Obscure Firm’s 1.219% Rise Shows Gain, Pain From Chip Crunch

(Bloomberg) — Nan Ya Printed Circuit Board Corp. is hardly a concept in the technical industry. But the obscure Taiwanese company makes a vital chip-making component, which has become the latest bottleneck for automakers and electronics companies suffering from a shortage of semiconductors.

The part goes by the unwieldy name Ajinomoto build-up film (ABF) substrate and it’s one of the least glamorous niches in the chips industry. It’s part of the package that protects the handful of chips needed to power your computer or car and enables communication between them.

Many of the world’s most advanced semiconductors cannot do without the substrates. So while giants like Intel Corp. and Taiwan Semiconductor Manufacturing Co. Spending hundreds of billions to fix chip shortages, the lack of that one part can hamper production for years. Stocks are likely to remain limited until at least 2025 due to limited capacity, according to people familiar with the matter.

Top executives of Intel, Nvidia Corp. and Advanced Micro Devices Inc. have all warned of shortages in recent months. Broadcom Corp. recently told customers that the lead time for its main router chips is going from 63 weeks to 70 weeks due to a lack of substrates, according to one person, who asked not to be named because the information is not public.

The crisis shows how vulnerable global supply chains remain to disruptions nearly two years after the Covid-19 pandemic. Companies and investors have almost no idea where the next shock could come from.

“This crisis has taken a number of players by surprise,” said Peter Hanbury, a partner at Bain & Co. “As demand for PCs, game cards and cloud services increased due to Covid-19 and working from home, this critical component suddenly became a real bottleneck for many players such as AMD and Nvidia.”

The pressure makes low-profile companies like Nan Ya stock market stars. Shares are up 1.219% over the past three years through Wednesday, with analysts predicting more to follow. ABF substrate makers such as Unimicron Technology Corp., Kinsus Interconnect Technology Corp. and Ibiden Co. have also seen their shares rise.

“Profits at these companies are expected to continue to rise in the coming years as shipment volumes skyrocket,” said Hideki Yasuda, an analyst at Ace Research Institute.

Nan Ya rose a staggering 3.2% on Thursday, while Unimicron gained 3.9% and Kinsus gained 2.7%.

ABF substrate is a relatively new component, developed by Intel in the late 1990s when it developed more powerful microprocessors. It takes its name from Ajinomoto Co., a Japanese company that produces the film-like insulation of the substrate. The material was first used as the preferred packaging technology for central processing units in personal computers and servers, as it enables fast calculations by high-end chips.

ABF substrate sales surged in the early 2000s with the internet boom, then took a hit as smartphones started to replace PCs in the late 2000s. The fortunes of substrate makers began to recover around 2018 as countries began rolling out fifth-generation wireless services, leading companies such as Broadcom that make network chips to adopt the material for use in routers, base stations, and related applications. The advent of 5G has also fueled increased demand for more powerful server chips for cloud computing, artificial intelligence and smart driving technologies. The cost of ABF substrate, usually listed per chip, starts at about 50 cents per chip and is $20 for premium server CPUs.

Major semiconductor companies such as Intel, AMD and Nvidia now all depend on ABF substrates to produce the most powerful chips in the world. But substrate producers have been reluctant to aggressively invest in capacity due to past money-losing slumps. Supply is expected to grow at a compound annual growth rate of 16% through 2024, while demand is expected to grow 18% to 19%, Citigroup Inc. analysts Grant Chi and Takayuki Naito predict in early July.

Owen Cheng, an analyst with President Capital Management Corp., wrote in a note this month that the gap between supply and demand will widen by as much as 33% next year compared to this year due to growth in technologies such as high-performance computing and artificial intelligence. intelligence. That will likely benefit Nan Ya and Unimicron.

“Nan Ya could increase the price of ABF substrates by 35% by 2022,” Cheng wrote.

The ABF situation adds to a series of chip industry bottlenecks that have hampered the global recovery from Covid-19 and even giants like Toyota Motor Corp. and Apple Inc. have hit. Companies around the world are struggling to produce enough to meet demand.

Intel warned in July that revenue in its client computing group will decline sequentially due to restrictions on substrates and other components. Broadcom, which sells to companies such as Apple and Cisco Systems Inc., declined to comment on the wait times.

Some customers take matters into their own hands. AMD CEO Lisa Su told analysts in April that the chipmaker would put its own money into increasing capacity at suppliers.

“Especially on the substrate side, I think there’s been too little investment in the industry,” she said. “And so we took the opportunity to invest in some substrate capacity for AMD, and we will continue to do so in the future.”

Automotive chip suppliers will use more ABF substrates as vehicles become more electrified and digitized. However, they struggle to get top priority among substrate manufacturers because they don’t have the bargaining power of major semiconductor companies like Intel, according to people familiar with the situation. This could mean more direct investments in substrate producers or the entry of new ABF substrate players.

“Going forward, I expect more players to change their approach to this segment with a more careful plan to monitor capacity and increased efforts to pre-book capacity,” said Bain’s Hanbury.

Nan Ya ramps up investment. The company will spend at least NT$8 billion ($289 million) in capital expenditures this year and even more in 2022. The company will increase ABF substrate production capacity by 40% by 2023 from 2020 levels, company spokesman Jack Lu said. Even that won’t be enough for customers.

“Demand will continue to exceed supply until 2023,” Lu said.

Unimicron said in July that most of the company’s ABF substrate capacity has been allocated to various customers through 2025.

The tightness is driving profits across the sector. Nan Ya is projected to nearly triple its operating profit this year as sales rise 33%, according to analyst estimates compiled by Bloomberg. Citigroup analysts Chi and Naito have raised their price targets for all major ABF substrate makers, including Unimicron, Nan Ya, Kinsus and Ibiden.

Cheng of President Capital Management recently raised his price target for Nan Ya to NT$570. That is 27% higher than the current price.

(Stock trading updates in ninth paragraph)

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