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

Overview

This earnings update assesses whether Iluvatar CoreX's weak 1H26 gross margin changes the investment case. Morgan Stanley says it does not: the firm views the margin pressure as a deliberate, near-term investment in major cloud service provider supply-chain entry and maintains Overweight.

Core views

Iluvatar reported 1H26 revenue of Rmb946mn, up 192% year on year but slightly below Morgan Stanley's Rmb976mn estimate. AI-GPU shipments, including Tiangai 150 and Zhikai-series chips, remained robust. Net profit attributable to shareholders reached Rmb106mn, compared with a loss a year earlier; the report notes that Rmb760mn of fair-value gains on equity investments was the principal driver of that turnaround. The central negative was gross margin of 17.2%, materially below Morgan Stanley's estimate. The report attributes this primarily to a Rmb171mn gross loss in the semiconductor-components segment. Based on its industry checks, Morgan Stanley believes the loss reflected strategic low pricing of server-memory products to secure a partnership with a major CSP customer, rather than structural deterioration in the core thesis. It also identifies Rmb72mn of impairment losses, which it believes mainly related to write-downs of legacy products. Morgan Stanley's reasoning is that entering major CSP supply chains requires near-term commercial concessions, while subsequent software and ecosystem integration with Iluvatar products can improve alignment with real-world token-production environments. The report argues that this integration creates the technical basis for sustained long-term order wins, supporting its decision to keep Overweight despite the earnings shortfall. The report also highlights inventory and prepayments exceeding Rmb3.9bn in 1H26. Morgan Stanley interprets this build-up as proactive wafer procurement and HBM stockpiling ahead of Tiangai 300 GPU shipments in 2027, positioning the company for accelerated revenue growth next year. Its model forecasts revenue of Rmb3,251mn in 2026e, Rmb8,244mn in 2027e and Rmb12,271mn in 2028e, with ModelWare net income moving from a Rmb232mn loss in 2026e to Rmb1,637mn in 2027e and Rmb2,920mn in 2028e. The HK$688 price target is supported by assumptions including an 8.3% cost of equity, a 34% long-term payout ratio, 16% medium-term growth and 6% perpetual terminal growth. Morgan Stanley identifies stronger-than-expected CSP orders, faster CUDA replacement through Iluvatar software and overseas and domestic capacity expansion as upside factors; weaker order ramp, sanctions escalation and intensifying competition are downside risks.

Analysis framework

Morgan Stanley compares reported revenue and margin with its estimates, uses industry checks to interpret the source of the semiconductor-components loss, and links CSP supply-chain penetration and software integration to future order potential. Its valuation uses explicit cost-of-equity, payout and growth assumptions.

Methodology notes

• Valuation methodsDDM (Dividend Discount Model)

  Dividend-discount valuation assumptions

  The report specifies a cost of equity, long-term payout ratio, medium-term growth rate and perpetual terminal growth rate, which are inputs to valuing future shareholder distributions.

• Competition & strategyValue chain analysis

  CSP supply-chain penetration and ecosystem integration

  The report treats low-priced server-memory sales as a strategic step to enter major CSP supply chains, with later software and ecosystem integration intended to support durable GPU orders.

Asset mapping & comparison

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

• Iluvatar CoreX Semiconductor Co., Ltd. (9903.HK)

  Primary covered company; Morgan Stanley sees strategic CSP supply-chain penetration and future AI-GPU orders as supporting the long-term thesis.

  Strengths

  Robust AI-GPU shipments, CSP software and ecosystem integration potential, and procurement preparation for Tiangai 300 shipments in 2027.

  Weaknesses

  1H26 revenue was slightly below estimate and gross margin was 17.2%, well below expectations.

  Comparison

  The report characterizes the 1H26 gross margin as below peer levels.

  Risks

  Order ramp below expectations, escalation of sanctions, and intensifying competition.

Key data

• 1H26 revenueRmb946mnUp 192% year on year; slightly below Morgan Stanley's Rmb976mn estimate.
• 1H26 gross margin17.2%Well below Morgan Stanley's estimate.
• Semiconductor-components gross lossRmb171mnAttributed by Morgan Stanley to strategic low pricing of server-memory products for a major CSP partnership.
• Impairment lossesRmb72mnBelieved mainly to reflect legacy-product write-downs.
• Net profit attributable to shareholdersRmb106mnTurned profitable from a year-earlier loss, largely driven by Rmb760mn of fair-value gains from equity investments.
• Inventory and prepaymentsMore than Rmb3.9bnLinked to wafer procurement and HBM stockpiling ahead of Tiangai 300 shipments in 2027.
• 2027e revenueRmb8,244mnMorgan Stanley Research estimate.
• 2027e ModelWare net incomeRmb1,637mnMorgan Stanley Research estimate.

Impact & implications

Morgan Stanley believes short-term margin pressure is the cost of establishing major CSP relationships and preparing supply for Tiangai 300 shipments, rather than evidence of structural weakness. The report therefore retains its Overweight view and expects accelerated revenue growth next year.

Risks

• Order ramp could fall below expectations.
• Sanctions could escalate.
• Competition could intensify.

What to watch

• CSP order strength and progress in major CSP supply-chain partnerships.
• The pace of CUDA replacement using Iluvatar's software.
• Overseas and domestic capacity expansion.
• Progress toward Tiangai 300 GPU shipments in 2027 and the associated inventory conversion.