Bank of America: ASE raises advanced packaging outlook as improving margins come with a larger cash flow shortfall

Where did third-quarter growth come from?

ASE Technology Holding’s third-quarter revenue rose 28% quarter on quarter, with integrated circuit assembly, testing and materials (IC ATM) up 20% and electronics manufacturing services (EMS) up 42%. Both businesses outperformed the company’s prior guidance.
Improved capacity utilization, pricing and product mix lifted IC ATM gross margin to 30.6%, its highest since 2015. The company’s overall gross margin was 22.1%, below Bank of America’s previous forecast of 22.8%.

The company guided for total revenue to rise 6%–8% quarter on quarter in the fourth quarter, with IC ATM up 11%–13%, driven by rising cloud AI demand and continued strength in mainstream businesses.
Bank of America noted that mainstream packaging capacity expansion has been limited since 2024, while some leading packaging and testing providers have withdrawn some capacity because of space constraints. Tight supply and demand support higher utilization and prices.
The company guided for fourth-quarter IC ATM gross margin to rise to 31.6%–32.6% and overall gross margin to reach 23%–24%; an improved product mix is one driver.

The company raised its 2026 sales guidance for its advanced packaging and testing business, LEAP, to more than 4 billion dollars, in line with Bank of America’s estimate. It raised its 2027 outlook to more than 8 billion dollars, still below the bank’s forecast of 11 billion dollars.
Bank of America sees growth coming from faster full-process packaging of Venice CPUs, demand for substrate and chip probe testing for AI CPUs, custom chips and network switch chips, and an initial contribution of about 500 million dollars from co-packaged optics. The bank estimates that LEAP will account for about 40% of IC ATM sales in 2027.

Supported by its order backlog, the company’s 2026 capital expenditure is expected to reach its guidance of 11.5 billion dollars. Bank of America expects it to rise further to 13 billion–15 billion dollars in 2027 to add cleanrooms and equipment.
Bank of America believes pricing power can keep depreciation at about 15% of IC ATM sales in 2027, below the long-term range of 15%–20%. Together with an improved product mix, this could lift IC ATM gross margin to around 35%.
Expansion also consumes cash. Bank of America’s model forecasts free cash flow of negative 202.073 billion and negative 197.354 billion New Taiwan dollars in 2026 and 2027, respectively, with net debt rising to 326.878 billion and 580.334 billion New Taiwan dollars, respectively.
Bank of America raised its 2026–2028 earnings-per-share forecasts by 2%–3% and maintained its buy rating and 900 New Taiwan dollar target price. The valuation is based on a forward price-to-earnings multiple of 20 times for the second half of 2027 through the first half of 2028.