Executive Summary
The key inflection point in these interim results is the company's decision to commit approximately JPY 151B in additional investment ahead of its Cell6/Cell7 decisions. The investment will fill the remaining space (just under half) of Kawama Cell6 with EMIB for CPUs. A new building would take at least four years and miss the timeline customers are demanding. Management therefore chose to secure SAP capacity early by using the remaining space in the existing building. The FY2030 plan (Revenue of JPY 1T, Operating Income of JPY 300B) was left unchanged because management intends to update it in one go once this investment and subsequent large-scale investments are finalized, not because of any concern over the outlook. Demand for EMIB for CPUs is also strong. Against that backdrop, the company is clearly turning its capacity constraints to its advantage, allocating capacity based on both customer demand and profitability.
Message from the Company
We are not debating whether to invest. Investment is a given; all that remains is to finalize which equipment to deploy and on what timeline. We did not leave the FY2030 figures unchanged because of any major risk. Including the investments to follow, we intend to properly disclose our plans for Cell7 and Cell9 within FY2026. Many investors view this positively.
Key Discussion Points
Kawama Cell6 Investment Front-Loads Capacity to Close the Supply Gap
Even if a new-building investment were approved this fiscal year, mass-production lines would not start until around FY2030, with earnings contribution slipping to FY2031–FY2032. Customers said this was too late. The company therefore decided to invest approximately JPY 151B in the remaining ~40% of space at the Kawama Plant to secure SAP capacity first. Lines will ramp up sequentially from FY2029 and are expected to contribute to FY2030 revenue.
FY2030 Plan Held Pending a Comprehensive Update That Incorporates New Investments
The current FY2030 plan excludes both the JPY 151B investment and the investment under consideration to fully utilize building capacity at the Ono Plant. As a rule of thumb for investment efficiency, the company targets incremental revenue roughly equal to the amount invested. Rather than make piecemeal revisions, management plans to update the entire plan alongside decisions on subsequent investments.
Product Strategy Prioritizes High-Value-Added Products Under Capacity Constraints
The SAP process can serve any customer or product. Once line qualification is obtained, capacity can be flexibly reallocated to match customer demand. Customers prefer to entrust the most technically demanding substrates to the company, which supports its strategy of capturing as many high-margin products as possible. Specifically, the new capacity will run GPU substrates for AI servers, EMIB-T for ASICs, and leading-edge EMIB for general-purpose server CPUs.
Envalith's Perspectives
The ~JPY 151B investment sits outside the FY2030 plan. Applying the company's benchmarks of 1x revenue turnover and a 30% OPM implies incremental revenue of roughly JPY 150B and Operating Income of roughly JPY 45B. Management stopped short of committing to this upside but did not rule it out. Utilization of the Ono Plant's building capacity and Cell7/Cell9 would widen the upside further.
The plan for FY2027 onward still reflects selling-price declines and pre-correction pricing. At 1Q, the company significantly raised its FY2026 Operating Income guidance after assuming no selling-price declines and reflecting price increases. The FY2027 upward revision was limited to about JPY 15B. This appears to include a sizable buffer against price disruption from new entrants, leaving room for further upside if pricing stabilizes.
Several manufacturers produce high-layer-count substrates. However, management believes the company ranks at the top in terms of quality and supply reliability. While management soberly acknowledges that customers hold the upper hand, the company's status as a top supplier allows it to negotiate a more profitable product mix. Capacity constraints are effectively driving a shift toward higher-margin products.
The most critical condition for the final Cell7/Cell9 decision is whether the company can meet customer timelines. The biggest bottleneck is engineering resources. The company plans to spend just over a year bringing EMIB-T yields toward customer targets, centered on foreign-matter countermeasures. Management appears to be addressing these challenges head-on.
Intensifying price competition from new entrants; longer procurement lead times for certain manufacturing equipment; investment delays due to engineering resource shortages; slower-than-expected EMIB-T yield improvement; a delayed recovery in the Ceramics business amid a weak auto market; and shrinking free cash flow as capex payments rise from next fiscal year onward.
Q&A Highlights
- Q
What is the key message you want to convey to investors with these results?
ALeaving the FY2030 plan unchanged is not a defensive decision. The Cell7/Cell9 investments are a given; only the equipment configuration and timeline remain to be finalized. We still intend to make the decision within this fiscal year. To meet customer requests, we first front-loaded approximately JPY 151B of investment at the Kawama Plant. We plan to update the plan for FY2030 and beyond in one go together with subsequent investments. The market environment is by no means negative.
- Q
What is the most critical condition for the final Cell7/Cell9 decision?
AIt comes down to whether we can meet customer timelines. The biggest bottleneck is engineering resources. Customers are asking us to pull schedules forward even further, and contracts and announcements will follow final adjustments. The next challenge is longer lead times for certain manufacturing equipment. We have made progress securing materials such as glass cloth, and that risk has declined considerably.
- Q
What are your selling-price assumptions for FY2027–FY2030?
AThe FY2030 plan still reflects price declines and pre-correction pricing, so there is ample potential upside. On the other hand, supply cannot keep pace with demand and a third player is expected to enter the market. We have also factored in the risk of new entrants disrupting the market. It is fair to view FY2027 as a conservative plan with a sizable buffer.
- Q
Given capacity constraints, which products and applications will you prioritize?
AProduction fundamentally follows customer demand, so we cannot pick only the most profitable products. That said, customers prefer to entrust us with the most difficult substrates, and we are discussing with them how to capture as many high-margin products as possible. New capacity will be allocated to GPU substrates for AI servers, EMIB-T for ASICs, and leading-edge EMIB for general-purpose server CPUs.
- Q
What is the outlook for cash generation amid continued heavy capex, and for the Ceramics business?
AWe expect significantly positive free cash flow this fiscal year. Capex payments will increase from next fiscal year, but we do not expect free cash flow to turn negative. Our minimum cash-on-hand benchmark is three months of revenue, and we expect to remain well above that level. The Ceramics business is in its toughest phase this fiscal year; we see this year as the bottom, with recovery from next fiscal year onward.
ENVALITH, INC. ("ENVALITH") provides exclusive research coverage services to domestic and international institutional investors, as well as domestic individual investors, with the objective of contributing to the development of global and Japanese capital markets by providing information necessary for considering investments in Japanese listed companies.
- Purpose and Disclaimer Regarding Investment Decisions
This report has been prepared solely for informational purposes and does not constitute a solicitation to acquire, sell, or hold securities or any other financial products. Furthermore, this report does not constitute specific investment, financial, or tax advice. Any opinions, judgments, or recommendations contained herein are not intended to induce investment activities. Please be advised that all investment decisions must be made based on the investor's own responsibility and judgment, and ENVALITH and subject company shall not be involved in any such investment decisions.
- Information Sources, Accuracy, and Disclaimer of Warranty
This report has been prepared based on a formal request from the subject company, utilizing information provided by and interviews conducted with said company. By using this report, you are deemed to have agreed to the following: 1. Information Sources: This report is prepared on the assumption that the publicly available information and information disclosed by the subject company and provided during interviews is true and reliable. ENVALITH has not independently verified or validated the veracity of such information. 2. Accuracy: The interpretations, analyses, and hypotheses or conclusions based thereon contained in this report are independently derived by ENVALITH using its own perspectives and analytical methods based on the information mentioned in the preceding paragraph. 3. Disclaimer of Warranty: In the event that there are errors or omissions in the information disclosed by the subject company, ENVALITH and subject company shall not be held liable for any inaccuracies in this report resulting therefrom. ENVALITH and subject company make no warranties, whether express or implied, regarding the accuracy, safety, validity, completeness, or any other aspect of this report, nor regarding the past or future performance of the subject company.
- Limitation of Liability
ENVALITH and subject company shall not be liable for any costs, damages, or losses (including direct, indirect, incidental, consequential, or punitive damages) arising from the use of this report or the information obtained therefrom. Users of this report acknowledge and agree that such use is at their own risk.
- Potential Conflicts of Interest
ENVALITH may have, or may have in the future, business relationships with the subject company. Accordingly, investors should be aware that conflicts of interest may exist that could affect the objectivity of this report.
- No Obligation to Change or Update Content
The contents and opinions in this report, as well as the information upon which it is based, are current as of the date of preparation and are subject to change without notice. Please be advised that ENVALITH is under no obligation to update the contents of this report, and investors must verify the timeliness of the information on their own.
- Governing Language
This report is prepared in Japanese, English, and Chinese. In the event of any discrepancy or difference in interpretation between the language versions, the Japanese version shall be treated as the original and shall prevail.
- Copyright
All rights (including copyrights) relating to this report belong to ENVALITH. Any reproduction, redistribution, or other use of all or part of this report without the prior written permission of ENVALITH is strictly prohibited.
- Use for Other Investment Products
Except where ENVALITH has provided prior written approval, the use of this report and the trademarks or trade names of ENVALITH or the subject company in connection with the information distribution, transaction, sales promotion, or advertising of any investment products (including derivatives, structured products, investment trusts, or investment assets whose price, return, or performance is based on or linked to this report) is strictly prohibited.