Summary of Key Points
Lianhua Holdings reported a year-on-year net profit increase of 48.75%-61.14% in its half-year report, yet its stock price hit the daily limit down the following day. The reason was not poor performance, but rather the market had already anticipated the growth in its monosodium glutamate (MSG) business. Now, everyone is focusing on its foray into the production of ABF-like membranes – a critical material for chip packaging, which is 95% monopolized by Japan's Ajinomoto. The concern is whether Lianhua can break this monopoly and create a new narrative around “semiconductor materials.” While Nufis (a subsidiary of Lianhua) has started mass-producing mid-to-low-end products, challenges such as high-end breakthroughs, improving yield rates, and gaining customer certifications remain unresolved, and the market needs to see tangible progress.
1. Surprising Drop in Stock Price Despite Strong Performance
The growth in Lianhua’s MSG business was within expectations; a 50% increase in earnings for a consumer company is quite good, but this growth had already been factored into the stock price by investors (all the positive factors have been priced in). The market's current focus is on whether the “second growth curve” represented by ABF-like membranes will be successful. After all, the MSG business is traditional and has a lower valuation, while semiconductor materials represent a high-profit sector with potential for significant valuation increases. However, since the membrane project is not yet fully established, investors are cautious and have voted with their feet by driving down the stock price.
2. How Did Lianhua’s MSG Business Cross Over to Chip Materials?
Ajinomoto, originally a manufacturer of MSG, has become an “invisible giant” in the chip industry through its ABF membrane business. Its approach is unique: by utilizing by-products from MSG production to create insulating materials for chips. ABF membranes act as the “flooring” within chips, ensuring that nanoscale circuits can connect to external circuit boards without short-circuiting. AI chips (such as NVIDIA’s H100) require 8-16 layers of these membranes, with demand being 15 times higher than for regular chips, leading to a surge in demand.
Lianhua Holdings has replicated this model, with its subsidiary Nufis using MSG by-products to produce ABF-like membranes. Lianhua itself has a foundation in fermentation and fine chemicals, making this transition less of a blind leap into an unfamiliar field. In April this year, Lianhua acquired 51% of Nufis for over 100 million yuan and still has 1.6 billion yuan in cash on hand, indicating no immediate financial constraints.
3. Progress with ABF-like Membranes, but Many Challenges Remain
Nufis reported revenue of 4.67 million yuan in the first half of the year (a 67% increase year-on-year) and has started mass-producing mid-to-low-end membranes for leading PCB manufacturers like Xinxing Electronics and Hwatong Computer. It also plans to build a superfactory with an annual production capacity of 20,000 tons, targeting domestic chips that require these materials. However, the real challenges lie in scaling up from this initial success:
- Technological Gap: Ajinomoto’s ABF membranes have reached the ninth generation with a yield rate of 99%, while Nufis is still in the mid-to-low-end range. It will take 2-3 years to improve quality and gain customer acceptance for high-end applications.
- Ajinomoto’s Counterattack: In May, Ajinomoto raised the price of ABF membranes by 30%. This move may seem like a supply-demand issue, but it is actually a strategy to invest in research and development, making it difficult for competitors to catch up. Lianhua will need to invest heavily to build its superfactory, which tests both its financial resources and commitment.
4. Valuation Based on Ajinomoto’s Performance, but Market Doubts About the Story
Ajinomoto’s stock price has increased fivefold due to ABF membrane sales, with profit margins exceeding 50%, leading institutions to give Lianhua a “buy” rating, hoping it will become China’s version of Ajinomoto. However, there are concerns:
- Diverse Transformation: Lianhua has expanded into four new areas in just three years: computing services, AI integrated devices, semiconductor materials, and large models. There is suspicion that it may be merely riding on trends rather than truly investing in innovative technology.
- Need for Concrete Evidence: The stock price drop on July 14th indicates that mere speculation is not enough; the market needs to see actual evidence of order growth, successful customer certifications, and improved yield rates.
5. Strategic Value, but Challenges Along the Way
At a national level, 90% of ABF membranes in China are imported. Any price increase by Ajinomoto affects the entire supply chain. Lianhua’s efforts to develop domestic alternatives are important for security. However, while this is a valuable initiative, there are doubts about whether Lianhua can achieve its goals quickly enough:
- Technical Speed: Can Lianhua make rapid technological breakthroughs?
- Cost-effectiveness of Investments: Will the investments be worthwhile?
- Market Patience: Will investors be patient?
The ultimate answer lies in Nufis’ future quarterly reports (revenue growth) and the list of top chip manufacturers that adopt its products. What the capital market needs are not just storytellers but those who can turn stories into reality.
Conclusion: Lianhua Holdings is on the right track with its membrane project, but there is still a long way to go. Whether it can transform from an MSG manufacturer into a leading chip material supplier depends on its ability to overcome patent barriers and improve yield rates. After all, no matter how appealing the story is, real orders are what matter most.