Advanced packaging enthusiasm for glass substrates boosts panel stocks, but earnings realization may have to wait until after 2028

Overview

This report focuses on the opportunity for Greater China display panel makers to enter advanced packaging via glass substrates. Morgan Stanley believes glass materials can bring potential advantages to advanced packaging through larger size, lower signal loss, lower thermal expansion mismatch/warpage risk, and higher mechanical strength; however, actual adoption in HPC scenarios is more likely in 2028/2029, and near-term stock-price enthusiasm has clearly run ahead of fundamental realization.

Core views

The core view is that a long-term technology opportunity exists, but investment judgment needs to differentiate among technology progress, mass-production timing, capex, and valuation. Innolux has the highest visibility in early glass core substrate development, but its valuation has already been significantly rerated, making the risk-reward unattractive; while BOE has lower advanced-packaging visibility than Innolux, its leadership in the display business and relative valuation make it the sector top pick; AUO faces less valuation pressure, but the timing of revenue contribution from its LEO and CPO businesses remains unclear.

Analysis framework

The report combines supply-chain checks, company technology roadmaps, capex plans, revenue contribution assumptions, and a P/B valuation framework to compare Innolux, BOE, and AUO on a relative basis, and evaluates target prices and risk-reward through bull, base, and bear scenarios.

Methodology notes

• Valuation methodP/B valuation method

  Using 2026e P/B multiples to assess the value of panel companies

  The report believes the panel industry is highly cyclical and earnings are heavily affected by capacity and pricing, so price-to-book better reflects the intrinsic value of Innolux, AUO, and BOE than earnings multiples.

• Industry researchSupply chain checks

  Judging glass substrate progress through PoC, validation testing, and mass-production plans

  Based on supply-chain information, the report concludes that Innolux has completed proof of concept and will move forward with more validation, while BOE already has a pilot line and is engaging domestic and overseas IC design customers, though the earliest mass production still points to 2028.

• Risk-reward analysisBull/Base/Bear scenarios

  Using different P/B multiples and business progress assumptions to derive scenario values

  The bull case emphasizes improving demand and faster contribution from advanced packaging, while the bear case emphasizes panel price declines, weaker supply discipline, and slower-than-expected progress in semiconductor-related businesses.

• Revenue modeling2028 revenue contribution assumptions

  Advanced packaging revenue begins to be included in forecasts for some companies starting in 2028

  The report estimates Innolux's packaging-related revenue at NT$20bn in 2028, about 6% of revenue; BOE's related revenue at Rmb5bn in 2028, about 5% of revenue; and no related revenue included for AUO before 2028.

Asset mapping & comparison

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

• BOE Technology (000725.SZ)

  Sector top pick, rated Overweight

  Strengths

  One of the world's largest panel manufacturers, with display manufacturing experience, and aims to complete the full glass core substrate process from TGV to build-up layers; its current 2.1x 2026e P/B is below the historical peak of 2.7x, offering relatively better risk-reward.

  Weaknesses

  Advanced-packaging business visibility is lower than Innolux's, and customer validation, capex execution, and the mass-production path still need to be proven.

  Comparison

  The report's relative preference ranking is BOE > Innolux > AUO.

  Risks

  Execution risk exists around the 2027 Rmb5bn capex, construction of monthly 15K substrate capacity, and the 2028 mass-production target; declining commodity panel prices would also pressure fundamentals.

• Innolux (3481.TW)

  Early leader in glass core substrates, rated Equal-weight

  Strengths

  Participates in a glass core substrate project with a foundry customer, with PoC completed and further validation to proceed; it has the highest near-term market attention on the FOPLP and TGV themes.

  Weaknesses

  TGV formation and copper electroplating are not traditional display panel processes and may require NT$20-30bn in initial capex; the stock price has nearly tripled within two months, and current valuation is already at historical highs.

  Comparison

  Technology visibility is stronger than BOE's and AUO's, but risk-reward is inferior to BOE's.

  Risks

  Mass production may come no earlier than 2028, so revenue realization is slow; other manufacturers may join competition at the mass-production stage; risks of panel price declines and valuation pullback are high.

• AU Optronics (2409.TW)

  Diversified follower, rated Equal-weight

  Strengths

  Focused on LEO antennas, CPO, and optical module directions, and is advancing a micro LED-based CPO architecture with partners such as Ennstar and Tyntek; current valuation is relatively not high among the three companies.

  Weaknesses

  At this stage its focus is not on HPC advanced packaging, the timetable for revenue contribution from LEO antennas and CPO modules is unclear, and the report does not include advanced packaging revenue before 2028 in its model.

  Comparison

  It has the lowest advanced-packaging visibility, but also the lowest valuation requirement.

  Risks

  There is uncertainty around market acceptance, customer adoption, and the timing of revenue contribution for LEO and CPO; the commodity panel cycle will still affect earnings.

Key data

• HPC adoption timing2028/2029The report believes actual adoption of glass panels in HPC advanced packaging is more likely to occur in 2028/2029.
• Innolux glass core project510mm*515mm glass panels; initial capex of about NT$20-30bnInnolux handles the TGV process and then passes it to Ibiden for the substrate process; the main challenges lie in TGV formation and subsequent copper electroplating.
• Innolux 2028 revenue contributionNT$20bn, about 6% of revenueThe report includes packaging-related business revenue in its 2028 model and mentions that the advanced packaging business may account for 15-20% of 2028 profit.
• BOE capacity planMay invest Rmb5bn in 2027, with monthly output of 15K 510*515mm substratesIf progress goes smoothly, BOE targets mass production in 2028 and hopes to complete the full process from glass core and TGV to build-up layers.
• BOE 2028 revenue contributionRmb5bn, about 5% of revenueThe report forecasts BOE's advanced-packaging-related revenue at about Rmb5bn in 2028.
• AUO revenue assumptionNo advanced packaging revenue included before 2028AUO is currently more focused on LEO antennas and CPO/optical modules, and the report believes visibility on the timing of revenue contribution is relatively low.
• Target priceInnolux NT$60.00；AUO NT$27.00；BOE Rmb9.30Target prices for all three companies were raised, but ratings diverge: BOE is Overweight, while Innolux and AUO are Equal-weight.
• Valuation multiplesInnolux 2.1x 2026e P/B；AUO 1.4x 2026e P/B；BOE 2.5x 2026e P/B base caseThe report uses P/B as the core valuation framework, reflecting the panel industry's cyclical and asset-driven characteristics.
• Panel price viewPrices may start to decline from 3Q26The report believes the current TV panel price increase may already have ended, though major panel makers may still maintain relatively good output discipline.

Impact & implications

For investors, advanced packaging with glass substrates is an important theme that can reshape the long-term narrative for panel makers, but in the short term technical feasibility should not be equated directly with earnings realization. Share prices have already reflected considerable optimism, especially with Innolux's valuation at historical highs; relatively speaking, BOE is more balanced among its core display business position, potential advanced-packaging expansion, and valuation risk-reward.

Risks

• Mass production of advanced packaging using glass substrates and HPC adoption may come later than 2028/2029.
• New processes such as TGV laser-induced etching, copper electroplating, and build-up layers may bring yield and capex risks.
• The current TV panel price upcycle may end, and panel prices may start declining from 3Q26.
• If supply discipline weakens, demand softens, or competition among Chinese panel makers intensifies, commodity panel profitability may come under pressure.
• Innolux's valuation has already been significantly rerated; if advanced-packaging revenue is realized slowly, risk-reward may deteriorate.
• Market acceptance of AUO's LEO antennas and micro LED-based CPO solutions remains uncertain.
• More competitors may enter during the mass-production phase, weakening the first-mover advantage of early participants.

What to watch

• Progress of Innolux's follow-up validation tests with foundry customers.
• Whether Innolux procures new glass-core-related equipment and the implementation pace of NT$20-30bn capex.
• BOE's 2027 Rmb5bn capex, construction of monthly 15K substrate capacity, and 2028 mass-production target.
• Validation results from domestic and overseas IC design companies for BOE's glass core substrates.
• Whether AUO's LEO antenna and CPO/optical module businesses secure clear customers and revenue timelines.
• TV/IT panel prices, capacity utilization, and supply discipline among major panel makers.
• Whether advanced-packaging revenue enters the Innolux and BOE models in 2028 as assumed in the report.
• Whether P/B valuation continues to be supported by the advanced-packaging narrative, or reverts to commodity panel fundamentals.