Asia Technology_ ABF oversupply to continue till 2H26E, with key impact to tier-2 suppliers; d_g Unimicron_Kinsus to Neutral_Sell

Summary of Conference Call on ABF Substrate Industry Industry Overview - The ABF (Ajinomoto Build-up Film) substrate market is expected to experience oversupply conditions until the second half of 2026, with a projected 7% oversupply in 2025 [1][11][25]. - The total addressable market (TAM) for ABF substrates has been revised down by 12% and 10% for 2025 and 2026, respectively, due to lower-than-expected AI server GPU substrate shipments and increased pricing pressure [2][22]. Key Insights - Demand Dynamics: The demand for AI server substrates has been cut by approximately 50% for 2025, reflecting a significant decrease in AI server rack shipments, which are expected to decline by 35% [2][60]. - Pricing Pressure: The average selling price (ASP) for AI GPU substrates has decreased from over US$120 earlier in the year to US$100, indicating a challenging pricing environment [2][60]. - Impact on Suppliers: Tier-2 suppliers like Unimicron and Kinsus are expected to face significant challenges due to their exposure to legacy ABF products and weaker-than-expected spillover orders from tier-1 suppliers [2][9][24]. Supplier Performance - Unimicron: Downgraded to Neutral from Buy due to weaker AI spillover orders and a slow PC demand outlook. Target price revised from NT$170 to NT$90 [9][10]. - Kinsus: Downgraded to Sell from Neutral, with a new target price of NT$63, reflecting less favorable growth in the mid-to-low-end ABF substrate market [9][10]. - Ibiden: Maintained Buy rating with a target price of ¥6200, benefiting from its leading position in the high-end substrate market [10][22]. - Zhen Ding Technology (ZDT): Initiated with a Buy rating, expected to benefit from ABF demand expansion from Chinese IC design houses [8]. Future Catalysts - The mid-to-long-term outlook for Taiwan ABF suppliers is expected to improve with the localization of AI IC production in China, projected to grow at a CAGR of 53% from 2025 to 2027 [3][4]. - Adoption of CPO (Chip-on-Package) technology is anticipated to double the consumption of switch IC ABF substrates compared to general 2.5D packaging substrates [3]. Capacity and Utilization - The overall industry capacity is expected to increase by approximately 40% from 2024 to 2027, with a significant portion of new capacity planned before 2024 [29][53]. - Utilization rates for ABF substrate suppliers are projected to improve in 2025, but overall industry utilization will remain below 80% [27][24]. Risks and Challenges - Potential risks include higher electricity costs in Taiwan and the impact of tariffs, which could increase costs as a percentage of revenue significantly [46][45]. - The overall cash margins for ABF substrate suppliers are expected to remain under pressure until at least the second half of 2025, with a potential recovery starting in 2026 [44][59]. Conclusion - The ABF substrate industry is currently facing a challenging environment with oversupply and pricing pressures, particularly affecting tier-2 suppliers. However, long-term growth opportunities exist through technological advancements and increased demand from AI-related applications. The market is expected to stabilize post-2026, with significant growth driven by AI and server upgrades.