AI Power And Cooling Expansion Will Support A Long Runway For Upside

Catalysts

About Lite-On Technology

Lite-On Technology supplies power, cooling and related solutions for cloud, AI, IT and opto-electronics applications.

What are the underlying business or industry changes driving this perspective?

• The rapid build out of AI compute capacity is creating sustained demand for high end cloud power products such as power shelves, PSUs and BBUs. AI related revenue already accounts for around 20% of company revenue, which directly supports future revenue and earnings.
• Lite-On is expanding into megawatt level integrated power and liquid cooling solutions for next generation GPU and ASIC platforms. This can lift content per rack and increase system level pricing, supporting revenue growth and potentially higher gross margins over time.
• Capacity expansions in Vietnam, Kaohsiung and Plano for power shelves, PSUs and BBUs, including a planned fourfold increase in BBU capacity versus the current quarter, position Lite-On to meet already booked demand and sustain high utilization. This is important for operating leverage and net margin resilience.
• The company is moving up the value chain from components to system integration for racks, CDUs and full cooling systems. This raises the share of high value business within Cloud and AIoT and contributes to the group gross profit margin of 23.3% and operating margin of 9.9% seen in the first three quarters of 2025.
• Exposure to structurally growing end markets such as low orbit satellites, high end gaming devices and mini LED or infrared opto semiconductors broadens the revenue base beyond AI. This supports the TWD 121.7b revenue level in the first three quarters of 2025 and can help smooth earnings as product mix shifts.

Assumptions

This narrative explores a more optimistic perspective on Lite-On Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Lite-On Technology's revenue will grow by 32.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.9% today to 10.5% in 3 years time.
• The bullish analysts expect earnings to reach NT$38.8 billion (and earnings per share of NT$17.0) by about January 2029, up from NT$14.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NT$26.4 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.8x on those 2029 earnings, down from 25.4x today. This future PE is lower than the current PE for the GB Tech industry at 20.8x.
• The bullish analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business is leaning heavily on AI related power and cooling, with AI high end power supply and BBU products already accounting for a large share of overall revenue. Any slowdown in AI infrastructure spending or a shift in GPU or ASIC architectures that reduces Lite-On's content per rack could put pressure on revenue growth and earnings.
• Management is planning very large capacity additions in Vietnam, Kaohsiung and Plano, including a fourfold increase in BBU capacity versus the current quarter. If customer orders were delayed or cancelled, this additional fixed cost base could hurt utilization, compress gross margin and reduce net margin resilience.
• Many Mainland Chinese and global power and infrastructure players are entering AI power and cooling, and Lite-On's CEO expects more competition as the "pie" grows. This could drive price pressure on PSUs, power shelves and BBUs and limit the ability to sustain current gross profit margin and operating margin levels.
• Liquid cooling and solid state transformer solutions are still at a preliminary stage with only one demonstration liquid cooling project and no current DC DC module shipments. If customer adoption is slower than hoped, the R&D and CapEx being directed into these areas may take longer to earn a return, which could weigh on operating margin and earnings.
• The company is increasing CapEx by at least 25% this year to around TWD 6b to TWD 7b and expects at least TWD 7b next year, funded in part by TWD 12b in zero coupon convertible bonds and additional investment in Vietnam. If cash generation or working capital efficiency weaken, balance sheet strength and future net profit after tax could come under pressure from higher capital intensity and potential dilution.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Lite-On Technology is NT$245.0, which represents up to two standard deviations above the consensus price target of NT$192.94. This valuation is based on what can be assumed as the expectations of Lite-On Technology's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$245.0, and the most bearish reporting a price target of just NT$117.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be NT$369.1 billion, earnings will come to NT$38.8 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of NT$160.0, the analyst price target of NT$245.0 is 34.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.