Ibiden: Accelerating Capacity Expansion to Meet Growing AI Demand - In the Buy Zone

Ibiden Co., Ltd. (TSE:6447), a key supplier of chip substrates for NVIDIA's (NASDAQ:NVDA) advanced semiconductors, is considering accelerating its capacity expansion to meet growing demand for AI chips. The company's CEO, Koji Kawashima, noted that AI substrate sales are strong, with clients snapping up the entire production, and this demand is expected to continue into the next year. Ibiden is constructing a new substrate factory in Gifu, Japan, set to start operations in late 2025, initially at 25% capacity, reaching 50% by March 2026. However, this may not suffice, and discussions are ongoing to bring the remaining capacity online.

Ibiden's diverse client base includes Intel (NASDAQ:INTC), Super Micro Computer (NASDAQ:SMCI), Samsung (KRX:005930), Taiwan Semiconductor Manufacturing Company (NYSE:TSM), and NVIDIA. Despite Intel's past dominance, accounting for up to 80% of Ibiden's substrate revenue, its share has dropped to about 30% recently. This shift in market dynamics may impact Ibiden's financial stability and its ability to invest in capacity expansion. However, Ibiden's CEO, Koji Kawashima, remains optimistic about future relations with Intel, citing its advanced technology.

The global IT device market has experienced a prolonged downturn, leading to a slower-than-anticipated rebound in the demand for IC substrates. This challenging market condition may make it difficult for Ibiden to secure the necessary funding or resources to execute its expansion plan. Additionally, Ibiden has postponed the operation of its planned Gama plant in Ōgaki, scheduled for the fiscal year of 2024, to the fiscal year of 2026. This delay in the construction of new facilities may hinder Ibiden's ability to increase its substrate production capacity and meet the growing demand for AI substrates.

The competition in the IC substrate market is intense, with other board manufacturers such as Shinko Electric (TSE:6449) and AT&S (VSE:M09) also vying for market share. Ibiden's dominance in the server IC board market may be challenged by these competitors, potentially impacting its ability to meet the growing demand for AI substrates.

Despite these challenges, Ibiden's strong position in the AI server board segment, accounting for nearly 30% of the overall server board revenue by 2027, suggests a promising outlook for the company. The server market is rapidly evolving, with AI server board usage growing significantly. While PC board usage will slightly decrease, standard server board usage is expected to grow by 30%. This growth is driven by the increasing computational requirements of AI servers, which differ from standard servers in their larger computational needs.

Ibiden is intensifying its efforts in developing next-generation boards, including those for 3D packaging, to meet the growing demand for advanced process chips. The company has joined the TSMC-led alliance "TSMC 3DFabric Alliance" and will leverage the Taiwan-based giant's Open Innovation Platform (OIP) ecosystem and 3Dblox standards to increase the production capacity of IC boards required for advanced process chips to ten times that of the existing capacity. This investment in research and development will help Ibiden maintain its leading position in the market and capitalize on the growing demand for AI server boards.

In conclusion, Ibiden may face several challenges in executing its capacity expansion plan, including the shift in market dynamics, the prolonged downturn in the IT device market, the delay in the construction of new facilities, and intense competition in the IC substrate market. However, the company's strong position in the AI server board segment and its investment in research and development suggest a promising outlook for the future. Given the massive scale of AI demand, investors should expect a massive shift in contribution from Ibiden's hardware prowess to its software capability. Therefore, we reiterate our Buy rating on Ibiden stock. However, if you are more conservative, you can consider taking a 10-15% haircut off its current price before adding.