Continued strong AI demand drove Montage Technology's second-quarter results above expectations; Morgan Stanley maintains Overweight

Overview

This report is Morgan Stanley's company commentary on Montage Technology Co Ltd's preliminary second-quarter results, progress in the Korea office antitrust investigation, and the share buyback proposal. The report believes that despite the negative impact from RMB appreciation against the US dollar, the company's second-quarter results still significantly exceeded expectations, mainly driven by AI-demand-led growth in RCD and new interconnect chip products. The company also said the Korea investigation is still ongoing, and the outcome and duration cannot be predicted, but current operations remain normal.

Core views

The core view is that Montage Technology remains an important beneficiary of expanding AI demand and the localisation of China's AI server semiconductors. Morgan Stanley maintains its Overweight rating, believing that AI demand from inference and agentic tasks will continue to drive the company's business through memory interface chips, while the PCIe business also makes the company a unique beneficiary proxy for China's AI server market. The third-quarter demand outlook remains strong, with high order visibility.

Analysis framework

Based on the earnings preview and company announcements, the report conducts an event-driven analysis of second-quarter revenue, net profit, ex-one-off net profit, third-quarter demand visibility, the status of the Korea antitrust investigation, and the A-share buyback plan, and combines Morgan Stanley ModelWare forecasts, consensus metrics, and a residual income valuation model to support the rating and target price.

Methodology notes

• Valuation methodsResidual income model

  base case residual income model

  The target price is based on a residual income model, with key assumptions including an 8.4% cost of equity, a 30% payout ratio, a 19.3% mid-term growth rate, and a 4% terminal growth rate.

• ForecastingMorgan Stanley ModelWare

  ModelWare estimates

  Most financial metrics in the report are based on the Morgan Stanley ModelWare framework, while some indicators such as EPS are presented using consensus methodology or Refinitiv Estimates data definitions.

Asset mapping & comparison

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

• Montage Technology Co Ltd (688008.SS)

  Main A-share coverage target

  Strengths

  Second-quarter results exceeded expectations; AI demand, RCD, new interconnect chips, and PCIe business form growth drivers, with strong order visibility.

  Weaknesses

  Valuation is relatively high, part of earnings is supported by non-recurring items, and RMB appreciation negatively affected revenue.

  Comparison

  Morgan Stanley believes it holds a strong position in the localisation of China's data center semiconductors and can serve as a beneficiary proxy for China's AI server market.

  Risks

  Uncertain outcome of the Korea antitrust investigation, cloud demand weaker than expected, DRAM interface technology migration slower than expected, and delays in new product launches.

• Montage Technology Co Ltd (6809.HK)

  Related H-share security of the same company

  Strengths

  Valuation assumptions use an exchange rate of 1.15 HKD:1 RMB and assume no discount of H shares versus A shares.

  Weaknesses

  H-share pricing may be affected by exchange rates, liquidity, and A/H market differences.

  Comparison

  Target price history shows a July 16 target price of 432 for 6809.HK and 377 for 688008.SS.

  Risks

  If H shares trade at a discount to A shares, valuation transmission may be weaker than the model assumes.

• AI servers and memory interface chip industry chain

  Core demand driver

  Strengths

  Expansion in inference and agentic tasks boosts AI demand, which in turn supports demand for memory interface chips, RCD, and interconnect chips.

  Weaknesses

  Demand depends on cloud capex and the pace of server buildout.

  Comparison

  The report positions Montage Technology as a unique proxy benefiting from China's AI server market and semiconductor localisation.

  Risks

  Cloud demand weaker than expected or slower technology migration would weaken the growth thesis.

Key data

• Preliminary second-quarter revenueRmb1.9bn, +28% Q/Q, +33% Y/Y, 6% above MSeThe report says revenue performance was negatively affected by RMB appreciation against the US dollar, but still exceeded expectations.
• Preliminary second-quarter net profit midpointRmb1.2bn, +36% Q/Q, +82% Y/Y, 50% above MSeNet profit was boosted by non-recurring items such as investment income and fair value changes.
• Preliminary second-quarter ex-one-off net profit midpointRmb0.7bn, +24% Q/Q, +27% Y/YReflects continued growth in core operating profit.
• Target price and upsideTarget price Rmb377.00; July 16 closing price Rmb211.13; upside 79%Rating is Overweight and industry view is Attractive.
• Buyback planRmb300-600mnProposed by Chairman and CEO Dr. Howard Yang on July 16, still pending board approval.
• 2026e EPSRmb3.09Presented in the report table under Morgan Stanley Research estimates.
• 2027e EPSRmb6.40Presented in the report table under Morgan Stanley Research estimates.
• 2028e EPSRmb9.26Presented in the report table under Morgan Stanley Research estimates.

Impact & implications

The report has a positive investment implication: second-quarter results above expectations reinforce the AI-demand-driven growth thesis, especially for RCD, new interconnect chips, and the PCIe business. If cloud capex growth, DRAM interface technology migration, and localisation of China's data center semiconductors continue to advance, support for the company's earnings forecasts and valuation could strengthen further. However, the outcome of the Korea antitrust investigation, volatility in cloud demand, and the pace of new product launches remain key uncertainties.

Risks

• The Korea prosecutors' investigation into potential antitrust violations is still ongoing, and the duration and outcome cannot be predicted.
• Cloud demand weaker than expected could affect demand for AI server-related chips.
• DRAM interface technology migration slower than expected could weigh on product upgrades and revenue growth.
• Delays in new product launches could affect the pace of growth realization.
• RMB appreciation against the US dollar has already negatively affected second-quarter revenue, and exchange rates may continue to affect subsequent performance.

What to watch

• Subsequent progress in the Korea antitrust investigation, regulatory conclusions, and the impact on operations or customer relationships.
• Whether third-quarter order visibility continues to remain strong.
• Shipment pace and gross margin performance of RCD and new interconnect chip products.
• The pace of volume ramp-up of the PCIe business in China's AI server market.
• Whether the Rmb300-600mn A-share buyback plan receives board approval and is implemented.
• The sustainability of cloud capex growth, DRAM interface technology migration, and the localisation of China's data center semiconductors.