M IdeaAsia Technology | Asia PacificMLCC Updates: Good, Not Great Morgan Stanley Asia Limited+Shawn KimEquity Analyst Shawn.Kim@morganstanley.com +852 3963-1005 Duan LiuResearch Associate Duan.Liu@morganstanley.com +852 2239-7357 Jia ZhangResearch Associate Jia.L.Zhang@morganstanley.com +852 2848-7291 S. Korea TechnologyAsia PacificIndustry ViewAttractiveIt’s not like we ever have complete certainty on the MLCC cycle, but today we have a lot less uncertainty than we did 12 months ago. We do not expect meaningful upgrades at this stage but the shares offer some value on top of structural growth from vehicle content upgrade and on-device AI. What's changed? Huaqiangbei Mart (the largest electronic component market in China) has returned to busy before Lunar New Year holidays, despite distributors' bearish sentiment. Overall we see gradual recovery into 2H24 and do not see much downside from here. • Inventory has remained at healthy levels for more than 2 quarters and there is no sign of it picking up again as the supply chain has become more disciplined. • Overall spot price remained flat in 1H January and we see sporadic price hikes on certain specs due to temporary shortages. • Contract prices reached trough level as well with only 1-2% negotiation room on big orders. But distributors have noticed more severe competition among Chinese local players, which could potentially cap the upside on price hikes if the cycle start to recover• Utilization rate is on track to improve, although levels differ across different players. Edge AI impact on MLCC demand. AI is about to remake PCs and smartphones and gives another boost to increased MLCC TAM from this year. We estimate higher MLCC content in AI PCs and the next iteration of AI phones in the form of higher capacitance but a marginal rise in unit content per device; along with replacement demand, this could drive 2-9ppt higher demand by 2025. It is still very early days in adoption but Samsung first AI phones are reaching new highs in terms of weekly pre-orders in Korea. Conclusion. Things will normalize and it isn’t different this time. Demand is rising, inventory levels are normalizing, and suppliers are managing their capacity utilization rates effectively. Demand for passive components is expected to pick up as the economy recovers and then as demand increases, manufacturers will be able to raise prices again without fear of losing customers. We prefer high-end MLCC exposure (smartphone/auto) over commodity and Korea/Japan over Greater China due to relative exposures. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single fac...
