AI Liquid Cooling Expands from Servers to Broader Rack Components, Upgrading Cooling Supply-Chain TAM

Overview

This report focuses on the Greater China technology hardware cooling-solution supply chain, with the core view that AI server-cabinet upgrades and higher liquid-cooling adoption are expanding the cooling market. Morgan Stanley expects the covered companies' revenue in 2Q26 to hit another quarterly high, with server contribution expected to exceed 50% on balance in 2026, and improved product mix and learning-curve gains from new capacity expected to expand gross margins.

Core views

The report argues that liquid-cooling upgrades are no longer limited to GPU servers, but have expanded to several rack designs related to the Vera Rubin POD, including VR NVL72, Groq 3 LPX, Vera CPU rack, Bluefield 4 storage rack, and Spectrum-X CPO switch rack. AVC and Fositek are seen as the primary beneficiaries of liquid-cooling penetration and AI data center infrastructure buildout, while Auras remains neutral due to unclear exposure to the Vera Rubin platform and Sunonwealth remains neutral as risk/reward is viewed as sufficiently reflected.

Analysis framework

The report combines quarterly earnings preview, earnings forecast revisions, target-price updates, valuation multiples, residual-income modeling, and scenario analysis to assess the impact of AI server liquid-cooling upgrades on each cooling supplier’s revenue, gross margin, EPS, and valuation. It closely tracks 1Q26 gross-margin, 2Q26 revenue momentum, server-revenue mix, liquid-cooling component shipments, customer platform onboarding, and product-mix changes.

Methodology notes

• Valuation methodsResidual income model

  Residual income valuation

  Target prices for AVC, Fositek, Auras, and Sunonwealth are all based on a multistage residual income model. Core assumptions include a 10% cost of equity, roughly 12.5%-14% mid-term growth rates, and 3% terminal growth.

• Valuation methodsP/E Multiple Comparison

  P/E multiple comparison

  The report compares 2026e P/E valuations with historical mean and standard-deviation ranges to evaluate attractiveness, for example, AVC target price implies 29x 2026e P/E, Fositek implies 36x, Auras implies 17x, and Sunonwealth implies 16x.

• scenario_analysisBull/Base/Bear Case

  Bull, base, and bear cases

  The report lists bull/base/bear valuation ranges for major constituents, with key variables including liquid-cooling penetration pace, server upgrades, 5G buildout, foldable-phone penetration, industry competition, and product-mix changes.

• earnings_previewKPI Surprise Assessment

  Earnings preview and EPS impact assessment

  The report focuses on 1Q26 gross margin, 2Q26 operating outlook, and the directional 12-month consensus EPS revisions to judge where upside versus consensus might be delivered and the implications for market expectations.

Asset mapping & comparison

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

• Asia Vital Components Co. Ltd. (3017.TW)

  Core beneficiary; top-rated cooling stock in the report

  Strengths

  Has liquid-cooling plate-module, enclosure, and manifold delivery capability, and is viewed as an important supplier for NVDA Rubin platforms and AI ASIC customers; AI server growth and liquid-cooling upgrades support revenue and profit growth.

  Weaknesses

  Valuation is relatively high versus other cooling stocks, and the stock has significantly outperformed the TAIEX and peers.

  Comparison

  Compared with Auras and Sunonwealth, AVC has stronger platform visibility and delivery track record in the liquid-cooling supply chain.

  Risks

  Data-center thermal-design upgrades slower than expected, slower 5G rollout, product-mix deterioration leading to margin compression, and intensified industry competition.

• Fositek Corp (6805.TW)

  Major beneficiary; rating maintained at Overweight

  Strengths

  Liquid-cooling quick couplings, server rails, and server-business growth are key 2026 drivers; higher server contribution is expected to lift gross margin from 26.3% in 2025 to 34.3% in 2027.

  Weaknesses

  Short-term switch in smartphone hinge models may keep 2Q26 year-on-year revenue growth flat.

  Comparison

  Compared with AVC, Fositek is also influenced by foldable-phone penetration and long-term opportunities in industrial robot gear reducers.

  Risks

  Slower-than-expected server/data-center liquid-cooling penetration, heightened industry competition and pricing pressure, and slower foldable-phone penetration than expected.

• Auras Technology Co Ltd (3324.TWO)

  Beneficiary but maintained at Equal-weight

  Strengths

  Expected cold-plate shipment ramp and improved Thailand greenfield output are expected to support 1Q26 gross-margin recovery and 2Q26 year-on-year revenue growth.

  Weaknesses

  Vera Rubin platform exposure remains unclear, and the report lowered 2026 and 2027 earnings forecasts.

  Comparison

  Compared with AVC, Auras has lower visibility in key AI liquid-cooling platforms, so its valuation is considered relatively fair.

  Risks

  Vera Rubin project uncertainty, downside revisions to 2027-2028 earnings, and liquid-cooling contribution below expectations.

• Sunonwealth Electric Machine Industry Co (2421.TW)

  Beneficiary but maintained at Equal-weight

  Strengths

  Higher AI server shipment assumptions help improve revenue assumptions; the company has a strong base in fans and thermal-related products.

  Weaknesses

  Clear evidence for liquid-cooling component contribution is still awaited, and risk/reward is considered fairly reflected.

  Comparison

  Compared with AVC and Fositek, Sunonwealth has weaker direct liquid-cooling upside and exposure.

  Risks

  Lowered target price, insufficient contribution from liquid-cooling products, intensified industry competition, and slower-than-expected server-upgrade pace.

Key data

• 2Q26 Industry OutlookCooling-stock coverage revenue is expected to set another quarterly recordDriven by the ramp in GPU, CPU, and ASIC server-cabinet shipments and sustained demand from general server demand.
• 2026e Server Revenue Share>50%The report expects server contribution for covered companies to be broadly above 50% in 2026.
• AVC Target Price RevisionNT$2,300 raised to NT$2,750, +20%Reflects 2026-2028 earnings estimate revisions upward and implies 29x 2026e P/E at the target price.
• AVC Earnings Forecast Revision2026/2027/2028 raised by 15%/16%/17%Mainly from higher margin assumptions due to stronger AI-related shipments and improved product mix.
• Fositek Target Price RevisionNT$2,000 raised to NT$2,150, +8%Target price implies 36x 2026e P/E. The report is positive on rising AI-related exposure and margin expansion.
• Fositek Earnings Forecast Revision2026/2027/2028 raised by 1%/0.3%/8%Reflects higher margin assumptions from favorable product mix.
• Auras Target Price RevisionNT$1,200 lowered to NT$1,080, -8%Reflects lower earnings revisions for 2027-2028; target price implies 17x 2026e P/E.
• Sunonwealth Target Price RevisionNT$175 lowered to NT$165, -6%Reflects revised 2026-2027 earnings forecasts and a higher dividend payout assumption; target price implies 16x 2026e P/E.
• AVC Bull/Base/Bear ValueNT$3,846 / NT$2,750 / NT$1,654Primarily driven by data-center cooling upgrades, 5G buildout, and the pace of margin expansion.
• Fositek Bull/Base/Bear ValueNT$2,664 / NT$2,150 / NT$1,120Primarily driven by server liquid-cooling penetration, server-rail projects, foldable-phone penetration, and competitive pressure.

Impact & implications

If the report’s thesis is realized, increasing liquid-cooling adoption in AI data centers will expand the addressable serviceable market for the cooling supply chain, allowing suppliers with cold-plate, manifold, quick coupling, rack, and server cooling-module capabilities to gain higher revenue elasticity and margin improvement. On the investment side, Morgan Stanley prefers AVC and Fositek, which have proven delivery capability and clearer customer-platform exposure, while waiting for clearer evidence of liquid-cooling contribution or platform onboarding for Auras and Sunonwealth.

Risks

• AI server and data-center thermal-design upgrades slower than expected.
• Liquid-cooling penetration in servers and data centers slower than expected.
• Uncertainty around Vera Rubin platform or key customer implementation.
• Heightened industry competition or pricing pressure leading to gross margins below expectations.
• Fositek facing model shifts in smartphone hinges or slower-than-expected foldable-phone penetration.
• Slowing momentum in 5G network deployment.
• Product-mix deterioration causing margin compression.
• Valuation of target companies may already reflect part of the positive news, and stock momentum may be vulnerable to profit-taking.

What to watch

• Whether 1Q26 gross margin shows both month-on-month and year-on-year expansion.
• Whether 2Q26 revenue maintains March-level momentum and sets a new quarterly high.
• Whether server revenue share exceeds 50% in 2026.
• Whether Vera Rubin POD-related rack designs continue to increase and adopt liquid cooling broadly.
• Progress of AVC deliveries of cold-plate modules, enclosures, and manifolds to NVDA and AI ASIC customers.
• Progress of Fositek orders for liquid-cooling quick couplings, server rails, and foldable phone hinges.
• Auras Thailand new-factory ramp, cold-plate shipment growth, and visibility of Vera Rubin platform exposure.
• Whether Sunonwealth shows meaningful improvement in liquid-cooling component contribution.
• Whether market-consensus EPS is revised upward by 1Q26 results and 2Q26 outlook.