferred long-term edge AI names

  Strengths

  Its WiFi MCU positioning is tied to edge AI opportunities, it is rated O in the disclosure table, and its valuation assumptions imply a relatively high mid-cycle growth rate.

  Weaknesses

  Overall industry demand remains relatively soft, and weak MCU spot prices may weigh on sentiment toward the sector.

  Comparison

  It is in the same favored direction as GigaDevice, but Espressif is more exposed to WiFi MCU and edge AI use cases.

  Risks

  China MCU localization progresses more slowly than expected, new customer expansion underperforms, and intensifying competition erodes margins.

• Nuvoton Technology Corporation (4919.TW)

  A covered MCU-related company on which the report remains Underweight

  Strengths

  If the MCU upcycle lasts longer, localization accelerates, and automotive and BMC businesses provide stronger pull, it could see upside risk.

  Weaknesses

  The report explicitly says it still maintains UW and will only become more constructive after gross margin recovery; it is rated U in the disclosure table.

  Comparison

  Compared with GigaDevice and Espressif, Nuvoton is less favored in the report.

  Risks

  The MCU upswing ends earlier than expected, price erosion is severe, China's MCU localization progresses more slowly than expected, automotive and BMC demand is weaker than expected, and competition compresses margins.

• Greater China Technology Semiconductors

  The industry asset pool covered by the report

  Strengths

  The industry view is Attractive and should benefit over the long term from domestic substitution, servers, drones, and edge AI opportunities.

  Weaknesses

  May MCU spot prices fell and overall demand remains weak; the cost side may be pressured by higher mature-node foundry pricing.

  Comparison

  Relative to broad market benchmarks, Morgan Stanley sees the industry as attractive over the next 12-18 months.

  Risks

  Demand recovery is insufficient, memory prices do not decline materially, edge AI ramps more slowly than expected, and foundry price increases compress gross margins.

Key data

• STMicro 32-bit MCU spot price in MayRmb12.8, down 7% m/mThe report says STMicro 32-bit MCU spot prices fell in May.
• GigaDevice 32-bit MCU spot price in MayRmb8.5, down 11% m/mThe report says GigaDevice 32-bit MCU spot prices fell, while also noting that it raised prices again from May 1.
• Industry viewAttractiveThe Greater China Technology Semiconductors industry view is Attractive.
• GigaDevice rating and priceO(05/15/2025), Rmb362.13The disclosure table shows GigaDevice Semiconductor Beijing Inc (603986.SS) rated O.
• Espressif rating and priceO(05/15/2023), Rmb176.68The disclosure table shows Espressif Systems (688018.SS) rated O.
• Nuvoton rating and priceU(11/10/2025), NT$181.00The report text says it still maintains UW on Nuvoton and is waiting for gross margin recovery.
• GigaDevice target price assumptionsRmb301; cost of equity 8.9%, payout ratio 40%, mid-cycle growth rate 16.4%, perpetual growth rate 3.0%The relevant section says the Rmb301 target price comes from the residual income model base case.
• Nuvoton valuation assumptionscost of equity 9.2%, payout ratio 55%, mid-cycle growth rate 7.0%, perpetual growth rate 3.5%The report discloses Nuvoton's base-case residual income model assumptions.
• Espressif valuation assumptionscost of equity 8.9%, payout ratio 40%, mid-cycle growth rate 18.5%, perpetual growth rate 4.5%The report discloses Espressif's base-case residual income model assumptions.

Impact & implications

The decline in spot prices means the MCU industry's near-term pricing power remains weak, and price increases are more visible in contract pricing or vendor quotations than in the spot market. If mature-node foundries raise prices further, MCU design companies' gross margins could come under pressure. In terms of investment implications, the industry still has long-term opportunities, especially in edge AI, servers, drones, and domestic substitution, but near term the key question is whether demand recovery is strong enough to offset pricing and cost pressure.

Risks

• MCU spot prices continue to fall, causing the industry recovery to underperform expectations.
• Further price increases by mature-node foundries compress MCU design companies' gross margins.
• Overall demand remains relatively soft, and demand outside servers and drones does not improve meaningfully.
• Memory prices do not decline meaningfully, limiting end-demand recovery.
• Edge AI demand ramps more slowly than expected.
• China MCU localization progresses more slowly than expected.
• Automotive, BMC, or new-customer business traction is weaker than expected.
• Intensifying competition leads to pricing erosion and lower margins.
• Morgan Stanley has investment banking, non-investment-banking, or potential business relationships with several covered companies, so conflicts of interest in the research disclosure should be monitored.

What to watch

• Whether STMicro and GigaDevice 32-bit MCU spot prices stop falling in June and later months.
• Whether GigaDevice's price increase from May 1 can be validated in the spot market.
• Whether demand from servers and drones remains strong and spreads to other end markets.
• Whether mature-node foundry prices continue to rise and how that affects MCU design companies' gross margins.
• Whether memory prices decline meaningfully.
• Whether edge AI demand drives improvements in MCU and WiFi MCU orders.
• The gross margin trends and management guidance of GigaDevice, Espressif, and Nuvoton.
• Progress in China's MCU localization and the pace of automotive, BMC, and new-customer adoption.