Morgan Stanley: China Industrials Enter a Stronger and Broader Capex Cycle, Driven by AI and Apple Chain Upgrades

Overview

Based on Morgan Stanley's recent field surveys of Chinese industrial companies, this report concludes by reinforcing confidence in a 'super capex cycle.' This cycle is led by AI hardware equipment and has broadly spread to general equipment, automation, and advanced equipment upgrades. Survey feedback indicates that AI hardware equipment and the Apple supply chain have performed most significantly above expectations, while demand for battery and semiconductor equipment is also surging. Unlike previous cycles, this AI-driven capex combines massive economies of scale with rapid technological iteration, resulting in sustained equipment upgrade demand. Most surveyed companies are expanding capacity and passing strong demand upstream to mechanical and electrical product suppliers, which not only enhances their ability to transition to higher-end equipment but also supports margin expansion. Additionally, demand for construction machinery, especially overseas, is stronger than market expectations, primarily driven by robust infrastructure construction and increasing market share for Chinese brands.

Core views

AI demand is the strongest common theme across sectors, and equipment suppliers are generally optimistic about growth in 2026-27. Domestic companies are benefiting from the global AI supply chain in three main aspects: First, AI is driving product and equipment upgrades, leading to higher average selling prices (ASPs) and margins, such as Han's Laser's ultrafast laser drilling equipment for AI servers, Megmeet's opportunities in Rubin power racks, and GKG Precision's solder paste printing equipment for AI servers (gross margin ~65%); Second, technological iteration and mass production are creating incremental equipment demand, such as optical module assembly automation (replacing manual labor) and testing equipment (e.g., Unicomp's X-ray CT inspection, Autowell's AOI equipment); Third, due to rapid product upgrades, delivery capabilities, and capacity bottlenecks among overseas peers, domestic players are poised to continue capturing market share. Feedback from the Apple supply chain was stronger than expected, with the 2026-27 innovation cycle supporting solid equipment demand. Opportunities have expanded beyond traditional 3C automation to areas like 3D printing, vapor chambers, camera modules, and UTG glass, particularly for this year's foldable phones and next year's six new models. All Apple supply chain equipment/component companies provided positive guidance. Meanwhile, next-generation technology roadmaps such as SST, HVDC, CPO, glass substrates, and solid-state batteries are moving from conceptual discussions to early-stage R&D and customer validation. For example, Megmeet has begun HVDC sidecar-related testing, RoboTechnik has engaged in early CPO discussions with overseas customers (mass production likely after 2027), and Lens, Han's Laser, and Hymson are all working on TGV/glass substrate-related processes, though the supply chain is not yet mature, making pilot line opportunities more likely to emerge next year. Humanoid robots remain an important medium-to-long-term theme, but the near-term ramp-up speed of leading US companies is slower than early expectations. Surveys indicate slight delays in progress at leading US companies, with current output limited and unlikely to reach 1,000 units per week in Q4, though expectations for 2027 output are more positive. Conversely, the domestic humanoid robot outlook is more active, with component suppliers like Leaderdrive, Zhaowei Electromechanical, Xinjienergy, Leisai Intelligence, and Huayan Precision responding to high shipment expectations and continuing to expand capacity. Leading component players, especially harmonic reducer suppliers, should stand out. Regarding general demand, fundamentals in automation, construction machinery, and batteries remain solid. Automation companies have strong order momentum, with AI-related demand being a key growth driver; for instance, Leisai Intelligence's YTD revenue grew over 40% YoY, and Xinjie's May orders grew over 35% YoY. In battery equipment, Lead Intelligent indicated Q2 new order growth would be at least flat or better than Q1's 60% YoY growth rate, with solid-state, SOFC, and MLCC equipment serving as additional drivers, and gross margins on new orders recovering sequentially. In construction machinery, Sany Heavy Industry expects Q2 revenue to grow ~20% YoY (overseas >20%, domestic ~15%) and operating profit to grow >40%; Zoomlion sees earnings growth accelerating over the coming quarters and maintains a full-year net profit guidance of ~RMB 6 billion. Globalized capacity is becoming a key competitive differentiator, not just a tariff hedge. Multiple companies emphasized overseas capacity readiness and delivery to overseas customers. For example, Megmeet is preparing Thai capacity for Nvidia power products, Hengli Hydraulic is preparing Mexican screw capacity for a leading US company, Zhaowei Electromechanical is preparing Thai capacity for overseas humanoid robot customers, and Topstar is preparing Vietnamese capacity for Apple-related precision equipment. This suggests that 'China Engineering + Overseas Delivery Capability' is a critical moat in the AI era.

Analysis framework

The institution employed a bottom-up survey aggregation method, visiting leading companies across various sub-sectors (covering automation, AI equipment, battery/solar equipment, construction machinery, etc.) to cross-validate industry sentiment. The analytical logic primarily revolves around 'demand drivers': first identifying sub-sectors exceeding expectations (AI hardware, Apple chain), then deeply analyzing the structural changes behind them (ASP increases driven by tech iteration, domestic substitution, capacity bottlenecks). Second, the institution focuses on corporate micro-indicators such as order growth rates, gross margin trends, capacity expansion plans, and overseas layouts to assess earnings visibility. Finally, by comparing the progress of domestic and international competitors (e.g., humanoid robot mass production pace, semiconductor equipment validation stages), it evaluates the competitive landscape and potential risks. This approach of 'macro theme validation + micro financial/operational data cross-checking' aims to capture Alpha opportunities within the capex cycle.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework Analysis

  The report analyzes the matching relationship between explosive downstream demand (AI, Apple, New Energy) and upstream equipment supply (capacity bottlenecks, tech iteration speed) to judge industry sentiment and pricing power. For example, it notes that capacity bottlenecks among overseas peers favor domestic manufacturers in seizing market share.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Industrial Chain Transmission Mechanism

  The report tracks the transmission of demand from terminal applications (e.g., AI servers, foldable phones) to midstream equipment manufacturers (e.g., laser equipment, automation lines) and further to upstream components (e.g., screws, reducers), identifying time lags and value distribution among benefiting segments.

• Competition & Strategy FrameworkMoat / competitive advantage

  Global Delivery Capability as a Moat

  The report posits that 'China Engineering + Overseas Delivery Capability' is a new competitive barrier. This is not merely a means to avoid tariffs but a core advantage in meeting global key clients' (e.g., Nvidia, Apple) requirements for supply chain stability and response speed, reflecting supply chain restructuring logic against a geopolitical backdrop.

• Industry/Sector Analysis FrameworkPenetration S-curve

  New Tech Penetration Rate and Mass Production Pace

  The report distinguishes maturity stages of different technologies; for instance, AI server equipment has entered a rapid penetration phase, while CPO, glass substrates, and humanoid robots remain in early validation or pilot stages (bottom of the S-curve). This classification helps investors judge the timing window for earnings realization and avoid premature entry into concepts not yet in mass production.

Asset mapping & comparison

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

• Lead Intelligent (300450.SZ)

  Benefits from stable lithium battery demand and new tech drivers like solid-state/sodium-ion batteries; market share continues to rise

  Strengths

  Domestic share 37-38%, Global 27%; Healthy gross margins on new orders (Domestic ~40%, Overseas ~45%)

  Comparison

  Share significantly higher than Yinghe Technology (15%) and Hangke Technology (10%)

• Han's Laser (002008.SZ)

  Benefits from PCB capex cycle and Apple 3D printing/foldable screen innovations

  Strengths

  Ultrafast laser drilling equipment ASP RMB 5-7mn; Priority access to initial Apple 3D printing orders

  Weaknesses

  New energy business losses narrowed but still drag overall performance

• Hengli Hydraulic (601100.SS)

  Dominant supplier of humanoid robot screws; Industrial screws as second growth curve

  Strengths

  >70% share of body screws for leading US company; Well-established Mexican capacity layout

  Weaknesses

  Q2 YoY growth slowed due to high base

• Sany Heavy Industry (600031.SS)

  Leader in construction machinery exports; Electrified products boosting unit profits

  Strengths

  Overseas revenue growth >20%; Electrified product ASP 30-40% higher with comparable gross margins

• Leader Harmonics (688017.SS)

  Core supplier of harmonic reducers; Benefits from humanoid robot volume ramp-up

  Strengths

  May shipments ~50k units; Continuous capacity expansion; Supplies leading US company and domestic clients

  Weaknesses

  Non-humanoid demand relatively flat

  Comparison

  Benchmarks Harmonic Drive's 2mn unit annual capacity next year

• Neway Valve (603699.SS)

  Valve leader; Benefits from LNG, nuclear power, and post-war Middle East reconstruction

  Strengths

  Offshore engineering new orders account for 32%; Medium-to-long-term gross margin target 37-40%

  Weaknesses

  Suspension of Middle East shipments causing Q2 delivery pressure

  Risks

  Middle East geopolitical risks

• Bozhon Precision (688097.SS)

  Core equipment maker in Apple supply chain; Expanding into optical module and AI server automation

  Strengths

  2026 new order guidance RMB 11.5-12bn; High gross margins on optical module equipment (50-60%)

Key data

• Han's Laser 2026 Revenue Guidance>RMB 26 BillionConsumer electronics expected to double to ~RMB 4bn; PCB ~RMB 10bn+
• Lead Intelligent Domestic/Global Market ShareDomestic 37-38% / Global 27%Long-term target raised to 45%; Q2 new orders YoY growth ≥60%
• Sany Heavy Industry Q2 Performance GuidanceRevenue +20% / Operating Profit +40%Overseas revenue growth >20%; Excavator overseas net margin 20%+
• Hengli Hydraulic Humanoid Robot Screw Share>70%Body screws for leading US company; Year-end capacity target to support 100k robots
• GKG Precision Server Application Gross Margin~65%Significantly higher than other downstream applications; Optical module automation line value ~RMB 10mn per line
• Bozhon Precision 2026 New Order GuidanceRMB 11.5-12 Billion~RMB 5bn each for 3C and New Energy, both growing 20-30% YoY

Impact & implications

The report believes the Chinese industrial equipment sector is in a strong upcycle driven by dual engines of technological innovation (AI, next-gen consumer electronics) and global expansion. For relevant companies, this implies higher revenue growth visibility and an optimized margin structure due to a rising mix of high-value-added products (e.g., AI-specific equipment, electrified construction machinery). In particular, leading enterprises with overseas delivery capabilities and core technological iteration abilities will gain greater market share amid global supply chain restructuring. However, large-scale commercialization of new technologies (e.g., CPO, humanoid robots) still requires time, manifesting more as valuation premiums rather than earnings contributions in the short term; investors need to monitor the fulfillment of mass production milestones.

Risks

• Mass production progress of new technologies (e.g., CPO, humanoid robots) falls short of expectations or intense competition leads to margin decline
• Geopolitical factors hinder overseas delivery or lead to changes in tariff policies
• Macroeconomic downturn leads to reduced capex in traditional manufacturing
• Raw material price volatility affects equipment manufacturing costs

What to watch

• Actual weekly production ramp-up of humanoid robots by leading US companies (Focus on whether 1,000 units/week is reached in Q4 2026)
• Order fulfillment for Apple's foldable phones and 3D printing equipment in H2 2026
• Batch delivery progress and margin performance of AI server optical module automated production lines
• Construction progress and commissioning efficiency of domestic enterprises' overseas capacity (Mexico, Thailand, Vietnam)
• Timing of full-line tenders for solid-state battery equipment (Expected by year-end)