Iluvatar CoreX Semiconductor Co., Ltd. (09903) Report Interpretation

Overview

This risk-reward update on Iluvatar CoreX Semiconductor keeps Morgan Stanley's Overweight view while reducing the price target to HK$668. The report attributes the 1H26 gross-margin shortfall to strategic pricing of server-memory products and argues that order visibility, product compatibility and supply access support the longer-term growth case.

Core views

Morgan Stanley lowers its price target to HK$668 from HK$688 but retains an Overweight rating. The immediate change is a weaker-than-expected 1H26 gross margin: the firm widens its 2026 per-share loss estimate to Rmb1.03 from Rmb0.91. It nevertheless characterizes the margin miss as “near-term pain, not structural weakness,” because the weakness reflects strategic low pricing of server-memory products intended to secure a partnership with a major cloud service provider (CSP). Against that near-term pressure, Morgan Stanley raises its EPS forecasts by 2% for 2027 and 3% for 2028, citing a strong order outlook from the major CSP client. The central growth argument is order visibility from domestic CSPs. Morgan Stanley expects TianGai-150 shipments to ramp in 2H26 and to contribute more than Rmb4bn of revenue in 2026-27. It also highlights high CUDA compatibility, which it says reduces migration friction, and notes successful large-language-model deployment as validation of product-market fit. A diversified foundry strategy, including access to TSMC capacity, is presented as a supply-security advantage that can mitigate export-control risk and domestic yield constraints. In the base case, Morgan Stanley assumes a 135% revenue CAGR for 2025-28e, supported by strong CSP orders and supply-chain capacity. It forecasts gross margin of 31.6% in 2026e and 43% in 2027e, with loss-making server-DRAM shipments weighing on the nearer-year margin profile, and expects full-year profitability in 2027. The HK$668 base-case target corresponds to 50x 2026e price-to-sales, below the stated peer average of 75x. The bull case is HK$1,225, based on revenue CAGR above 150% in 2025-28e as domestic AI-infrastructure build-out and procurement of training and inference chips accelerate. It assumes gross margin above 40% in 2026e and 50% in 2027e through scale, technology maturation and a higher-value product mix, with full-year profitability achieved in 2026. The bear case is HK$334, assuming revenue CAGR below 80%, slower domestic AI capital expenditure and large-model commercialization, relaxed Nvidia export restrictions on mid-range AI chips to China, more intense price competition, gross margin below 25% in 2026e and 30% in 2027e, and no full-year profitability until 2028.

Analysis framework

Morgan Stanley updates earnings estimates for the 1H26 gross-margin outcome, then weighs the resulting near-term profitability pressure against CSP order visibility, product migration capability and foundry supply access. It frames valuation through base, bull and bear scenarios using 2026e price-to-sales multiples and explicit growth and margin assumptions.

Methodology notes

• Valuation methodsPS valuation

  Scenario-based 2026e price-to-sales valuation

  Morgan Stanley values the base case at 50x 2026e P/S and compares it with a stated peer average of 75x, while setting separate bull and bear price outcomes.

• Quantitative, Factor, and Portfolio TheoryCAPM (Capital Asset Pricing Model)

  Cost of equity derived from beta, risk-free rate and equity risk premium

  The report states an 8.3% cost of equity derived from a beta of 1.05, a 2.0% risk-free rate and a 6.0% equity risk premium as a valuation assumption.

Asset mapping & comparison

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

• Iluvatar CoreX Semiconductor Co., Ltd. (09903.HK)

  Primary covered company; Morgan Stanley maintains Overweight while lowering its price target after weaker 1H26 gross margin.

  Strengths

  Strong domestic CSP order visibility, TianGai-150 shipment ramp, CUDA compatibility, validated LLM deployment and access to TSMC capacity.

  Weaknesses

  Strategic low pricing of server-memory products and loss-making server-DRAM shipments pressure near-term gross margin.

  Comparison

  The HK$668 target implies 50x 2026e P/S versus a stated peer average of 75x.

  Risks

  Order ramp below expectations, sanctions escalation and intensifying competition.

Key data

• Price targetHK$668.00Reduced from HK$688.00; base-case value.
• 2026 per-share loss estimateRmb1.03Widened from a prior Rmb0.91 loss because of weaker-than-expected 1H26 gross margin.
• 2027 EPS forecast revision+2%Raised on a strong order outlook from the major CSP client.
• 2028 EPS forecast revision+3%Raised on a strong order outlook from the major CSP client.
• TianGai-150 revenue contribution>Rmb4bnExpected across 2026-27 as shipments ramp in 2H26.
• Base-case revenue CAGR135%Assumed for 2025-28e.
• Base-case gross margin31.6% in 2026e; 43% in 2027eIncludes pressure from loss-making server-DRAM shipments.
• Base-case valuation50x 2026e P/SBelow the stated peer average of 75x.
• Bull and bear casesHK$1,225 and HK$334Risk-reward scenario values.

Impact & implications

Morgan Stanley's maintained Overweight view rests on its assessment that strategic margin pressure is temporary and that CSP demand, TianGai shipment growth, CUDA-compatible software and foundry access can support a recovery in earnings and margins. The lower target reflects the weaker near-term gross-margin outlook rather than a change in that broader thesis.

Risks

• Order ramp below expectations.
• Escalation of sanctions.
• Intensifying competition.
• Slower domestic AI capital expenditure and large-model commercialization could weaken growth.
• Relaxed Nvidia export restrictions on mid-range AI chips to China could intensify price competition.

What to watch

• CSP AI-capex growth and CSP order strength.
• The TianGai shipment ramp in 2H26.
• CUDA migration trends and adoption of Iluvatar's software.
• Expansion of overseas and domestic capacity, including supply-chain access.
• The gross-margin improvement trajectory and timing of full-year profitability.