Nomura: ASE packaging and testing gross margin breaks above 30%: advanced packaging expansion accelerates as capital spending rises

Third quarter beats expectations: where did the profit improvement come from?

ASE’s revenue in the third quarter of 2026 was 244.2 billion New Taiwan dollars, up 28% quarter on quarter and above the company’s previous growth guidance of 21%–22%; net income was 27 billion New Taiwan dollars, 21.8% above Nomura’s previous forecast.
The gross margin of the packaging, testing and materials business (ATM) reached 30.6%, exceeding the upper end of the company’s 28%–29% guidance. Management attributed the improvement to faster-than-expected deployment of LEAP advanced packaging capacity, higher overall utilization and a rising LEAP share; exchange-rate movements also raised the ATM gross margin by 0.5 percentage points quarter on quarter.
ATM accounted for 61.7% of third-quarter revenue and 91% of operating profit. Revenue at the other business, electronic manufacturing services (EMS), rose 42% quarter on quarter, but its gross margin fell to 8.3%, down 0.6 percentage points: passing component price increases on to customers raised revenue and raw-material costs while diluting the gross margin.

Management believes the previous structural gross-margin range no longer applies as the business mix changes rapidly. The former 30% ceiling has become the baseline, and management expects ATM gross margin to continue improving quarter by quarter from that level. LEAP’s overall gross margin is above the business average, supported by capacity expansion and a more favorable pricing environment.
The company expects total fourth-quarter revenue to rise 6%–8% quarter on quarter, with the 7% midpoint above market consensus of about 3%. ATM revenue is expected to grow 11%–13% and its gross margin to improve by 1–2 percentage points quarter on quarter, while EMS revenue is expected to be roughly flat.
Growth is not coming from advanced packaging alone: the company expects general-market revenue to grow more than 20% year on year in 2026. A recovery in automotive, industrial and AI-related chips offset weak smartphone and PC demand caused by higher component prices.

The company raised its 2026 LEAP revenue target from 3.7 billion US dollars to more than 4 billion US dollars and reiterated its goal of doubling revenue in 2027 to about 8 billion US dollars. Its full turnkey business is expected to generate 300 million US dollars in revenue in 2026 and more than 1 billion US dollars in 2027; the company said yields have reached levels suitable for mass production and large-scale shipments.
The company quantified co-packaged optics (CPO) revenue for the first time: mass production began in the fourth quarter of 2026, and CPO is expected to contribute more than 500 million US dollars in 2027, included in LEAP revenue.
Factory space remains the main bottleneck. The company expects full turnkey demand next year to far exceed what it can deliver, and it is prioritizing packaging capacity because of limited resources, constraining the expansion of testing capacity.

The company raised its 2026 capital expenditure by another 1 billion US dollars to 11.5 billion US dollars and expects higher spending in 2027. Half of the additional 1 billion US dollars will go to facilities and half to equipment; 60% of the additional equipment spending will go to LEAP and the remaining 40% to mainstream businesses.
Expansion comes with financing pressure: at the end of the third quarter, the company had cash and liquid financial assets of 107.9 billion New Taiwan dollars and interest-bearing debt of 406.5 billion New Taiwan dollars, up 100.2 billion New Taiwan dollars from the previous quarter; unused credit facilities stood at 457.3 billion New Taiwan dollars. Management expects cash flow to remain negative next year.
Citing broad business strength and gross-margin expansion, Nomura raised its 2026–2028 earnings-per-share forecasts by approximately 15%–20%, maintained its buy rating and increased its price target from 800 to 940 New Taiwan dollars. The target applies a price-to-earnings multiple of 25 times to average forecast earnings per share for 2027–2028, at the high end of the company’s historical range; Nomura identified the sustainability of AI hardware chip demand and CoW process yields as downside risks.