Morgan Stanley: Tech hardware investment theme shifts to structural upgrading + AI infrastructure; prefer targets with deep supply chain moats.

GMTEight APP has learned that Morgan Stanley, in feedback from the 2026 China BEST Conference, pointed out that the current investment theme in the technology hardware sector is shifting from "total volume recovery" to "structural upgrading + AI infrastructure," with the industry maintaining an In-Line rating. The AI transceiver track shows a supply-determines-demand dynamic, and the dual rise in iPhone supply chain ASP and gross margin is a relatively certain earnings theme for the second half of the year; Android is relying on premiumization to offset shipment pressure, the AR/VR industry inflection point falls in 2027, and the dense release of new AI hardware in Q4 2026 will bring event-driven opportunities. Stock selection should focus on companies with deep supply chain moats and strong product premiumization capabilities, rather than betting on industry beta recovery. Morgan Stanley distilled several core themes from the feedback at this conference, covering AI infrastructure, the smartphone supply chain, and emerging hardware categories. The AI transceivers track continues to boom, with industry demand maintaining strong momentum from H2 2026 to 2027, but supply bottlenecks are becoming prominent, with 1.6T DSP and high-end EML/CW chips facing supply shortages. Manufacturers with supply chain resource advantages are expected to capture excess order share, with revenue and profit growth significantly outperforming peers. The handset supply chain sector shows clear divergence. The iPhone new model cycle has been more resilient than expected, and most supply chain companies remain optimistic about performance after the new model launch. For components featuring new designs and specification upgrades, ASP and gross margin are expected to achieve double-digit improvement versus the previous generation, with the structural upgrading dividend clear. Headwinds remain in the Android smartphone market. Affected by the pass-through of memory costs to end devices driving ASP higher, Android shipments in H2 2026 are expected to come under pressure. However, starting from Q3 2026, memory cost increases will return to a normal range. If end-device manufacturers successfully complete ASP hikes, they will most likely maintain a high-price strategy and expand the industry TAM. Android supply chain manufacturers are actively adjusting product mix, tilting resources toward high-value-added premium product segments, relying on product portfolio upgrades to absorb shipment downside pressure, with earnings quality taking priority over scale expansion. In emerging hardware, the AR/VR industry is in a buildup phase, and 2027 will be the inflection point for positive industry growth. Q4 2026 will still be mainly about product groundwork and ecosystem building, with multiple new products expected to land concentrated in 2027, making a return to industry growth highly certain. New AI hardware, meanwhile, is expected to usher in a dense release window in Q4 2026, with many manufacturers planning to launch new products, bringing short-term catalysts to the consumer electronics sector, though mass production scale and the pace of commercialization remain to be continuously tracked. On the risk side, upside risks for the sector include AI infrastructure capex being revised up more than expected; iPhone new model sales and component upgrade penetration exceeding expectations; faster premiumization by Android brands; and market acceptance of AR/VR and AI hardware products exceeding expectations. Downside risks come from the shortage of 1.6T and high-end optical chips lasting longer than expected, constraining supply chain shipments; global consumer electronics demand recovery falling short of expectations; memory costs rising sharply again and squeezing midstream and downstream profit margins; and intensifying industry competition triggering simultaneous declines in product ASP and gross margin. Morgan Stanley concluded that opportunities in the hardware sector no longer come from an overall industry recovery, and structural opportunities are the main theme. Leading companies in the AI transceiver track have stronger order visibility and pricing power; the certainty of earnings recovery in the iPhone supply chain is prominent; the Android sector needs to wait for premiumization to materialize; and new AI hardware products in Q4 are a short-term event catalyst. Overall, the stock selection approach should prioritize names with deep supply chain moats and product mixes that continue to migrate toward high-end.