With memory capacity expansion coupled with Huawei’s breakthrough in 3D IC technology, we are raising our target prices for semiconductor equipment stocks.

Overview

Morgan Stanley released a report noting that China’s semiconductor equipment sector is benefiting from the dual tailwinds of “accelerated memory capacity expansion” and “Huawei’s breakthroughs in 3D IC technology.” Based on this, the firm has revised upward its forecast for the size of China’s wafer fabrication equipment (WFE) market and reaffirmed its Overweight rating on Northern Huacheng (Naura), AMEC, and ACM Research (ACMR), while substantially raising the target prices for all three companies. The report argues that aggressive capacity‑expansion plans by domestic memory manufacturers, coupled with Huawei’s demand for specialized equipment driven by its LogicFolding technology, will provide robust growth momentum for local equipment suppliers.

Core views

China’s WFE market outlook has been revised upward, with memory capacity expansion serving as the primary growth driver. Morgan Stanley’s Global Semiconductor Team has raised its 2026 global WFE market forecast to USD 149 billion (up 27% year over year) and its 2027 forecast to USD 191 billion (up 28% year over year). Against this backdrop, China’s WFE market is expected to grow 15% year over year to USD 48 billion in 2026 and 18% year over year to USD 56 billion in 2027. This expansion is primarily driven by memory foundry investments that have exceeded expectations, coupled with sustained domestic demand for AI‑related semiconductors. Despite export controls, Chinese foundries and memory manufacturers continue to ramp up production at both mature and advanced nodes to support domestic needs in AI computing, automotive, and industrial applications, while Japanese and local Chinese suppliers are stepping in to fill equipment gaps across multiple process steps. The two leading storage players are accelerating capacity expansions, significantly boosting domestic content ratios. Industry surveys indicate that Yangtze Memory Technologies (YMTC) and CXMT will begin constructing new fabs in 2026 to scale up production. YMTC’s Fab 3 is currently under construction and is slated to start ramp-up in 2026, with Fab 4 and Fab 5 planned to follow. Meanwhile, CXMT, in addition to its existing facilities in Hefei and Beijing, plans to expand capacity in Shanghai. Affected by stricter U.S. export controls, CXMT’s future projects are now projected to feature a domestic equipment penetration rate 5–10 percentage points higher than previously estimated, reaching 35%. For YMTC, the domestic content ratio at its new fab has already climbed to approximately 60%, with priority given to qualified domestic suppliers for key processes such as 3D NAND etching, deposition, and hybrid bonding. Consequently, institutions have substantially upgraded their capacity forecasts for both companies: YMTC’s 2027 and 2028 capacity projections have been raised to 85,000 and 100,000 wafers per month, respectively, while CXMT’s 2026–2028 capacity estimates have been adjusted upward to 80,000, 90,000, and 100,000 wafers per month, respectively. Huawei’s breakthrough in LogicFolding technology opens up new equipment demand. In a recently published paper, Huawei introduced t-scaling theory and LogicFolding—a 3D IC architecture that achieves shorter interconnect lengths and reduced RC delays through vertical stacking of digital circuits. This approach aims to enable 5nm/7nm chips to deliver performance comparable to more advanced nodes, thereby circumventing lithography tool limitations. Key enablers for implementing this technology include hybrid bonding systems and copper electroplating (ECP) equipment for through-silicon vias (TSVs). The report suggests that semiconductor equipment suppliers capable of providing these critical tools—particularly those with strengths in TSV metallization—will be among the primary beneficiaries. Key stock updates: 1. Northern Huacheng (002371.SZ): As a long-term beneficiary of China’s semiconductor equipment localization trend, the company’s major customers are set to continue aggressive capacity expansions. Institutions have revised up its 2026–2028 EPS forecasts by 1%, 11%, and 16%, respectively, raising the target price from RMB 600 to RMB 818. The rationale lies in increased demand for hybrid bonding and wet‑cleaning tools driven by memory fab expansions and Huawei’s LogicFolding technology. 2. AMEC (688012.SS): With a strategic position in etching and deposition equipment, AMEC recently raised its 2026 backlog growth guidance from 30% to 50%. Institutions have upgraded its 2026–2028 EPS forecasts by 1%, 6%, and 11%, respectively, and lifted the target price from RMB 450 to RMB 550, reflecting potential gains in market share among memory and advanced-node customers. 3. ACM Research (ACMR.O): Its ECP and wet‑cleaning tools are critical enablers for Huawei’s LogicFolding technology. Institutions anticipate that Huawei’s process will accelerate the adoption of ECP in TSV metallization, spurring rapid growth in ACMR’s non‑wet cleaning business. Accordingly, the firm’s 2026–2028 EPS forecasts have been raised by 3%, 11%, and 17%, respectively, with the target price increased from USD 68 to USD 90.

Analysis framework

This report employs a combined approach that integrates top-down industry‑level cyclical analysis with bottom-up company‑fundamental validation. First, at the industry level, analysts have revised their forecasts for China’s WFE market size by tracking global and regional wafer fab capital expenditure (Capex) data and factoring in insights on memory cycles and AI demand. In particular, the report conducts an in-depth review of the construction progress and capacity plans of China’s two leading memory manufacturers—YMTC and CXMT—quantifying specific capacity expansion figures (measured in kWpm) and assessing the extent to which equipment localization has advanced amid geopolitical dynamics. Second, from a technological‑change perspective, the report analyzes Huawei’s latest technical paper, identifying “LogicFolding”—a 3D IC architecture—that generates additional demand for certain semiconductor processes, including hybrid bonding and TSV ECP. This analysis goes beyond conventional process‑node scaling, focusing instead on optimizing system‑level time constants (tau) to uncover new incremental opportunities in the equipment market. Finally, at the corporate valuation level, analysts apply the Residual Income Model to value three key companies. By adjusting mid‑term growth assumptions—reflecting opportunities arising from capacity expansions and technological breakthroughs—and refining earnings projections—accounting for revenue growth and operating leverage—they derive updated target prices. This methodology underscores a firm’s long‑term ability to generate excess returns, rather than merely responding to short‑term P/E ratio fluctuations.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-and-demand framework

  Supply-and-Demand Analysis of the Semiconductor Equipment Industry

  The report derives the market potential for upstream semiconductor equipment suppliers by analyzing downstream wafer fabs’ capital expenditure plans and the pace of capacity expansion. This constitutes the core logic of semiconductor cycle analysis: equipment manufacturers’ performance is highly contingent on wafer fabs’ willingness and ability to expand production capacity.

• Valuation MethodologyRIM Residual Income Model

  Residual Income Model

  An absolute valuation method that determines equity value by discounting the present value of a company’s future residual income in excess of its cost of capital. In the report, this approach is applied to Northern Huacheng, CWTC, and ACM Research, emphasizing their long-term ability to generate returns above the weighted average cost of capital (WACC).

• Industry/ Sector Analysis FrameworkOthers

  Moore’s Law Extension and 3D IC Packaging

  As traditional planar process scaling (Moore’s Law) encounters physical and geopolitical bottlenecks, enhancing system performance through vertical chip stacking (3D IC) and advanced packaging technologies has emerged as an alternative path. The report notes that Huawei’s LogicFolding technology falls into this category, reducing reliance on lithography equipment while increasing demand for bonding and TSV‑related tools.

Asset mapping & comparison

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

• Northern Huacheng (002371.SZ)

  Benefits: As China’s leading platform-based semiconductor equipment provider, the company stands to benefit directly from domestic memory manufacturers’ capacity expansions and the rising share of domestically produced equipment.

  Strengths

  The company boasts a broad product portfolio—covering etching, deposition, cleaning, and more—while maintaining a solid customer base and poised to benefit over the long term from the ongoing trend of domestic substitution.

  Comparison

  Compared with a single equipment vendor, it exhibits stronger risk resilience and boasts a larger revenue scale.

  Risks

  The semiconductor capital expenditure cycle has slowed; market share has declined; and weakening demand in sectors such as automotive and industrial automation has led to an oversupply of chips.

• AMC Microelectronics (688012.SS)

  Benefits: The company boasts global competitiveness in the etching equipment sector, with its market share expanding in both the memory and advanced logic chip segments.

  Strengths

  Technological leadership, robust backlog guidance (50% growth by 2026), and entry into new segments such as CMP.

  Comparison

  The company boasts strong competitiveness in the etching segment, rivaling global industry leaders, and is one of the few domestic equipment suppliers with international market clout.

  Risks

  Global semiconductor market weakness; product development lagging behind expectations; deceleration in domestic demand.

• ACM Research (ACMR.O)

  Benefits: Its ECP and wet-cleaning tools are critical enabling equipment for Huawei’s LogicFolding 3D IC process.

  Strengths

  The company boasts proprietary technologies in single-wafer cleaning and ECP, with a high revenue share from the Chinese market and clearly defined gross-margin targets.

  Weaknesses

  In the first half of 2026, profit margins may come under pressure from intensified competition and inventory write-downs.

  Comparison

  It possesses differentiated advantages in specific cleaning and electroplating sub‑segments, setting it apart from general‑purpose cleaning equipment suppliers.

  Risks

  China’s equipment demand has been weaker than expected; the U.S. has imposed additional restrictions that are impacting operations; and global semiconductor demand is slowing.

Key data

• China’s WFE Market Forecast for 2026US$48 billionUp 15% year on year
• China’s WFE Market Forecast for 2027US$56 billionUp 18% year on year
• YMTC 2028 Capacity Forecast100,000 wpmSignificantly revised upward from the previous forecast.
• CXMT 2028 Capacity Forecast100,000 wpmSignificantly revised upward from the previous forecast.
• Northern Huachuang’s target priceRMB 818Raised from 600 yuan
• Zhongwei Company’s target priceRMB 550Raised from RMB 450
• ACM Research’s target priceUSD 90Raised from $68

Impact & implications

The research report argues that China’s semiconductor equipment industry is poised for structural growth. On the one hand, the recovery of the memory cycle and the explosive surge in domestic AI computing demand are prompting leading domestic players such as YMTC and CXMT to accelerate capacity expansion, which is translating into substantial orders for etching, deposition, and cleaning equipment. On the other hand, Huawei’s technological breakthroughs in 3D IC—specifically its LogicFolding technology—have provided a viable pathway for China’s chipmakers, which currently lack access to the most advanced lithography tools, to enhance performance. This development is set to reshape value dynamics across certain equipment segments, with hybrid bonding and TSV copper plating equipment emerging as new growth drivers. For investors, this implies that top-tier domestic equipment suppliers stand to benefit not only from volume-driven growth—through expanded production capacity—but also from qualitative improvements, including rising localization rates and the adoption of cutting-edge processes. Northland Precision, AMEC, and ACM Research, owing to their leading positions in their respective niche markets and their ability to adapt to emerging technologies, are viewed as key beneficiaries.

Risks

• China’s semiconductor capital expenditure cycle has slowed, resulting in equipment orders that fall short of expectations.
• Geopolitical risks have intensified, and the United States has imposed stricter export controls, impacting supply chains and corporate operations.
• Weak overall demand in the semiconductor industry has prompted wafer fabs to postpone their capacity expansion plans.
• Domestic equipment manufacturers are lagging behind expectations in R&D, resulting in lost market share and margin pressure.
• Weaker demand in sectors such as automotive, factory automation, and the Internet of Things has led to an oversupply of semiconductors.

What to watch

• The actual progress of capacity ramp-up and equipment tendering for Yangtze Memory Technologies Co., Ltd. (YMTC) and CXMT.
• The progress of mass production of Huawei’s LogicFolding technology and the specific procurement requirements for hybrid bonding and TSV equipment.
• Quarterly changes in new orders (Bookings) and order backlogs (Backlog) for domestic semiconductor equipment manufacturers.
• Any new developments in U.S. export controls on semiconductors to China.