AI Data Center Cooling Adoption Will Drive Long-Term Upside Potential

Catalysts

About Asia Vital Components

Asia Vital Components supplies thermal and mechanical solutions for high performance computing, servers and related hardware.

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

• Rising demand for high power computing and wider liquid cooling adoption in data centers is increasing server related product contribution, which could support revenue scale and help sustain higher gross margin.
• Content per rack is moving higher as systems grow more complex, with denser chassis that must support liquid cooling modules and stricter performance requirements, which can lift average selling prices and support operating margin.
• Asia Vital Components is expanding capacity, including a new facility in Vietnam already in mass production for next generation GPU solutions, which can support customer order growth and maintain earnings leverage if utilization stays healthy.
• Deep involvement across both GPU and ASIC platforms, including major positions in cold plates, manifolds and switch products for leading cloud and AI customers in the US and China, can diversify demand drivers and underpin revenue and earnings resilience.
• Growing engineering intensity and automation in production, supported by strong operating cash flow and higher free cash flow, can improve cost efficiency and help sustain corporate level net margins over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Asia Vital Components's revenue will grow by 32.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 21.4% in 3 years time.
• Analysts expect earnings to reach NT$93.0 billion (and earnings per share of NT$190.25) by about September 2029, up from NT$29.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$104.7 billion in earnings, and the most bearish expecting NT$83.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.1x on those 2029 earnings, down from 45.4x today. This future PE is greater than the current PE for the TW Tech industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Asia Vital Components is heavily tied to AI data center and liquid cooling build out, so any slowdown in AI infrastructure spending, a shift back toward lower power computing, or slower than expected liquid cooling penetration in data centers could weigh on server related product demand and limit revenue growth.
• The business model depends on rising content per rack and more complex thermal and mechanical designs, and if customers standardise designs, simplify architectures or pressure suppliers to reduce content value per system, average selling prices could come under pressure and weigh on gross margin and operating margin.
• Management is planning CapEx of about TWD 18b in 2026 and a higher level in 2027, and if customer orders or pull in timing fall short of expectations, new capacity in places like Vietnam could be underutilised, which would dilute margins and slow earnings growth.
• Asia Vital Components positions itself as a major supplier to both GPU and ASIC platforms across the US and China, and any tighter export controls, changes in China AI spending, or customers shifting volume to local Chinese competitors could reduce cross region orders and affect revenue scale and earnings resilience.
• Gross margin reached 32.57% in the second quarter of 2026, supported by a favourable product mix and higher server contribution, and if product mix tilts back toward lower margin segments, price competition in ASIC solutions increases, or key input costs in sub components like tubing and cold plate materials rise, company level net margins and EPS could come under pressure.

Valuation

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

• The analysts have a consensus price target of NT$3962.29 for Asia Vital Components based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$4500.0, and the most bearish reporting a price target of just NT$3327.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be NT$434.2 billion, earnings will come to NT$93.0 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of NT$3410.0, the analyst price target of NT$3962.29 is 13.9% 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.