Citi: ASE’s advanced packaging lifts margins as expansion spending rises

Why did third-quarter profit rise sharply?

ASE Technology Holding’s net profit reached 27 billion New Taiwan dollars in the third quarter of 2026, up 28% quarter on quarter and 148% year on year. Higher utilization in conventional packaging and testing and a better product mix from the ramp-up of its LEAP advanced packaging business together drove results.
Management expects consolidated revenue to grow 6%–8% quarter on quarter in the fourth quarter, with consolidated gross margin rising to 23%–24% from 22.1% in the third quarter. Packaging, testing and materials revenue is expected to grow 11%–13% quarter on quarter, while electronics manufacturing services revenue is expected to remain flat.
Demand for conventional packaging and testing is also improving, supported by automotive, industrial and AI-related chips; smartphone and PC demand, however, is soft. Management still expects its general-market business to return to growth in 2027.

Management expects LEAP revenue to exceed 4 billion US dollars in 2026 and double in 2027. The LEAP ramp-up and higher utilization in conventional packaging and testing are the main reasons the company expects gross margin to keep expanding.
Co-packaged optics (CPO) is scheduled to enter mass production in the fourth quarter of 2026. The company expects revenue to exceed 500 million US dollars in 2027; this is included in LEAP revenue.
Turnkey services revenue is expected to be about 300 million US dollars in 2026 and exceed 1 billion US dollars in 2027, with growth supported by projects from multiple customers.

Packaging and testing demand still exceeds existing capacity, and factory space is also a constraint. The company raised its 2026 capital expenditure outlook to 11.5 billion US dollars and expects a further increase in 2027. Resources are being prioritized for packaging and wafer probe testing, with packaging expected to grow faster than testing.
The company has 22 construction projects in Taiwan and expects more than half to begin contributing some revenue by the end of 2027. Funding may come from multiple sources, including customer trade financing arrangements.
Citi’s model forecasts operating cash flow of about 239.8 billion New Taiwan dollars in 2026, below capital expenditure of about 373.4 billion New Taiwan dollars. Free cash flow to shareholders is forecast at negative 133.6 billion New Taiwan dollars, turning positive to about 97.9 billion New Taiwan dollars in 2027.

Citi expects advanced packaging to account for a larger share of the business and gross margin to rise structurally. It raised its net profit forecasts for 2026–2028 by 12%, 18% and 16%, respectively. Its 2027 gross margin forecast rose from 23.4% to 25.2%, while its revenue forecast increased by about 1%.
Citi maintained its buy rating and raised its target price from 750 New Taiwan dollars to 908 New Taiwan dollars, continuing to apply a price-to-earnings multiple of 25 times forecast 2027 earnings per share. The bank also noted that aggressive capacity expansion could create industry oversupply and that competition could erode prices.