Executive Summary / Key Takeaways

• AI-Driven Growth Catalyst: ASE Technology Holding Co., Ltd. (ASX) is strategically positioned as a critical enabler of the AI-led super cycle, with its Leading-Edge Advanced Packaging and Testing (LEAP) services experiencing robust demand and projected to add an additional $1 billion in revenue in 2025, reaching over $1.6 billion.
• Technological Leadership and Investment: The company is aggressively investing in advanced technologies like FOCoS-Bridge with TSV, 3D IC packaging, silicon photonics, and large panel solutions, which are crucial for next-generation AI and high-performance computing (HPC) applications, aiming for superior integration, power management, and bandwidth.
• Strong Financial Outlook Despite Headwinds: Despite near-term currency headwinds and inflationary pressures, management projects ATM gross margins to recover to the structural range of 24% to 30% in 2025, with further improvements expected in 2026, driven by higher utilization and accretive LEAP business.
• Aggressive Capital Allocation for Long-Term Moat: ASX is undertaking significant capital expenditures, including doubling facilities CapEx to approximately $2 billion in 2025, to build fungible and flexible capacity for a 7-10 year utilization horizon, reinforcing its competitive moat through scale, speed, and synergy within the Taiwan ecosystem.
• Diversified and Resilient Business Model: As the largest outsourced semiconductor assembly and test (OSAT) provider, ASX benefits from its integrated ATM and EMS segments, with its test business accelerating and expected to reach 19-20% of ATM revenue by Q4 2025, further enhancing profitability and market share.

The Dawn of a New Era: ASX's Strategic Imperative in the AI Super Cycle

ASE Technology Holding Co., Ltd. (ASX), founded in 1984 in Kaohsiung, Taiwan, stands at the forefront of the semiconductor industry's most transformative period. As a leading provider of semiconductor assembly, testing, and material (ATM) services, alongside its electronic manufacturing services (EMS) segment, ASX plays an indispensable role in the global technology supply chain. The company's overarching strategy is firmly anchored in capitalizing on the burgeoning "AI-led super cycle," a multi-year growth phenomenon driven by the expansion of hyperscaler data centers, ongoing upgrade cycles, and the anticipated proliferation of AI edge applications over the next decade. This strategic pivot, initiated in 2023, has seen ASX aggressively reorient its investments and operational focus towards advanced packaging and testing, which are now critical bottlenecks in unlocking the full potential of AI and high-performance computing (HPC).

The semiconductor industry is witnessing a profound shift where advances in chip performance are increasingly reliant on the back-end of production, as the benefits of Moore's Law reach their physical limits. This environment elevates the importance of outsourced semiconductor assembly and test (OSAT) providers like ASX. The company's foundational strengths lie in its scale, speed of execution within the robust Taiwan ecosystem, and the synergy derived from its integrated business model, encompassing ASE, SPIL, and USI. This unique combination allows ASX to offer comprehensive, end-to-end solutions, from design and manufacturing to logistics, providing a competitive advantage in a rapidly evolving landscape.

Technological Edge: Fueling Next-Generation AI and HPC

ASX's core investment thesis is deeply intertwined with its technological differentiation in Leading-Edge Advanced Packaging and Testing (LEAP). The company's comprehensive technology toolbox includes 3D, 2.5D, fan-out, large panel System-in-Package (SiP), and co-packaged optics (CPO). These advanced interconnect technologies are vital for addressing the escalating demands of future generations of AI, networking, and communications, particularly in areas like power delivery, High Bandwidth Memory (HBM) integration, and increased I/O densities.

A significant technological highlight is ASE's Fan-Out Chip-on-Substrate-Bridge (FOCoS-Bridge) with Through Silicon Via (TSV), which was announced in May 2025. This innovation is designed to deliver critical performance improvements by reducing power loss by 3x for next-generation AI and HPC applications, directly addressing the growing demand for increased bandwidth. Furthermore, ASX is actively developing solutions for silicon photonics, a foundational technology expected to provide the necessary bandwidth, speed, latency, and efficiency to enable even more advanced applications like humanoid robotics. While revenue from silicon photonics has not yet seen a significant uptick, its strategic importance is clear. The company is also focusing on power management solutions (VRM) at the IP, technology, and capacity levels, working with key customers to define next-generation requirements.

ASX's R&D initiatives extend to large panel packaging, with a 300x300 fully automated line expected by the end of 2025 and a 600x600 fully automated line to be delivered by Q4 2025. These advancements aim to provide greater throughput and flexibility in designing footprints, crucial for cost efficiency and scalability. For investors, these technological differentiators are paramount. They contribute directly to ASX's competitive moat by enabling higher Average Selling Prices (ASPs), potentially better margins, and a stronger market position in the most lucrative and rapidly growing segments of the semiconductor industry. The company's aggressive R&D and capacity investments are designed to ensure long-term customer loyalty and capture the multi-wave expansion of AI, from hyperscaler data centers to inference and eventually, the massive volume of AI edge applications.

Competitive Landscape and Strategic Positioning

ASX operates in a highly competitive environment, with key rivals including Amkor Technology (AMKR) and, indirectly, integrated device manufacturers (IDMs) like Taiwan Semiconductor Manufacturing Company (TSM) that offer packaging as part of their foundry services. ASX's position as the largest OSAT provider gives it significant influence and scale advantages.

Compared to Amkor, ASX's integrated packaging and testing services offer a more holistic solution, potentially providing greater flexibility for complex projects and a broader range of customized offerings. While Amkor is recognized for its operational efficiency and rapid prototyping, ASX's scale and global manufacturing footprint enhance supply chain resilience and allow for stronger negotiation power with suppliers. Against TSMC, which dominates in cutting-edge front-end technology and increasingly in advanced packaging like CoWoS, ASX differentiates itself through its focus on end-to-end, cost-effective back-end solutions for a diverse customer base, including ASIC players and system customers. ASX's ability to handle high-volume production with integrated real-time testing, particularly in automotive and consumer electronics packaging, provides a distinct value proposition.

The company's strategic response to competitive dynamics involves leveraging its "scale, speed, and synergy" within the Taiwan ecosystem. This allows for rapid execution of capacity expansion, which is critical given the current "very, very full" leading-edge capacities in Taiwan. Furthermore, ASX is actively recalibrating its overseas expansion plans, focusing on one or two strategic areas for larger investments, rather than multiple smaller ones, to maximize impact amidst evolving tariff dynamics and exchange rates. This approach aims to build capacity that is fungible and flexible, capable of serving diverse applications for 7 to 10 years, thereby widening its competitive moat.

Financial Performance and Operational Momentum

ASX's financial performance in recent periods reflects its strategic investments and the growing demand for advanced packaging. In the first half of 2025, unconsolidated revenue grew 9% year-on-year, with ATM revenues up an impressive 18% year-on-year. LEAP revenues were over 10% of ATM revenues in H1 2025, a significant increase from 6% for the full year 2024. The testing business, a key strategic focus, demonstrated robust growth of 31% year-on-year in the first half of 2025, with momentum expected to continue into the second half.

For Q2 2025, consolidated net revenues reached NT$150.8 billion, representing a 7% sequential increase and an 11% year-over-year increase on a U.S. dollar basis. ATM revenues for the quarter were NT$92.6 billion, up 13% sequentially and 23% annually in U.S. dollar terms. Despite these strong revenue figures, gross margin for the ATM business in Q2 2025 was 21.9%, a sequential decline of 0.7 percentage points, primarily due to the appreciation of the NT dollar against the U.S. dollar and higher utility rates. Management estimated that foreign exchange fluctuations had a negative 2.2 percentage point impact on ATM margins sequentially. Excluding this impact, the ATM gross margin would have been approximately 2.2 percentage points higher, aligning with original expectations.

Operating expenses increased due to ramping R&D activities, increased R&D staffing, and other labor-related costs, reflecting the significant investments in LEAP. The Computing segment, driven by LEAP, continues to grow as a larger component of the business, indicative of AI's expanding share of the electronics market. The wirebond business also showed signs of a more general market recovery, growing on a U.S. dollar basis, though outpaced by LEAP and testing.

Capital Allocation and Liquidity for Future Growth

ASX is undertaking an aggressive capital expenditure program to support its multi-year growth strategy. Machinery CapEx for H1 2025 was $1.9 billion, with an additional $0.9 billion for factory facilities and automation, primarily driven by advanced packaging and testing. For the full year 2025, machinery CapEx is expected to be the annualized amount of Q4 2024, with 60% allocated to leading-edge technologies and over 30% to testing. Facilities CapEx is projected to double to approximately $2 billion in 2025 for multiple new sites in Taiwan and overseas, as smart factory buildings become essential for leading-edge services.

These substantial investments are reflected in the company's debt profile. Total interest-bearing debt increased to $240.1 billion in Q2 2025, with further increases anticipated. Net debt to equity was 52% in Q2 2025 and is expected to peak in Q3 2025 at roughly below 70%, before returning to the target range of 60% to 65%.

Management views these investments as critical for servicing the "generational evolution of packaging in electronic devices" and believes the leading-edge component is becoming "more mainstream and significant in terms of size and scale."

Outlook and Guidance: A Clear Path to Structural Margins

ASX's management provides a clear and confident outlook for the coming periods, underpinned by the strong demand for LEAP services. For Q3 2025, consolidated revenue is projected to grow by 12% to 14% quarter-over-quarter in U.S. dollar terms. ATM revenue is expected to grow by 9% to 11% quarter-over-quarter in U.S. dollar terms, while EMS revenue is anticipated to grow by 18% to 20% quarter-over-quarter in U.S. dollar terms.

Despite an expected 0.9 to 1.1 percentage point sequential decrease in ATM gross margin for Q3 2025, largely due to the NT dollar appreciation, management remains confident in the underlying business health. They project that excluding currency impact, ATM gross margin would be around 26%, near the midpoint of their structural target. For the full year 2025, ASX targets to increase LEAP revenue by an additional $1 billion, bringing the total to over $1.6 billion, with 75% from packaging and 25% from advanced testing. The general segment is expected to grow by mid-to-high single digits year-on-year.

Management is "very confident" that ATM gross margins will return to the structural range of 24% to 30% in 2025, with further improvements in 2026. This recovery is expected through efficiency improvements, automation, strategic pricing, and the aggressive expansion of LEAP, which is a margin-accretive business. The test business is projected to outgrow packaging by twofold in 2025 and approach 20% of ATM revenue by Q4 2025, with final test, including burn-in and system-level testing for AI chips, expected to start generating revenue in Q4 2025 and grow aggressively in 2026.

Risks and Challenges

While the outlook is compelling, ASX faces several risks. Foreign exchange fluctuations, particularly the appreciation of the NT dollar, can significantly impact margins, as demonstrated by the estimated 5 percentage point negative impact on ATM Q3 2025 gross margin. Operational execution, including securing human talent, managing machine delivery, and navigating land and facility constraints, presents ongoing challenges given the rapid pace of expansion. The company also acknowledges the inherent cyclicality and market conditions in the semiconductor industry, with a "lukewarm" general market recovery anticipated for 2025 outside of AI/HPC. Geopolitical factors, including trade policies and regulatory controls, could also influence business operations and supply chain dynamics, particularly concerning its China facilities and potential shifts in loading to Taiwan.

Conclusion

ASX is undergoing a profound transformation, strategically aligning its formidable scale and technological prowess with the monumental opportunities presented by the AI-led super cycle. The company's aggressive investments in Leading-Edge Advanced Packaging and Testing, coupled with its commitment to innovation in areas like FOCoS-Bridge with TSV and silicon photonics, position it as an indispensable partner in the evolution of high-performance semiconductors. While near-term currency volatility and operational challenges persist, ASX's clear guidance towards structural margin recovery in 2025 and sustained growth into 2026 and beyond underscores a compelling investment thesis. The strategic emphasis on building fungible capacity, expanding its margin-accretive test business, and leveraging its integrated ecosystem strengthens its competitive moat, making ASX a pivotal player in shaping the future of the digital economy.