AI Server, ASIC, and Optical Networking Expansion Supports Hon Hai's Growth; J.P. Morgan Maintains Overweight

Overview

This report summarizes the key takeaways from discussions with Hon Hai management during J.P. Morgan's Asia Tech Tour, focusing on the AI customer mix, ASIC and Vera Rubin projects, CPO optical networking, margin management, and the smartphone business. The report believes AI servers will continue to dominate near-term growth and maintains its Overweight rating and NT$330.00 target price for Hon Hai.

Core views

AI demand remains strong, although different customer groups are at different stages of development. Management divides AI server customers into four categories: AI developers, cloud service providers and neoclouds, governments, and enterprises. Hon Hai's current AI business is still dominated by cloud service providers, and the company expects to begin penetrating neoclouds by the end of 2026. Government sovereign AI projects require controlled datasets and local server capabilities, resulting in longer development cycles. Enterprise customer participation is also just beginning. Demand from both categories remains at an early stage, but management expects it to grow over time. The negotiating structure of neoclouds is more favorable to Hon Hai, so their gross margins are expected to exceed those of traditional cloud service providers and enterprise customers. Customer discussions indicate that demand remains strong, and Hon Hai will need to continue expanding capacity over the next few years. This means capital investment will remain elevated even after capital expenditure grows by 30% in 2026. J.P. Morgan expects AI server revenue to grow by more than 130% YoY in 2026 and more than 70% YoY in 2027, remaining the principal growth engine over the coming quarters. ASIC growth is expected to outpace AI GPU growth. Management expects the GPU-to-ASIC mix within AI server revenue to shift from approximately 90:10 at the end of last year to approximately 80:20 by the end of 2026 and is targeting a long-term ASIC market share of at least 40%. Supporting factors include Hon Hai's capabilities in GPU rack assembly, high degree of automation, and design-for-manufacturing capabilities. According to management, compute tray assembly time has been reduced from several hours to several minutes, with automation at approximately 100%. J.P. Morgan believes Hon Hai's primary ASIC projects include CPU tray and rack assembly for Google TPU v8 and entry into AWS Trainium 3 rack assembly. By the end of 2026, the company has further room to increase its share of the TPU v8 tray project. The report also believes that rising internal share at Google, Hon Hai's largest ASIC customer, will provide support. The Vera Rubin platform is progressing as scheduled. Management confirmed that mass production will begin in 3Q26, with no recent changes to the schedule, and expects Hon Hai's share of the platform to rise to approximately 50% by the end of 2026. Management stated that industry-wide rack-level AI server shipments in 2026 could approach the recent market guidance of 70,000–75,000 units, implying potential upside to the year's AI rack shipment outlook. Although the transition from Blackwell to Rubin will occur in 4Q26, full-year AI rack shipments are still expected to increase sequentially each quarter. J.P. Morgan expects VR200 to enter mass production from late 3Q26 to 4Q26, with industry-wide VR rack shipments reaching as many as 10,000 units in 2026. Because the average selling price of a VR200 rack is approximately twice that of GB300, and because Hon Hai has secured Google and potential new customers such as SpaceX within the NVIDIA ecosystem, the report expects the company to benefit from Vera Rubin volume growth and market share gains. The expected cadence for 2H26 is strong growth from GB300 in 3Q26, followed by the start of the VR200 ramp in 4Q26, continuing into 2027. CPO switches and optical networking represent an additional addressable market and offer higher margins than traditional AI rack assembly. Management stated that the value of CPO products is higher than previously expected, with each switch potentially priced at US$100,000–150,000. Approximately 10,000 CPO switches are expected in 2026, with volumes potentially increasing severalfold in 2027, reflecting Hon Hai's dominant position in the early-stage market. J.P. Morgan expects networking and optics revenue to grow by 440% in 2027 and 74% in 2028. CPO switch margins are expected to exceed 20%, significantly above the mid-single-digit margins of NVL72 rack assembly. In addition to GPU platforms, management identified CPO opportunities on the ASIC side as another growth driver that warrants close monitoring. Margin management primarily depends on increasing the share of the consignment model and vertical integration. Management reiterated its operating margin target of approximately 3% and expects operating profit to continue growing despite market concerns that gross margins could be diluted. Most ASIC customers use the consignment model, and some GPU projects have also begun adopting it, with HGX transitioning to consignment. However, J.P. Morgan believes most NVL72 racks still use a buy-and-resell model, which consumes Hon Hai's balance sheet capacity. The company plans to use loans to meet its working capital needs and has explicitly stated that it does not want to dilute equity. J.P. Morgan expects the consignment model's share of AI servers to rise from 10% in 1H26 to 20% by the end of 2026. Meanwhile, Hon Hai says it can supply approximately 50% of components other than GPUs and memory. Vertical integration capabilities in areas such as liquid cooling, connectors, midplane PCBs, and L12 assembly are expected to cushion pressure on gross margins from commodity price increases. The report expects operating margins to remain at 3.3%–3.4% over the coming quarters. The smartphone business is still expected to maintain healthy growth. Management expects revenue from the Smart Consumer Electronics segment to grow significantly by 4%–14% YoY in 2026, with the guidance already incorporating the impact of memory supply. The impact from tier-one customers is currently limited, with pressure primarily concentrated in entry-level consumer electronics. Hon Hai has not observed any delays in the foldable phone plans of its major customers and has begun building inventory for shipments in August. The company typically holds approximately 60% of iPhone electronics manufacturing services share. As the principal new product introduction and production partner, its share could rise further during new product ramps. Based on AI server growth, margin improvement from changes in the business model, and expansion of the addressable market through optical networking, J.P. Morgan maintains its Overweight rating. The Jun-27 target price of NT$330.00 is based on approximately 14 times forward 12-month earnings per share, above the average valuation multiple of the past five years. The report justifies the premium based on the company's increased exposure to the AI business. Explicit downside risks are that Hon Hai's share of AI servers in the Blackwell or Rubin generations could fall below expectations and that iPhone demand could be weaker than expected.

Analysis framework

The report first uses management discussions during the Asia Tech Tour to segment AI server customer types and demand stages, then assesses the growth trajectory based on the revenue mix, shipment volumes, market shares, and average selling prices of GPU, ASIC, Vera Rubin, and CPO projects. It subsequently evaluates margins through changes in the consignment and buy-and-resell models, working capital arrangements, and vertical integration capabilities, supplements this with the smartphone business outlook, and finally derives the target price using a forward 12-month earnings-per-share multiple and lists the rating risks.

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward 12-month earnings-per-share multiple valuation

  The report derives a Jun-27 target price of NT$330.00 using approximately 14 times forward 12-month earnings per share. This multiple is above the five-year average because of Hon Hai's stronger exposure to the AI business.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of shipment volumes, average selling prices, and product mix

  The report separately examines AI rack and CPO switch volumes, the average selling price of VR200 relative to GB300, and changes in the GPU and ASIC revenue mix to explain the sources of differences in revenue growth and margins.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Transmission from AI platforms and customer demand to racks, optical networking, and components

  The report connects cloud customer and ASIC demand, as well as the platform transition from Blackwell to Rubin, to business opportunities in rack assembly, CPO switches, liquid cooling, connectors, and PCBs.

• Competition and Strategy FrameworkValue chain analysis

  Analysis of vertical integration and manufacturing capabilities

  Through automated assembly, design for manufacturing, and the ability to supply approximately 50% of components other than GPUs and memory, the report explains how Hon Hai can secure project share and cushion pressure on gross margins.

Asset mapping & comparison

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

• Hon Hai Precision (2317.TW, 2317 TT)

  Expansion in AI servers, ASICs, Vera Rubin, and CPO optical networking constitutes the primary source of growth, while the smartphone business provides supplementary growth.

  Strengths

  Capabilities include GPU rack assembly, high automation, design for manufacturing, vertical integration, and share advantages in the early-stage Vera Rubin and CPO markets.

  Weaknesses

  Many GPU racks still use a buy-and-resell model that consumes balance sheet capacity, while rising commodity costs could dilute gross margins.

  Comparison

  The gross margin of the neocloud business is expected to exceed that of traditional cloud service providers and enterprise customers. CPO switch margins are expected to exceed 20%, above the mid-single-digit level of NVL72 rack assembly.

  Risks

  Lower-than-expected share of AI servers in the Blackwell or Rubin generations and weaker-than-expected iPhone demand.

Key data

• AI Server Revenue Growth2026: 130%+ YoY; 2027: 70%+J.P. Morgan forecasts that AI servers will remain the primary growth driver over the coming quarters
• 2026 Capital Expenditure Growth30%Continued capacity expansion means capital expenditure could remain elevated over the next few years
• GPU-to-ASIC Revenue MixApproximately 80:20Expected to be reached by the end of 2026, versus approximately 90:10 at the end of last year
• Long-Term ASIC Market Share TargetAt least 40%Management target
• Compute Tray AutomationApproximately 100%According to management, assembly time has been reduced from several hours to several minutes
• Vera Rubin Mass Production Timing3Q26Management confirmed that there have been no recent changes to the schedule
• Vera Rubin ShareApproximately 50%Management expects this level to be reached by the end of 2026
• 2026 Industry-Wide AI Rack Shipments70–75kManagement said shipments could approach recent market guidance, implying potential upside to the outlook
• 2026 VR Rack ShipmentsUp to 10K unitsJ.P. Morgan expects VR200 to enter mass production from late 3Q26 to 4Q26
• VR200 Rack Average Selling PriceApproximately 2x that of GB300The higher selling price supports the revenue contribution from the Vera Rubin platform ramp
• CPO Switch Unit PriceUS$100–150KManagement said the product value is higher than previously expected
• 2026 CPO Switch VolumeApproximately 10K unitsManagement expects volumes to increase severalfold in the following year
• Networking and Optics Revenue Growth2027: 440%; 2028: 74%J.P. Morgan forecast
• CPO Switch Margin20%+J.P. Morgan estimates that this is significantly above NVL72's mid-single-digit margin
• Management Operating Margin TargetApproximately 3%Management reiterated the target and expects operating profit to continue growing
• Operating Margin Forecast for the Coming Quarters3.3–3.4%J.P. Morgan forecast
• AI Server Consignment Model Share10% in 1H26; 20% by the end of 2026A higher consignment share helps manage margins and working capital
• Share of Components Supplied InternallyApproximately 50%Excluding GPUs and memory, reflecting vertical integration capabilities
• Smart Consumer Electronics Revenue Growth4–14% YoY in 2026Management guidance already incorporates the impact of memory supply
• iPhone Electronics Manufacturing Services ShareApproximately 60%The share could increase during new product ramps due to Hon Hai's position as the principal NPI and production partner
• Target Price Valuation MultipleApproximately 14x 12m forward EPSAbove the five-year average multiple, which the report attributes to stronger AI business exposure

Impact & implications

The report believes Hon Hai's sources of growth are expanding beyond traditional GPU racks into ASICs, Vera Rubin, and CPO optical networking, with CPO and neocloud customers potentially offering higher margins. A higher share of the consignment model and vertical integration are expected to cushion gross margin pressure caused by commodity price increases and changes in product mix, allowing rapid AI revenue growth to translate more effectively into operating profit growth.

Risks

• Hon Hai's share of AI servers in the Blackwell or Rubin generations could be lower than expected.
• iPhone demand could be weaker than expected.

What to watch

• Monitor whether CPO opportunities on the ASIC side can become an additional growth driver following GPU optical networking.