Bull Market Phase 2: Semiconductors' "Fiesta" and "Reflection"

After the initial widespread recovery, the market is likely to enter a phase of prolonged volatility, often referred to as a "protracted war" of fluctuations. Against the backdrop of very active trading volumes, sectors such as semiconductors, which represent both "China's core assets" and the direction of "new quality productivity," have once again become the vanguard of the rebound. The index representing the upstream semiconductor industry, specifically semiconductor materials and equipment, has set a new high since May 2023 in just a few trading days, significantly boosting the market's investment enthusiasm for semiconductors.

By examining recent favorable events in the chip and semiconductor sector, it can be observed that the surge in the chip and semiconductor index is primarily driven by the following three core logics:

1. Solid fundamentals with a global and domestic upward cycle resonance

Both global and Chinese semiconductor sales have achieved year-on-year growth for ten consecutive months, and have maintained double-digit year-on-year increases since the beginning of the year. In August, global semiconductor sales reached a historical high. This is mainly due to improvements in supply chain inventory in sectors such as automotive and industrial control, as well as increased demand for AI.

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2. Looking domestically, recently, semiconductor listed companies are also in the window period for disclosing their third-quarter reports. The semiconductor equipment leader, North HuaChuang, has greatly exceeded expectations. For the first three quarters of 2024, the estimated operating income is 18.83 billion to 21.68 billion yuan, and the net profit attributable to the shareholders of the listed company is 4.13 billion to 4.75 billion yuan. In the previous year, North HuaChuang achieved an operating income of 22.079 billion yuan, a year-on-year increase of 50.32%, and a net profit attributable to the parent company of 3.899 billion yuan, a year-on-year increase of 65.73%. The performance and revenue for the first three quarters are already at the same level as the previous year's performance and revenue, and the profit has even surpassed that of the previous year, indicating the rapid growth rate of the domestic semiconductor equipment leader.

3. Strong demand for domestic substitution, with investment amounts repeatedly setting new highs

With the development of AI, recently, there have been several new product releases in the electronics field. For example, Huawei's autumn new product launch included the Huawei Smart Screen product V5Max110 and several other products like the Smart Boundary R7, with strong chip demand. According to SEMI's forecast, from 2025 to 2027, global 300mm wafer fab equipment spending will exceed 400 billion US dollars for the first time, with China maintaining the top position, with investment exceeding 100 billion US dollars.

Looking at the market share of leading companies, we can also see the acceleration of the domestic substitution process. Founder Securities has calculated the revenue and market share of ten leading companies in the semiconductor equipment field. It can be seen that the domestic substitution rate for CMP equipment and cleaning equipment has risen from 27.09% and 19.68% in 2022 to 35.84% and 20.57% in 2023, respectively. The domestic substitution rates for etching equipment and film equipment have also made significant breakthroughs, rising from 8.13% to 22.97% and from 4.47% to 18.65%, respectively. However, the domestic substitution rates for metrology and inspection equipment and photoresist coating and development equipment are still at a relatively low level, indicating ample room for domestic substitution.

Looking ahead, against the backdrop of slowing performance of overseas giant companies, semiconductor equipment and materials may be ushering in a golden period for domestic substitution. SEMI points out that in 2022, the domestic substitution rate of semiconductor equipment in mainland China was about 30%, and by 2025, the domestic substitution rate is expected to reach 50%.Chips have a high correlation with the economy and continuously benefit from policy efforts.

Reviewing past market trends, when policies are implemented, the market's main focus often shifts towards growth sectors that are highly related to the economy and are in the favorable cyclical direction. Chips benefit from policy friendliness and have higher market elasticity. For example, during the favorable cyclical bull markets in 2016-17, 2020, and the significant rebound in November 2022, chips were not absent.

As a representative of the upstream chip industry, the semiconductor materials and equipment index, due to industry concentration, often has stronger elasticity in bull markets. Taking the bull market of 2019 as an example, the semiconductor materials and equipment index rose by 373% within the year, while the CSI 300 index rose by 64% during the same period, significantly outperforming the broader market.

It is worth noting that the recent rise in semiconductors is gradually moving away from fundamentals and towards being dominated by sentiment and capital. Currently, the valuation of the semiconductor materials and equipment index is 63.77 times, which is at the 55.29% percentile over the past five years and at the 48.82% percentile since its listing, relatively high.

As the saying goes, "forewarned is forearmed." When more and more voices in the market mention the "technology bull," we need to calm down and consider the risks in the industry. At present, there are mainly the following three points:

1. Slowdown in South Korean semiconductor exports

Data released by South Korea's customs on Monday showed that in the first 20 days of October, the total export value, adjusted for working days, only slightly increased by 1% year-on-year, while the increase for the entire month of September was 7.5%.

South Korea's semiconductor export value is seen as a barometer for the global semiconductor industry. The slowdown in growth may mean that the issue of whether the momentum of chip sales has reached its peak is gradually becoming prominent. For several months, the growth of South Korea's monthly semiconductor exports has continued to slow down, and the price increase of storage chip shipments in September has also slowed down.

2. Short-term investment exceeds demand

3. [The third point is not provided in the original text, so it cannot be translated.]During certain periods, due to optimistic expectations about future demand, companies may heavily invest in new production lines and technology research and development. If actual demand fails to meet the expected level, it may lead to overcapacity.

The photolithography giant ASML's third-quarter performance was a bombshell, with Chief Financial Officer Roger Dassen stating in the performance report that demand for AI-related chips is indeed surging. However, other parts of the semiconductor market are weaker than expected, leading to logic chip manufacturers postponing orders and memory chip manufacturers only planning "limited" additional capacity. Subsequently, the AI chip giant TSMC's third-quarter performance continued to exceed expectations, also verifying the upward trend of AI chip prosperity.

However, in other chip fields besides AI chips, the recovery situation is obviously not as optimistic. Taking automotive chips as an example, earlier, giants such as Texas Instruments (TI), STMicroelectronics (ST), and Renesas successively released financial reports, all of which were not very optimistic about the automotive segment; TSMC, which released its first-quarter financial report earlier, also pointed out at the performance meeting that the recovery of automotive chip market demand was not as expected.

During the pandemic, automotive chips were extremely scarce, and prices even increased by 10-20 times, which also led to a significant expansion of production in the industry chain. But now that supply chain pressures are gradually easing, this capacity growth has become stable, and what may be faced is the issue of overcapacity.

Domestic substitution has a long way to go.

If we break down according to the global value chain, the process of a chip from research and development to becoming a finished product can be divided into the following specific processes: research and development - design - manufacturing - assembly, testing, and packaging - sales.

According to the view of Xing Yuqing, a professor of economics at the National Graduate Institute for Policy Studies in Japan, further value decomposition will reveal the leading position of American semiconductor companies globally. For example, 72% of the added value generated by core IP belongs to the United States; 67% of the added value of logic chip design is also occupied by the United States; the United States accounts for 28% of the added value in memory design; in other non-logic chips and non-memory chips, the United States has 37% of the added value in design; and in the semiconductor equipment field, the United States also has 42% of the added value.

Therefore, although the domestic chip industry chain has made significant progress in recent years, there is still a gap on the international stage. The United States has an advantage in the knowledge-intensive field of semiconductor manufacturing, which is also the higher-profit segment in the semiconductor manufacturing chain.

After looking at the prospects and potential risks of the semiconductor industry, how should we deal with the future market situation?Firstly, it is clear that AI demand is currently a significant driver of semiconductor growth. One month from now, NVIDIA's financial report should be a focal point for the market, which may have an impact on the semiconductor industry. At the same time, industry data such as South Korea's semiconductor export volume should also be monitored; if it continues to weaken, there may be a turning point in the market trend.

Secondly, it is essential to establish a sense of asset allocation. The semiconductor market is rising rapidly. Investors with a higher risk appetite and certain expectations for returns can allocate semiconductor products in their positions. However, they can also pay attention to high-dividend stocks with dividend safety margins and real estate and consumer stocks that have超跌反弹ed, diversifying their configurations to spread risks.

Related Products:

The semiconductor market is showing a positive recovery trend. Investors may wish to consider the Semiconductor Materials ETF (562590) and its linked funds (Class A: 020356, Class C: 020357). These products closely track the China Securities Semiconductor Materials Equipment Index, with semiconductor equipment (53.7%) and semiconductor materials (22.9%) accounting for a significant proportion, totaling over 76% of the weight, fully focusing on the index theme, and all are key links in domestic substitution.