A third-quarter beat: what did revenue and profit each contribute?

  • Third-quarter revenue in 2026 was 10.478 billion yuan, up 66% year on year and 20% quarter on quarter, exceeding Morgan Stanley’s forecast by 15% and the market consensus by 18%. Net profit was 1.878 billion yuan, up 94% year on year and 34% quarter on quarter, exceeding the bank’s forecast and the market consensus by 33% and 18%, respectively.
  • Profit grew faster than revenue: gross margin rose to 34.4%, up 2.7 percentage points quarter on quarter; operating margin rose to 22.7%, up 2.3 percentage points. The bank attributed the improvement to product mix, utilization and narrower ABF losses. Growth also diverged across businesses: PCB and packaging substrate revenue rose quarter on quarter, while PCBA revenue declined.

Why does a higher AI share boost gross margin?

  • AI-related products’ share of PCB revenue rose from about 50% in the second quarter to about 60% in the third, with demand spanning AI compute accelerators, server storage, switches and power-supply modules. Gross margin benefited from two changes in the mix: higher-margin PCBs accounted for a greater share of total revenue, and AI products accounted for a greater share within PCBs.
  • Price increases also contributed to the improvement in gross margin, but management noted that they corresponded to higher raw-material costs. The quarter’s improvement therefore included both a higher share of high-end products and cost pass-through; the price increases cannot all be interpreted as additional profit margin.

Optical module PCB upgrades: where does the added value lie?

  • The high-density design requirements of 800G and 1.6T optical modules are accelerating adoption of the mSAP process, lifting PCB average selling prices and improving the product mix. The growth case includes both increased demand and higher value per unit from more complex products.
  • Addressing concerns about PTFE material processing capabilities, management stressed that the company has accumulated relevant experience through its wireless base station business since 2018. PCBs for 1.6T optical modules are currently at the sampling stage, with a larger-scale ramp-up expected in 2027.

Can ABF shift from a drag on profit to a contributor?

  • Narrower ABF losses in the third quarter have already helped improve overall profitability. FCBGA (ABF) substrate revenue is expected to exceed 600 million yuan in 2026, compared with just over 100 million yuan in 2025. Management expects revenue to double year on year in 2027 and the business to achieve profitability in a single quarter by the end of 2026; the target is a quarterly turnaround to profit.
  • Mass-production capability has advanced from 22 layers to 26 layers, and customers remain predominantly domestic. Phase-one capacity in Guangzhou is close to full utilization. The company is equipping reserved factory space and preparing a new dedicated FCBGA plant to accommodate expanding customer demand.

What support does BT provide, and how has the institutional view changed?

  • The Shenzhen and Wuxi BT substrate plants maintain high utilization, and storage-related products account for about 40% of the company’s IC substrate revenue. The company believes that global peers are shifting capital expenditure toward ABF, tightening BT supply. Together with new capacity in Wuxi and Guangzhou and upgrades to higher-layer-count products, Morgan Stanley sees BT as a business capable of sustained growth and profit expansion.
  • The strong results did not change the bank’s Equal-weight rating, with a target price of 415 yuan. It believes the results leave its existing investment thesis unchanged and that the market consensus for earnings per share could be revised slightly upward over the next 12 months.