Morgan Stanley: China's advanced packaging will reach 100 billion in 2029, equipment vendors outperform testing factories, ACM Research (ACMR.US) as top recommendation

According to Zhitong Finance APP, Morgan Stanley released a research report stating that advanced packaging in China remains a long-term growth track driven by AI, but there is a divergence between industry scale growth and profit growth among packaging and testing companies.

Morgan Stanley pointed out that the profitability of packaging and testing companies depends on whether capacity can be filled, while equipment manufacturers’ revenue depends on whether capacity is being built. Therefore, they prefer equipment manufacturers over packaging and testing companies, and in the packaging and testing segment, they prefer companies growing their market share. The industry view remains "attractive." Among the four companies in this round of capacity expansion, ACM Research is Morgan Stanley's top pick and the only one listed primarily on the US stock market.

Market Size to Reach 100 Billion Yuan by 2029

The research estimates that the market size of advanced packaging in China will reach around RMB 100 billion by 2029, with a compound annual growth rate of approximately 13% from 2025 to 2029. Among them, Chiplet/2.5D will grow the fastest, with a market size of about RMB 17.7 billion by 2029 and a compound annual growth rate of 40%. Flip chip and wafer-level packaging will see CAGR of only 10% and 9% over the same period, respectively.

Morgan Stanley pointed out that AI accelerators’ demand for computing power density, memory bandwidth, and heterogeneous integration continues to rise, and as access to advanced front-end process equipment becomes restricted, performance improvements driven by packaging hold higher strategic value for China.

Moderate Oversupply Risks Exist

The research estimates that China’s 2.5D annual production capacity will increase from 120,000 wafers in 2025 to 436,000 wafers in 2027, equivalent to about 16% of overseas capacity (mainly led by TSMC). JCET, Tongfu Microelectronics, Huatian Technology, and Yongsi Electronics, among others, are expanding production simultaneously. Coupled with long equipment delivery times and the demand for localization in the AI supply chain, companies generally prefer to "build capacity first, then wait for orders."

On the demand side, it is constrained by advanced process yields and HBM supply: the bank estimates that shipments of AI GPUs from Chinese manufacturers will reach 4.9 million units in 2027. With roughly 21 good dies per wafer and an overall yield of 85%, this corresponds to about 277,000 wafers in demand. Domestic HBM3E production, at about 3-4 million chips, can only support 750,000 to 1 million GPUs, with the rest still relying on overseas supply. Overall calculation indicates the industry’s capacity utilization rate will be only about 63% in 2027. In addition, most domestic capacity starts with CoWoS-S, while the next generation of products is moving toward CoWoS-L, possibly leading to a structural mismatch of "S-type capacity oversupply and L-type capacity shortage."

Equipment Manufacturers Will Benefit More Than Packaging and Testing Companies

Morgan Stanley stated that regardless of whether the newly added packaging and testing capacity achieves ideal returns, building capacity itself requires upfront equipment investment. At the same time, migration to 2.5D/3D brings increases in process steps such as fine RDL, TSV, wafer-level processing, temporary bonding, TCB, and hybrid bonding, so the value of equipment per unit capacity increases accordingly. Data shows that global capital expenditure by packaging and testing companies will grow 65% year-on-year in 2025 and is expected to rise by 67% in 2026, reaching a historical high as a proportion of revenue.

The bank’s top picks are ACM Research (ACMR.US) and ASMPT: The former benefits from wet processes such as electroplating and cleaning, and in Q2 2026, its advanced packaging revenue (excluding ECP) increased by 153% year-on-year. It also received its first mass production order from a mainland China customer for a 510×515mm panel-level electroplating tool. ASMPT is a leader in TCB and hybrid bonding, reaching a record high of $339 million in advanced packaging revenue in H1 2026, accounting for 30% of group income.

Short-term Contributions of 3DIC, HBM, and CPO May Be Overestimated

The bank believes these three technologies have significant strategic importance but their profit contributions over the next two years may fall short of market expectations. 3DIC is limited by costs and composite yield, making large-scale rollout difficult this year, and the Chinese market size will only be tens of millions of US dollars in the next 2-3 years—even though Huawei has already applied logic stacking technology to its flagship processor and aims to reach an equivalent 1.4nm density by 2031. HBM has the largest potential demand, but the packaging value mainly remains within the memory ecosystem, making it difficult for independent packaging and testing firms to benefit directly. Large-scale deployment of CPO is more likely to happen in 2027-2028.

Main Beneficiaries Listed in US Stocks

Specifically, Morgan Stanley gives ACM Research (ACMR.US) an "Overweight" rating with a target price of 130 USD, implying about 94% upside from the closing price of 66.9 USD on September 15, with a risk-reward ratio of 6.3, ranking first among all covered stocks.

This company is positioned in segments where equipment intensity is rising rapidly—electroplating, cleaning, and other wet processes, which happen to be the steepest areas for equipment value per unit capacity in 2.5D/3D and panel-level packaging. The fundamentals are already materializing: in Q2 2026, its advanced packaging revenue (excluding ECP) increased 153% year-on-year, and it delivered its 2,000th electroplating chamber that quarter. More importantly, it received the first mass production order for a 510×515mm horizontal panel-level electroplating tool from a mainland China customer, marking a shift from "near mass production" to "real mass production" in panel-level packaging. ACM Research is listed on Nasdaq but mainly has capacity and customers in China, possessing both attributes of a US-listed stock and a domestic substitution target.