Is MSG Bad for You? Not if It Comes With a Side of Microchips

Washing down this semiconductor play with a glass of foamy Japanese beer won’t leave a bad taste.

By guest author Jacky Wong from the Wall Street Journal.

Caption and graphic courtesy by the Wall Street Journal

The chip shortage is adding extra flavour to a 113-year-old Japanese seasoning company.

Japan’s Ajinomoto is renowned for inventing monosodium glutamate—the controversial flavour enhancer that adds umami to dishes. But it also makes a material that goes into the central processing units of computers around the world.

Using by-products from making MSG, Ajinomoto manufactures a type of insulation material called Ajinomoto Build-up Film, or ABF. That in turn goes into a semiconductor component called ABF substrate, which connects microchips to circuit boards.

Chip makers such as Intel and AMD are seeing shortages in the substrate, as the Covid-19 pandemic has driven supply and demand out of kilter. Share prices of substrate manufacturers such as Japan’s Ibiden and Taiwan’s Unimicron have more than doubled in the past couple of years. Unimicron said its capacity for ABF substrate is booked up in the next few years.

There is no shortage on Ajinomoto’s end, but it has also benefited. Business profit at its specialty-chemicals segment, of which a big part likely came from ABF, grew 39 % year-over-year in the fiscal year ending in March. The segment accounted for only 4 % of the company’s sales, but made up 17 % of its business profits, indicating higher margins.

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While the pandemic has certainly given the business a surprise boost, the underlying trend seems favourable too. The lackluster personal computer market had driven a slowdown in ABF demand before 2018, but new applications such as data centres and networking equipment could drive growth higher again.

Higher performing chips may also increase demand due to their more complex design. Ajinomoto expects ABF shipment volume to grow 67 % over the next four fiscal years. And its customers downstream are expanding capacity to meet demand. Ajinomoto said growth this fiscal year may slow but it will pick up again once those expansion plans are realised.

The company is also seeing strong growth in Southeast Asia: Sales of seasoning and quick foods in the Philippines grew 19 % year-over-year last quarter and increased 13 % in Vietnam. Asia outside of Japan is the company’s biggest market, making up more than half of sales for the segment. It may take time to change the bad rap on MSG, but the company is selling other seasonings and soup bases too. It now sells more such alternative offerings than MSG itself.

Ajinomoto’s enterprise value is 10.3 times expected earnings before interest, taxes, depreciation and amortization, slightly higher than its five-year average. But with solid growth prospects and ties to the world economy’s most important food group—semiconductors—it looks like a good way to have your chips and eat them too.