Has the semiconductor sector, which has been rising strongly for several days, encountered a "sniper"?

Recently, the continuous strong rise of semiconductors has become a major topic of discussion in the current secondary market. Taking the semiconductor sector in the Hong Kong stock market as an example, the sector recorded increases of 30.18%, 20.83%, 15.44%, and 6.25% on October 4, October 7, October 18, and November 5 respectively. For the semiconductor sector, which hit the bottom from the end of 2023 to the beginning of 2024, this is no less than a clear signal of a bottom reversal.

(Image Source: Central China Securities)

However, the good times did not last long. With the market's downward adjustment today (November 12), the semiconductor sector in the Hong Kong stock market also showed a significant decline—on November 12, the sector plunged by 7.42% at the close, ranking at the forefront of declines. Almost all the concept stocks within the sector turned green, with Contel (01912) leading the decline by 11.51%, while Semiconductor Manufacturing International Corporation (00981) and Shanghai Fudan (01385) both fell by over 7%.

From a news perspective, according to Reuters, the U.S. Department of Commerce has written to Taiwan Semiconductor to stop supplying 7-nanometer and more advanced AI chips to clients in mainland China starting from the 11th. This export restriction measure mainly targets chips used for AI accelerators and Graphics Processing Units (GPUs). Sources said that Taiwan Semiconductor has notified affected clients that chip shipments will be suspended starting from the 11th.

Is the momentum of the rebound in the semiconductor sector really about to come to a sudden halt?

The “multiple logic” of accelerating the substitution of domestic chips

Objectively speaking, after Trump came to power, the domestic semiconductor industry may usher in a development opportunity of “opportunity and challenge coexisting.”

The challenge lies in that during Trump's previous term, he has always been keen on using trade restrictions and sanctions to restrain China's technological progress. If Trump is re-elected, it is very likely that he will continue this tough policy towards China, as he has previously mentioned imposing tariffs of 60%-100% on Chinese imported products. If the sanctions on China's semiconductor industry are further intensified, it will pose greater challenges to Chinese semiconductor companies.

However, for the substitution of domestic chips, this will be an “opportunity greater than challenge.” This may accelerate the substitution of domestic chips, ushering in a new cycle of growth. Looking through the current development trend of the domestic semiconductor industry, there are several multiple growth logics as follows:

Firstly, from the perspective of domestic substitution, with Trump coming to power, the United States may further increase its technological restrictions on China, thereby stimulating the independent and controllable development of China's semiconductor industry.

As is well known, in the fields of AI and GPU, the advanced level of process technology directly affects the performance of the products, leading to increased costs and delayed product launches. Against the backdrop of restricted equipment and foundry services, mainland Chinese semiconductor equipment manufacturers urgently need to increase R&D of high-end equipment to support the expansion of local advanced process capacity and achieve the localization of the semiconductor industry chain.

Whether it is restricting advanced process foundry services for domestic chip design companies or reviewing and tightening the export of semiconductor materials and equipment to China, it will help accelerate the progress of domestic substitution. This is expected to give rise to investment opportunities in the domestic substitution of the entire industry chain of semiconductor equipment, manufacturing, advanced packaging, and chip customization services.

haitong sec pointed out that with the escalation of external influences, it is expected that advanced process flow chips will become more stringent, and the resistance to building advanced process production lines in china has increased somewhat. However, the relevant regulations cannot offset the real demand of overseas chip manufacturers in china. In addition to a few individual links that still need time to overcome in the chinese chip industry chain, the overall situation has basically become perfect. It is expected that the trend of domestic substitution in key areas such as semiconductors will still continue.

Secondly, from the perspective of policy support, semiconductors are the top priority industry strongly supported by current national policies. Against the backdrop of the complex and ever-changing global situation, promoting the domestic independent controllable production of the semiconductor industry is one of the most certain trends.

On May 24 this year, the National Integrated Circuit Industry Investment Fund Phase III was established, with a registered capital of 344 billion yuan, exceeding the sum of phases I and II. The establishment of Phase III of the fund marks a new development stage for the chinese semiconductor industry. Compared with the previous two phases, the investment scale of Phase III is larger, and it is expected to focus on investment in advanced wafer manufacturing, key equipment, and components, accelerating the domestic substitution of upstream equipment materials. This measure will help solve the "bottleneck" problem of the domestic semiconductor industry in key technological areas and enhance the self-controllable capability of the industry chain.

The registered capital of Phase III of the fund is 344 billion yuan, and it is expected to leverage more than 1 trillion yuan of investment in the semiconductor field, demonstrating the strong support from the country for the semiconductor industry. This level of investment will not only provide sufficient financial support for the semiconductor industry but also attract more social capital into the semiconductor industry, creating a good investment atmosphere.

Therefore, it is not difficult to see that under the continued policy support and the acceleration of domestic substitution driven by external factors, domestic semiconductor equipment and components, semiconductor materials, and ai computing power chips are all expected to continue to grow at a higher rate.

Industry cycle reversal drives strong performance recovery

It is an undeniable fact that the semiconductor industry experienced a downturn from 2022 to 2023 due to factors such as weak consumer electronics demand, concentrated release of production capacity, and the need for further verification of high-spec products.

However, with the appearance of inventory replenishment demand in the first half of 2024, the industry has gradually emerged from the downturn and ushered in a cycle reversal.

Be data-driven.

According to SIA data, the global semiconductor industry sales reached $55.3 billion in September 2024, a year-on-year increase of +23.2%, and a month-on-month increase of +4.1%. The global semiconductor market continued to grow in 24Q3, with the quarterly sales growth rate being the highest since 2016, and September's sales reached the highest monthly total sales in market history, thanks to a 46.3% year-on-year growth in the Americas region.

By region, in September, monthly sales in Japan (5.3%), Asia Pacific/Other regions (4.5%), Americas (4.1%), Europe (4.0%), and China (3.6%) all increased.

The cyclical turnaround in the semiconductor industry is also reflected in the performance of related companies.

According to related research reports, as inventory clears and downstream demand picks up, the semiconductor industry (CICC) revenue for the first three quarters of 2024 was 429.641 billion yuan, a year-on-year increase of 22.57%, and net profit attributable to the parent company was 27.211 billion yuan, a year-on-year increase of 42.91%.

Specifically, during the same period, integrated circuits, discrete devices, semiconductor equipment, and semiconductor materials sectors saw revenue increases of 19.83%, 19.39%, 43.92%, and 25.36% respectively; integrated circuits, discrete devices, semiconductor equipment, and semiconductor materials sectors saw net profit attributable to the parent company increase by 125.80%, -44.80%, 26.73%, and -3.42%, respectively.

Looking at the performance of the two giants in semiconductor manufacturing international corporation (00981, 688981.SH) and hua hong semi (01347, 688347.SH) in the third quarter, we can also see the potential reversal of this sector.

According to financial report data, in the third quarter of 2024, the revenue of semiconductor manufacturing international corporation reached 15.61 billion yuan, a year-on-year increase of 32.5%, a quarter-on-quarter increase of 14%, and for the first time in a single quarter, revenue exceeded 2 billion US dollars, reaching a historic high. At the same time, the net income in the third quarter reached 1.06 billion yuan, a year-on-year increase of over 56%. Similarly, hua hong semi also saw a significant increase in profits. During the period, the company's revenue was 0.53 billion US dollars, a year-on-year decrease of 7.4%, a quarter-on-quarter increase of 10%; the net profit attributable to the parent company reached 44.8 million US dollars, turning losses into profits with an increase of more than twice year-on-year, and a more than fivefold increase quarter-on-quarter.

Of particular note is that the capacity utilization rates of the two major foundry giants have been steadily increasing this year. In the third quarter, the capacity utilization rate of semiconductor manufacturing international corporation reached 90.4%, compared to only 77.1% in the same period last year. The capacity utilization rate of hua hong semi further increased to 105.3%, compared to 86.8% in the third quarter of last year. As a key indicator to measure whether the production capacity of a factory is fully utilized, capacity utilization directly determines the profitability level of wafer foundry plants. With the significant increase in capacity utilization rates, the profitability levels of these two companies have also significantly increased.

In summary, the cyclical reversal of the semiconductor industry clearly reflects in the improvement of valuations and performance. According to further forecasts by hua fu securities, as external restrictions continue to escalate, the catalyzing investment opportunities for domestic substitution, local equipment companies are expected to continue their strong performance, and related equipment manufacturers are expected to expand their market share. It is estimated that by 2025, the localization rate will reach 50%. This also means that the short-term fluctuations in the semiconductor industry are not enough to affect the long-term development of the domestic semiconductor industry.