China's semiconductor equipment investment boom is expected to continue! Morgan Stanley: Wafer fabrication equipment spending is expected to keep growing in 2027 and 2028, and the localization process may further accelerate.

Morgan Stanley released its latest research report, stating that the strong growth momentum in China's wafer fabrication equipment (WFE) market is expected to continue through 2027 to 2028. The bank estimates that China's WFE spending will increase from $45.6 billion in 2026 to $55.8 billion in 2027, and further reach $68.6 billion in 2028, with year-over-year growth of 23% in both 2027 and 2028. As domestic DRAM and NAND manufacturers continue to expand capacity and the localization of key semiconductor manufacturing segments accelerates, local equipment manufacturers are expected to continue gaining market share; by 2028, capacity expansion for advanced-node logic chips may also open up new growth space for the industry. Morgan Stanley remains overall positive on the Greater China semiconductor sector and continues to rate NAURA Technology Group (002371), Advanced Micro-Fabrication Equipment Inc. China (688012), and ACM Research's parent company ACM Research (ACMR.US) as "Overweight." Although the bank lowered its price targets for the three companies due to factors such as increased R&D investment, it believes the medium- to long-term logic of semiconductor equipment localization in China remains unchanged. China's WFE market may approach $69 billion by 2028; memory chips become the main growth engine Morgan Stanley estimates that China's WFE market size will grow from $45.6 billion in 2026 to $55.8 billion in 2027, and reach $68.6 billion in 2028. This means that in just the two years from 2026 to 2028, China's WFE spending will increase by nearly $23 billion. During the same period, China's share of the global WFE market is expected to reach 28%, 25%, and 27%, respectively, continuing to occupy an important position in the global semiconductor equipment market. Unlike previous investment cycles driven mainly by capacity expansion at mature-node fabs, Morgan Stanley believes that the structure of China's WFE spending is changing, with investment focus gradually shifting toward memory chips and more advanced process technologies. Among this, growth in 2027 is expected to be mainly driven by memory chip capacity expansion. As domestic DRAM and NAND manufacturers increase capacity, demand for deposition, etching, and cleaning equipment is expected to continue growing. By 2028, capacity expansion for advanced-node logic chips may become a new growth driver, extending equipment demand further from memory into advanced logic chip manufacturing. In terms of localization, Morgan Stanley estimates that China's WFE equipment localization rate in 2026 will be only about 25%, meaning local manufacturers still have significant room for import substitution. CXMT Corporation and Yangtze Memory continue capacity expansion; equipment demand from 2027 to 2028 receives important support Memory chips are one of the core reasons Morgan Stanley is bullish on China's semiconductor equipment market this time. In the DRAM segment, the bank expects CXMT Corporation to add approximately 100,000 wafers per month of capacity in each of 2026, 2027, and 2028. Based on previous estimates, CXMT Corporation's overall DRAM capacity is expected to increase from 180,000 wafers per month in 2025 to 500,000 wafers per month in 2028, while its product mix gradually upgrades toward higher-value products such as DDR5, server DRAM, and HBM. Morgan Stanley noted that CXMT Corporation's mass production of Gen4B products, certification for DDR5 and server DRAM, and HBM development are all progressing. However, DUV (deep ultraviolet) lithography equipment remains one of its main external bottlenecks. The bank's latest supply chain survey shows that CXMT Corporation's previously planned Lingang expansion project may be delayed, with more front-end capacity potentially shifting to Hefei. But Morgan Stanley believes this is more a matter of adjustment in timing and location of expansion rather than a fundamental change in the company's medium-term capacity expansion targets. On the NAND side, Yangtze Memory's capacity expansion is also worth watching. Morgan Stanley expects Yangtze Memory to add approximately 35,000 wafers per month of capacity in 2026, and approximately 100,000 wafers per month in each of 2027 and 2028. At the same time, Yangtze Memory is advancing its A-share listing, with an IPO plan to raise RMB 33 billion, of which about RMB 20.8 billion is intended for technology upgrades on mass production lines. Morgan Stanley believes this means that in addition to building new fabs, technology upgrades themselves will also continue to create demand for semiconductor equipment, providing further growth space for etching, deposition, and cleaning equipment manufacturers. Export controls may be a "double-edged sword": short-term impact on capacity expansion, but long-term acceleration of domestic substitution In addition to demand growth, Morgan Stanley also paid special attention to the potential impact of the proposed U.S. MATCH Act on China's semiconductor equipment industry. According to the research report, if the bill is ultimately implemented, it will seek to push U.S. allies toward more consistent policies on key semiconductor equipment export controls, and may cover key equipment such as DUV immersion lithography, TSV deposition and etching, low-temperature etching, and cobalt deposition equipment that China currently finds difficult to supply at equivalent scale. Related restrictions may not only involve equipment exports, but may also extend to equipment installation, calibration, repair, software and firmware updates, training, and other technical support. Wafer fabrication companies involved may include facilities related to Semiconductor Manufacturing International Corporation, Hua Hong, Huawei, CXMT Corporation (688825), and Yangtze Memory. Morgan Stanley believes this could have two effects. In the short term, if some key overseas equipment remains difficult to replace with domestic products, stricter restrictions could affect domestic fabs' equipment installation and capacity ramp-up pace, thus posing certain execution risks. But in the medium term, escalating restrictions may also force domestic fabs to certify domestic equipment faster. Given that Morgan Stanley estimates China's WFE equipment localization rate in 2026 will be only about 25%, further tightening of export restrictions may increase the urgency for fabs to adopt domestic etching, deposition, and cleaning equipment, thereby helping local equipment manufacturers gain greater market share. Therefore, Morgan Stanley summarizes the potential policy changes as follows: in the short term, they may drag on capacity expansion execution at some fabs, but in the medium term, they may become a catalyst for equipment localization. NAURA Technology Group remains top pick, but price target cut to RMB 788 On individual stocks, Morgan Stanley continues to rate NAURA Technology Group as "Overweight" and believes it remains one of the broadest major beneficiaries of China's semiconductor equipment localization trend. NAURA Technology Group's business spans multiple key segments including deposition, etching, and thermal processing, so it can benefit both from memory chip capacity expansion and from domestic substitution in advanced-process equipment. Morgan Stanley believes that Chinese logic chip and memory chip manufacturers may still maintain relatively high capital expenditure from 2026 to 2027, which will continue to support NAURA Technology Group's revenue growth. However, the bank lowered NAURA Technology Group's price target from RMB 818 to RMB 788 this time. The main reason is not deteriorating demand expectations, but higher R&D expense assumptions, while also taking into account delivery delays caused by restricted component procurement in the second quarter of this year. Morgan Stanley lowered its EPS forecasts for NAURA Technology Group for 2026, 2027, and 2028 by 14%, 5%, and 6%, respectively, to RMB 10.93, RMB 17.71, and RMB 22.27; over the same period, revenue forecasts were only cut by 2%, left unchanged, and cut by 1%, respectively. This means the downward revision to earnings forecasts comes more from the expense side rather than a weakening in medium- to long-term demand judgment. Specifically, the bank expects NAURA Technology Group's revenue to grow from RMB 39.353 billion in 2025 to RMB 50.109 billion in 2026, further rise to RMB 70.389 billion in 2027, and reach RMB 85.875 billion in 2028. Maintains ACM Research "Overweight" rating; new product R&D weighs on short-term margins Morgan Stanley also maintains its "Overweight" rating on ACM Research, but lowered its price target from $130 to $115. Similar to NAURA Technology Group, this price target adjustment is mainly due to increased R&D expenses rather than weakening equipment demand. Morgan Stanley kept its revenue forecasts for ACM Research from 2026 to 2028 unchanged at $1.172 billion, $1.542 billion, and $1.857 billion, respectively. The bank expects the company to increase R&D investment in new equipment platforms such as PECVD and Track, so it lowered its operating margin forecasts for 2027 and 2028 from 19.0% and 21.7% previously to 17.7% and 20.6%, and correspondingly cut its EPS forecasts for the two years by 11% and 4%, respectively, to $3.87 and $5.50. Its 2026 EPS forecast remains unchanged at $2.82. However, Morgan Stanley believes that higher R&D investment will help ACM Research expand its product portfolio and serviceable market over the long term. In addition to traditional cleaning equipment, the company's layout in areas such as electrochemical plating (ECP), advanced packaging, and PECVD may all become new sources of growth in the future. Advanced Micro-Fabrication Equipment Inc. China expected to benefit from memory equipment localization; price target adjusted to RMB 428 For Advanced Micro-Fabrication Equipment Inc. China, Morgan Stanley also maintains an "Overweight" rating and adjusted its price target to RMB 428. The report noted that this price target change is mainly related to the previous share split rather than a clear weakening in fundamental judgment. Morgan Stanley believes that Advanced Micro-Fabrication Equipment Inc. China holds an important strategic position in the localization of China's etching equipment and is expected to benefit from continued capacity expansion by memory chip manufacturers. The company not only continues to receive new orders from advanced-process and memory customers, but is also expanding its wafer fabrication equipment product lines such as epitaxy equipment and process control, and has entered the CMP field through acquisitions. The report believes that as companies such as CXMT Corporation and Yangtze Memory expand capacity, demand from local memory chip manufacturers for domestic etching and deposition equipment is expected to continue increasing, and Advanced Micro-Fabrication Equipment Inc. China will be one of the important beneficiaries of this trend.