Original author: Rita

Introduction

Morgan Stanley has just raised the target price for Samsung Electro-Mechanics from 920,000 won to 2.56 million won. Analysts have rewritten the story of MLCC (multi-layer ceramic capacitors) from a cyclical industry to one of structural prosperity. The core logic is straightforward: AI servers' demand for MLCC is 10 to 15 times higher than that of traditional servers.

AI Ignites “Simultaneous Increase in Volume and Price”

An AI server requires 440,000 MLCCs. How many does a traditional server need? 30,000. That's more than ten times difference.

This is not just a matter of quantity. The requirements for MLCC from AI are also upgrading: higher capacitance, smaller size, lower ESL and ESR. From competing on quantity to competing on quality, ASP (average selling price) is rising accordingly. Morgan Stanley states that Samsung Electro-Mechanics' MLCC business will contribute 15% of revenue by 2026, and this proportion will jump directly to over 50% by 2030. This is backed by an enhancement of pricing power, resulting in genuine profit expansion.

Supply Tightness is Structural, Not Cyclical

This cycle resembles the MLCC supercycle of 2017 to 2018, but the underlying logic is completely different. That time was characterized by short-term mismatches caused by insufficient inventory and a surge in orders. This time, a capacity ceiling meets new demand that continues to grow.

High-end MLCC production lines have been fully booked, and new production lines will take two years to be operational. The current inventory level in the supply chain has spread from the spot market to contract pricing, and distributors have started stockpiling, indicating they no longer view this as a temporary shortage.

Morgan Stanley predicts that MLCC prices will rise by 30% in the second half of 2026 and then by another 30% to 50% in 2027. This is not just a prediction from futures traders, but a conclusion drawn from the contract prices and distributor behaviors that can already be observed.

Why Samsung Electro-Mechanics is the Biggest Beneficiary

Samsung Electro-Mechanics benefits from three main dimensions.

The first is the direct price increase of MLCC. MLCC for IT is rising, and MLCC for AI is also rising, with the AI segment having thicker profit margins. After the 1Q26 financial report comes out, revenues have exceeded expectations, reaching 3.2 trillion won against an expectation of 3.1 trillion won. More importantly, Morgan Stanley has raised its EPS forecasts for the next three years, with FY27E raised to 55,477 won, a 71% increase from previous estimates. The operating profit margin is expected to jump from the current 15.7% to 24.5% in 2027, and 25.9% in 2028. This is not merely a numbers game, but a genuine profit expansion stemming from enhanced pricing power.

The second line of benefit is from ABF substrates. The orders from AI customers for ASIC chips are already saturated, and Samsung Electro-Mechanics' shipments and profits in this area are growing rapidly.

The third line involves new product lines. Silicon capacitors have secured orders worth 1.3 billion dollars, and glass substrates have begun trial production. These won't contribute to revenue this year or this month, but set the stage for future earnings.

Will ROE Really Jump from 7.5% to 32.2%?

Morgan Stanley forecasts that Samsung Electro-Mechanics' ROE (return on equity) will rise from 7.5% in FY25 to 17.3% in FY26, and up to 32.2% in FY28. Meanwhile, the company’s dividend payout ratio is expected to increase from the current 5% to 20%.

This implies that a Korean electronic component company, which already has a decent ROE, may enter a higher profit cycle due to changes in product structure and pricing power. The current valuation stands at 1.4 times P/B (price to book ratio), lower than the historical average of 1.7 times. Raising the target price from 920,000 to 2.56 million represents a nearly 178% increase, which is not solely due to net profit growth but also leaves room for valuation recovery.

Identifying the Risks

Upside risks: MLCC could be forced to continue major price increases due to genuine shortages; smartphone demand could rebound more than expected; consumption stimulus policies from the Chinese government could bring additional demand.

Downside risks: A significant downturn in Samsung Electronics' flagship smartphone cycle (with consumer products accounting for a considerable share of Samsung Electro-Mechanics' business); ineffective execution in expanding Chinese smartphone customers; weak global consumer demand.

As for catalysts? Further increases in contract prices, a continued rise in the Book-to-Bill order shipment ratio, production capacity utilization nearing full load, and confirmation of increased MLCC content from next-generation AI platforms (Rubin, VR200).

New Noble of AI Infrastructure

Transforming from a side dish to the main course, from cyclical to structural, from traditional capacitor vendor to AI infrastructure supplier. This is the story Morgan Stanley is telling about Samsung Electro-Mechanics. How long this story can hold up will depend on how the demand for AI chips, capacity construction, and competitive dynamics evolve. But currently, supply constraints support prices, and rising prices support profits.

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