Electronic parts firms enjoy rosy outlook on AI supercycle

Samsung Electro-Mechanics' Flip Chip Ball Grid Array for servers / Courtesy of Samsung Electro-Mechanics

Electronic parts makers are emerging as key beneficiaries of the chip supercycle driven by a global surge in artificial intelligence (AI), with Samsung Electro-Mechanics and LG Innotek presenting an upbeat outlook after posting solid first-quarter earnings.

On Monday, IBK Securities, Eugene Investment and Meritz Securities raised their target price for Samsung Electro-Mechanics to 1.05 million won ($713), 1.03 million and 1.02 million won, respectively, each setting target prices above 1 million won for the first time.

The brokerages each attributed the increased target prices to the company’s robust sales from Flip Chip Ball Grid Array (FC-BGA), a substrate for advanced semiconductors, and Multilayer Ceramic Capacitors (MLCCs), a component that stabilizes power for semiconductors and other electric devices.

“As demands are far exceeding the company’s production capacity, discussions are underway with customers to sign long-term supply agreements for both MLCC and FC-BGA substrates,” Eugene Investment analyst Lee Ju-hyung said.

Samsung Electro-Mechanics’ plant in Suwon, Gyeonggi Province / Courtesy of Samsung Electro-Mechanics

Long-term supply agreements in the semiconductor market are generally interpreted as a signal of stable profitability in recent months. Discussions around such deals imply that customers are willing to lock in supply at current price levels, even if it means accepting higher prices to ensure volume. For suppliers, this suggests that the recent earnings momentum is likely to continue for the time being.

Samsung Electro-Mechanics posted 3.2 trillion won in sales and 280.6 billion won in operating profit for the first quarter, representing 17 percent and 40 percent year-on-year growth, respectively.

Its component division, which produces MLCCs, saw operating profit rise 26.6 percent from a year earlier, while its package solutions division, which makes FC-BGA substrates, posted a 187 percent increase. The utilization rates of its MLCC and FC-BGA production facilities are both reported to have exceeded 90 percent in the first quarter.

“The demand for high-performance semiconductors is surging amid the spread of agentic AI, leading existing FC-BGA customers to request increased supply,” the company said during its earnings call on Thursday.

“Demand from new customers for the second quarter is also coming in stronger than expected, pushing overall demand beyond our production capacity,” the company said, adding it plans to double its facility investment this year.

“I expect Samsung Electro-Mechanics’ operating profit growth will continue through the fourth quarter,” IBK Securities analyst Kim Un-ho said. “To meet demand, capital expenditures are likely to surge this year, with spending over the next three years expected to match the past decade. This reflects rapidly growing demand for AI semiconductors and new FC-BGA customers.”

LG Innotek's Flip Chip Ball Grid Array / Courtesy of LG Innotek

LG Innotek also posted strong first-quarter results, driven by solid performances in both its optical solution and substrate businesses. It posted 5.53 trillion won in sales and 295.3 billion won in operating profit, up 11 percent and 136 percent year-on-year, respectively.

Sustained demand from key clients such as Apple in the optical solution business, while rising demand for semiconductor substrates — including Radio Frequency System-in-Package (RF-SiP), Flip-Chip Chip-Scale Package (FC-CSP) and FC-BGA — supported overall growth.

In particular, RF-SiP, widely used in wireless communication devices, is reportedly being produced at full capacity, while FC-BGA is also believed to be nearing capacity shortages.

“We are expanding semiconductor substrate production capacity to meet surging demand amid the chip upcycle,” the company said during its earnings call on April 27.

“Within five years, we will be able to raise the substrate business’s contribution to operating profit to a level comparable to the optical solutions business.”

Samsung Electro-Mechanics shares closed at 918,000 won on Monday, up 10.34 percent from the previous session, while LG Innotek ended at 595,000 won, up 3.84 percent during the same period.