Ajinomoto's ABF business still has room for margin expansion, with AI demand supporting semiconductor materials growth

Overview

This report is Morgan Stanley's event commentary on Ajinomoto's Virtual Fine-Techno Plant Visit, with a focus on the functional materials business, especially ABF. The report argues that AI semiconductor demand is driving both higher package substrate volumes and performance upgrades, and that ABF, supported by its high market share, customer co-development capability, and asset-light supply chain model, still has room for revenue growth, product mix upgrades, and margin expansion.

Core views

The core view is that ABF growth has not peaked at the current high margin level. The company holds about a 95% share in the semiconductor package substrate insulating materials market and has previously achieved price and margin expansion through a higher-tech product mix; as AI semiconductors expand from training to inference and AI agents drive higher data traffic, demand for high-performance materials in next-generation packaging will strengthen further. Management also emphasized that the capacity platform is flexible, with the Gunma plant and future new plants providing expansion options if demand exceeds expectations.

Analysis framework

The report uses an event-tracking plus valuation framework: on one hand, it evaluates ABF's supply chain, capacity, product structure, and next-generation packaging positioning based on the plant visit and management commentary; on the other hand, it derives the target price using Morgan Stanley ModelWare financial forecasts and a relative P/E approach, and assesses relative returns over the next 12 to 18 months within the Overweight relative-rating framework.

Methodology notes

• Valuation frameworkMorgan Stanley ModelWare

  Financial forecasts based on ModelWare

  Unless otherwise specified, the financial metrics in the report are based on the Morgan Stanley ModelWare framework, including forecasts for revenue, operating profit, EPS, P/E, P/BV, ROE, and EV/EBITDA.

• Valuation methodRelative P/E valuation

  F3/29e EPS ¥208 × P/E 30.0x

  The target price is derived from F3/29e EPS of about ¥208 and a 30.0x P/E, reflecting a valuation premium for profit growth in advanced areas and capital return policy.

• Relative valuationIndustry relative multiple

  Food industry average P/E 16.5x × relative multiple of 1.76x

  The 30.0x P/E is based on the food industry average P/E of 16.5x multiplied by a relative multiple of 1.76x, which corresponds to the five-year industry relative average of 1.44x plus two standard deviations.

• Rating frameworkMorgan Stanley relative rating system

  Overweight

  Overweight means the analyst expects the stock's risk-adjusted total return over the next 12 to 18 months to exceed the average of its industry coverage universe.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Ajinomoto (2802.T)

  Research target, a Japanese food and functional materials company

  Strengths

  The ABF business has a high share in semiconductor package substrate insulating materials, profit growth in functional materials is accelerating, the overseas seasonings business is highly competitive, and the company is supported by an active buyback policy and capital returns.

  Weaknesses

  Valuation depends on continued high growth and high margins in ABF; if growth in advanced areas slows, volatility in the food or frozen food businesses could weigh on overall earnings flexibility.

  Comparison

  An Overweight rating means Morgan Stanley expects its risk-adjusted total return over the next 12 to 18 months to be above the average of its industry coverage universe; the industry view is In-Line.

  Risks

  Key risks include slower-than-expected Forge growth, loss of ABF share, elevated crude oil prices, and a prolonged impact from the U.S. frozen food recall.

• ABF

  Ajinomoto's core functional material, semiconductor package substrate insulating material

  Strengths

  With about 95% market share, it has built barriers through early participation in customer product development, a rapid development system, and supply chain collaboration, while also benefiting from dual demand for higher semiconductor volumes and performance upgrades driven by AI.

  Weaknesses

  The business is highly dependent on semiconductor packaging conditions and key customer technology roadmaps; if package substrate technology changes or the supply chain is disrupted, the company's share and margins could come under pressure.

  Comparison

  Compared with the traditional food business, ABF has stronger technological barriers and higher margins, making it the main source of the valuation premium.

  Risks

  AI demand below expectations, slower-than-expected penetration of next-generation products, and slower-than-expected capacity ramp-up or shift increases could all affect the realization of growth.

• Food and seasonings business

  Ajinomoto's traditional business and valuation foundation

  Strengths

  The overseas seasonings business is highly competitive, and the report believes it can help absorb weakness in the processed food umami seasoning market.

  Weaknesses

  Growth in the food business is usually lower than in advanced materials, and it may also be affected by raw materials, crude oil prices, and recall events.

  Comparison

  This business provides stable cash flow and valuation support, while ABF and advanced areas contribute the more significant growth premium.

  Risks

  Sustained high crude oil prices, a prolonged impact from the U.S. frozen food recall, and weaker seasonings demand could undermine overall profit growth.

Key data

• Stock ratingOverweightThe stock rating shown on the report cover.
• Industry viewIn-LineThe industry view shown on the report cover.
• Target price¥6,300The target price history shows a target price of JPY 6,300 as of June 29, 2026.
• Closing price¥5,816Corresponding to the closing price on June 29, 2026.
• Upside to target price8%The report shows upside of about 8% to the target price.
• Market capitalization¥5,686.5bnThe current basic market capitalization shown on the report cover.
• 03/27e dividend yield0.9%The dividend yield forecast shown on the report cover.
• ABF market shareabout 95%ABF holds about a 95% share of the semiconductor package substrate insulating materials market.
• Semiconductor market growth forecastabout 37% in 2026, about 27% in 2027The report cites WSTS forecasts, with growth driven mainly by AI-related demand.
• ABF margin changefrom about 30% in FY18 to above 50% in FY25The report believes the shift in product mix toward higher value-added products drove margin expansion.
• F3/29e EPS valuation assumption¥208The F3/29e EPS used in the target price valuation is about ¥208.
• 03/29e revenue¥1,888.0bn03/29e net sales forecast in the ModelWare table.
• 03/29e operating profit¥278.0bn03/29e operating profit forecast in the ModelWare table.

Impact & implications

The investment implication is positive: if AI semiconductor demand continues to expand, ABF should benefit simultaneously from higher package substrate usage, a higher share of high-performance products, and extension into next-generation packaging materials, supporting Ajinomoto's valuation premium over traditional food companies. That said, the report's target price already reflects a relatively high multiple, and future delivery depends on stable ABF share, continued margin improvement in advanced products, the pace of capacity expansion, and the ability of the food business to buffer cyclical or recall-related shocks.

Risks

• Forge revenue growth is slower than expected.
• Disruptions in semiconductor package substrates lead to ABF share loss.
• Crude oil prices remain elevated.
• The impact of the U.S. frozen food recall is prolonged.
• If AI-related demand is below expectations, ABF usage growth and next-generation product mix improvement may weaken.
• If new capacity expansion or shift increases proceed more slowly than demand, supply flexibility may be constrained.
• Morgan Stanley disclosed that it may have investment banking relationships with the covered company, and the research conclusions should be judged independently in combination with other information.

What to watch

• The extent to which AI semiconductors expand from training to inference and AI agents become more widespread, driving demand for both the quantity and performance of package substrates.
• Changes in the mix of ABF next-generation products, and whether margins can continue to rise from the above-50% level in FY25.
• The pace at which the new Gunma plant moves from single-shift to multi-shift operations, and whether the FY32 new plant is brought forward due to stronger-than-expected demand.
• Commercialization progress of next-generation packaging-related products such as CPO materials, optical waveguides, adhesives, and packaging materials.
• Whether Forge business revenue growth and earnings inflection arrive earlier than expected.
• Whether the overseas seasonings business can continue to offset weakness in the processed food umami seasoning market.
• Whether the target price and EPS forecasts are further revised upward along with ABF orders, the semiconductor cycle, and buyback policy.