King Yuan Electronics 1Q26 In-Line, Reiterates 2026 Revenue Growth >40% Target; Maintain OW

Core Conclusion

King Yuan Electronics (2449.TW) reported 1Q26 results in line with estimates, and management reaffirmed the 2026 full-year revenue growth target of >40% YoY with gross margin above 40%. We maintain Overweight rating and NT$338 price target (9% upside from NT$311 close). The key investment thesis rests on stronger 2H26 momentum driven by the R-series XPU ramp and two additional TPU SKUs entering production, which the current valuation does not fully discount.

What the Market May Be Underestimating

The market focuses on 1Q smartphone pull-in and near-term weakness in consumer segments, but the dominant driver for 2H26 is the AI compute testing cycle. Two new Google TPU SKUs (8t and 8i) and the R-series XPU from the major customer will collectively push 2H26 revenue growth materially above 1H26 levels. Management’s reiterated >40% full-year growth implies 2H26 revenue must accelerate to >50% YoY, a scenario the stock’s 31.6x forward P/E does not fully price in given the underlying earnings compounding.

Evidence Chain

1Q26 results confirm execution: Revenue NT$10.19bn (+39.3% YoY, +2.3% QoQ) and EPS NT$1.87 were both within 2% of Morgan Stanley estimates. Gross margin of 39.7% beat the 38.6% estimate by 110bps, reflecting scale benefits and AI mix.

2Q26 guidance supports sequential growth: Management guided low-teens QoQ revenue growth, driven by strong Google TPU and CPU demand. This aligns with our estimate of ~10% QoQ. The slight QoQ deceleration in smartphone (from pull-in) and a modestly lower R-series XPU allocation are temporary.

2H26 momentum is structurally stronger: The company expects 3Q26 revenue growth to exceed 2Q. Key catalysts: (1) R-series XPU volume ramp from the major customer, (2) two new TPU SKUs (8t and 8i) entering production, and (3) continued strength in Google’s CPU testing demand. Management’s maintained >40% full-year growth target directly implies a 2H26 run rate that is >50% YoY.

Capex already deployed: The company lifted 2026 capex to NT$50bn and prepared cleanroom space for 2027. This signals capacity readiness for the expected AI testing volume surge. No near-term capex hike is expected, reducing dilution risk. CPO testing remains in R&D and is not a near-term catalyst or risk.

Key Divergences and Risks

Bull-bear divergence: The bull case hinges on exponential AI test volume growth from TPU/XPU; the bear case argues that non-AI demand (smartphone/consumer) will remain weak and that the major customer’s XPU allocation could shift to other OSATs.

Downside risks:

• Non-AI demand weakness could persist, compressing utilization rates outside AI.
• Testing market share erosion from competition (e.g., ASE, Amkor).
• Drop in shipments from MediaTek or other core customers.
• The 2026 revenue >40% target relies on a ramp that is back-end loaded; any delay in R-series production or TPU SKU introduction would cause a shortfall.

Upside risks:

• Stronger-than-expected AI demand from both GPU and ASIC sides.
• Deeper penetration of wafer sorting business.
• Increased IDM outsourcing to OSATs.

Valuation or Trading Implication

Our NT$338 target is derived from a residual income model with 9.8% cost of equity, 10.5% intermediate growth, and 3.0% terminal growth. At NT$311, the stock trades at 31.6x consensus 2026E EPS of NT$9.84 and 21.5x 2027E EPS of NT$14.45. Given the 2026-2028 EPS CAGR of ~33% (from NT$9.84 to NT$18.77), the forward P/E is below its historical cycle peak of ~35x on a normalized basis. The implied 2027E P/E of 21.5x offers a favorable risk/reward for investors with a 12-month horizon.

We see the strongest entry point during any weakness related to 2Q smartphone noise, as the 2H26 inflection is well-supported by management guidance and visible product pipeline. The maintained full-year target is the anchor: any intra-year pullback should be viewed as a buying opportunity before the ramp materializes.

Positioning: Overweight. Up/downside to target: +9%.

Appendix Data Summary