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The Most Savory Semiconductor Player is Still a Good Bet

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The global economy is souring, but it turns out a little bit of MSG has been healthy for your portfolio. That could well continue to be the case, even if a global recession dents investors’ appetite for most stocks.

Japan’s Ajinomoto—known for inventing the flavor enhancer monosodium glutamate or MSG—has been a surprise winner in the stock market over the past couple of years. Its shares have more than doubled since the end of 2019 and just hit another record high this week. In comparison, the Topix is up just 13% since 2019.

The rally isn’t because people have suddenly fallen in love with MSG—a substance that has been the subject of much debate by the health-conscious. Rather, it is because Ajinomoto also manufactures something that goes into electronic devices.

Ajinomoto makes a type of material called Ajinomoto Buildup Film, or ABF, which helps insulate integrated circuits. ABF was once made using byproducts from MSG—that’s how Ajinomoto found its way into the semiconductor supply chain. Although the substance is now manufactured using a different process, it is still used in an important chip packaging component called “ABF substrate.”

Business profit at Ajinomoto’s functional materials segment, which includes the ABF business, grew 50% year over year in the six months ended in September. That performance far outpaced the 7% profit growth for the company as a whole. Ajinomoto’s core seasoning business, for example, recorded a decline in profit. The functional materials segment now accounts for 27% of Ajinomoto’s business profits, even though the unit only made up only 6% of its revenue—reflecting its higher margins.

The chip shortage has driven strong demand for components like ABF substrate and supply has struggled to keep up. That shortage, however, should ease soon as demand for chips has slowed substantially. Manufacturers of ABF substrate—many of which are Ajinomoto’s customers—have experienced a sharp boom-and-bust cycle since the beginning of the pandemic. For example, shares of Taiwan’s Nan Ya Printed Circuit Board have halved this year, after surging more than 1100% in the previous two years.

Ajinomoto’s share price has experienced less of a roller-coaster ride. Partly that’s because its profit growth during the good times, while impressive, was less wild than at companies downstream, where chip-related shortages were most acute. The overall slowdown in the semiconductor industry, however, could still knock Ajinomoto’s growth. The Japanese company expects profit growth at its functional materials division to slow to 24% year over year in the second half of this fiscal year, which ends in March. That would be a significant slowdown compared with the 50% growth notched in the first half.

The company, however, remains sanguine about its long-term prospects. Ajinomoto expects an average of 18% annual growth rate in ABF shipments over the next few years. Data centers, in particular, will be a major growth driver. Ajinomoto is also speeding up expansion plans to add ABF capacity, according to a Bloomberg interview with its chief executive officer Taro Fujie last week.

Ajinomoto trades at 26 times next-12-months expected earnings, compared with an average of 22 times over the past 10 years, according to S&P Global Market Intelligence. That may not be cheap. But investors looking to spice up their portfolios—particularly those with a longer time horizon who want exposure to a steadier part of the chip supply chain—might still want to take a look.

Write to Jacky Wong at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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