Semiconductor: has the typical cycle attribute, the inventory level is the stock price core influence variable.

For a long time in the past, the global semiconductor industry basically maintained a slightly higher annual compound growth rate than GDP, reflecting the strong correlation between the semiconductor industry and the macro-economy, as well as the continuous improvement of the "silicon content" of the whole society. From a short-and medium-term perspective, the inherent "capacity-inventory" attribute of the semiconductor industry will lead to a phased industrial supply-demand mismatch, resulting in a typical cycle attribute of the industry, with each complete cycle lasting about 3-4 years.

Stock prices are more of a response to expectations than facts. Historical data show that year-on-year changes in SOX (Philadelphia Semiconductor Index) share prices are significantly negatively correlated with year-on-year changes in industry inventory levels (absolute changes in inventory days).To put it simply, the high point of inventory level generally corresponds to the low point of the SOX index, which is also consistent with the main price formation mechanism of the semiconductor industry.

This report focuses on the judgment of the operating position of the global semiconductor cycle, focusing on two categories: logic chips and memory chips. it is also committed to answering: the high inventory level in the current cycle of the semiconductor industry, the extent to which the market is expected to take into account the downward cycle, and the similarities and differences between this semiconductor cycle and history.

Inventory level: the high probability of Q3 is the high point of this cycle.

According to SIA data, 2022Q2, the number of days of global semiconductor inventory is about 108 days. Combined with the relevant manufacturers' three quarterly report data, we judge that the inventory level of the industry is still rising further in the third quarter. Combined with the latest expressions of Taiwan Semiconductor Manufacturing Co Ltd, Qualcomm Inc, MediaTek, Intel and other enterprisesWe judge that the high probability of Q3 is the inventory peak of the current semiconductor cycle, and the plate is expected to return to normal inventory levels around 2023Q2 after two quarters of inventory deregulation in 2022Q4 and 2023Q1.The current weakness of consumer electronics (smart phones, PC) has been fully recognized by the market, but the market is also worried about the subsequent weakening demand for Apple Inc's mobile phones and servers, driving up the global semiconductor inventory level. Our analysis shows that:

1) the initial sales data show that iPhone 14Pro/Pro max is expected to account for 60% of iPhone 14 series sales, up from about 50% of previous generations. The ideal product mix, the purchasing power of high-end consumers, and the favorable competition pattern in the high-end mobile phone market are expected to continue to support.$Apple (AAPL.US)$The short-term performance of mobile phones

2) looking forward to 2023, the still strong demand for cloud computing in North America, and next year$Intel (INTC.US)$、$Advanced Micro Devices (AMD.US)$The replacement demand brought about by the new generation of server CPU chips is expected to boost the capital expenditure of North American cloud manufacturers by about 10%, which in turn supports the demand of the global server market.

Market adjustment: share price decline from its peak, valuation contraction, EPS expectation adjustment, which is closer to the bottom of the historical downward cycle.

The stock price at the bottom of each cycle of the semiconductor industry, the range of EPS adjustment, and the valuation level during the period when the market hit bottom are important references for the bottom position of the market.

The SOX index has fallen 44 per cent since its peak at the start of the year, significantly higher than in recent downturns, only better than during the dotcom bubble (- 84 per cent) and the 2008 financial crisis (- 69 per cent).

Valuation levelAt present, SOX PE (NTM) has fallen to around 14x, approaching the level at the bottom of the 2018 / 2019 cycle. At the same time, from the point of view of the representative enterprises in each link$Taiwan Semiconductor Manufacturing (TSM.US)$(wafer manufacturing),$Qualcomm (QCOM.US)$The PE (NTM) of (IC design) is 10 and 11x respectively, while the 2018 / 19 cycle low is 12 and 15x respectively. At the same time, the current PB of memory chip manufacturers is 1.2x, which is also close to the 2018 / 19 cycle low (1.0x).

EPS levelSince Q2 this year, the performance of major semiconductor companies in US stocks is expected to enter the downward adjustment channel in the field of memory chips.$Micron Technology (MU.US)$The adjustment is the most drastic, at the same time$NVIDIA (NVDA.US)$、$Intel (INTC.US)$、$Applied Materials (AMAT.US)$And other enterprises have also significantly adjusted downwards, and basically all have made significant adjustments after the three quarterly reports.

This cycle: oversupply and shrinking demand coexist, and the slope of stock price recovery is weaker than history.

In the latest comparable 19-year cycle of 2018, the downward trend of the plate is more due to the phased structural imbalance between supply and demand caused by oversupply. There is also oversupply in this downward cycle, with capital expenditure and capacity expansion in the past two years similar to those in 2017 / 18, but with a higher density of capital expenditure.

The most obvious feature of this cycle is that the supply surplus is accompanied by a rapid decline on the demand side.Take PC as an example, global PC sales are expected to decline by nearly 20 per cent this year and 5 per cent to 10 per cent next year. At the same time, the Fed's monetary tightening cycle has also led to a continued rise in global macroeconomic and demand uncertainty.

We judge that the inventory of US stock semiconductors has basically peaked in this round, but in view of the continued contraction on the demand side in this downward cycle, the US semiconductor sector may still face more disturbances from the demand side during the stock price recovery phase. and the slope of stock price recovery is weaker than historical comparable cycles such as 2018 / 19.

Risk factors:

The risk of more-than-expected recession in the global economy; the risk of tightening monetary policy due to the slow decline in inflation in Europe and the United States; the risk of difficulties in the cross-border flow of technology and talent caused by global geopolitical conflicts; the risk of slow supply clearing caused by the slow reduction of capital expenditure in some enterprises; the downside risk of higher-than-expected hardware demand in consumer electronics and data centers; the risk of intensified market competition and the loss of core technical personnel in enterprises.

Investment strategy:

The semiconductor industry has a typical cyclical attribute, and the trend change of industry inventory level is the core variable that determines the trend of stock price.Judging that the high probability of 2022Q3 is the inventory peak of this semiconductor cycle.At the same time, combined with the industry index, the cumulative decline of individual stocks since the peak, valuation contraction, EPS consensus expected adjustment, and so on.At present, the characteristics of the bottom of the plate are more obvious.Considering that this global semiconductor downward cycle is also accompanied by a contraction on the demand side, although stock prices are bottoming out and reboundingHowever, we expect the recovery slope of sector stocks to be weaker than historical comparable cycles such as 2018 / 19.