Recently, the semiconductor industry has been continuously strengthening. According to Wanlian Securities' statistics, as of July 25, over 30% of A-share semiconductor companies have disclosed their first-half performance forecasts, with approximately 71.4% of these companies reporting positive performance, higher than the overall positive performance ratio of A-shares.

It can be said that after more than a year of high inventory, low demand, reduced investment, and decreased production capacity, the global semiconductor industry has finally emerged from the darkness into the light.

Price increases are the most direct signal of a cycle reversal.

In 2024, power semiconductors led the way in price hikes, with Sanlian Sheng raising prices by 10-20% across all products, Lancai Electronics by 10-18%, Gaogexinwei by 10-20%, and Jiejie Microelectronics raising TrenchMOS prices by 5-10%. In May and June, leading power manufacturers such as CR Microelectronics and Yangjie Technology also initiated new pricing negotiations.

The price hike trend has even begun to spread from components to wafer foundry services.

According to the latest market news, TSMC plans to raise prices for its 3nm foundry services by more than 5%, and its advanced packaging prices are expected to increase by approximately 10%-20% next year. Influenced by this news, TSMC's share price in Taipei gapped up on June 18, setting a new all-time high intraday. Morgan Stanley also noted in its latest report that Hua Hong Semiconductor's wafer fabs are currently operating at over 100% capacity utilization and predicted a 10% price increase for wafers in the second half of the year.

Companies within the industry chain are best positioned to perceive changes in the market.

In the wafer fab sector, SMIC reported revenue of RMB 12.594 billion in Q1 2024, up 23.36% year-on-year and 3.63% quarter-on-quarter, and guided for a further 5%-7% sequential revenue growth in Q2. Among packaging and testing companies, Changdian Technology reported revenue of RMB 6.842 billion in Q1 2024, up 16.75% year-on-year, while Tongfu Microelectronics reported revenue of RMB 5.282 billion, up 13.79% year-on-year.

In Q1 2023, leading domestic chip manufacturers such as GigaDevice, Chipbond Technology, Will Semiconductor, Montage Technology, Amlogic, Rockchip, Beijing Action Star Technology, Holy Stone, and Unisplendour Microelectronics had an average inventory turnover days of up to 351 days. This figure declined to 298 days in Q2, 268 days in Q3, 243 days in Q4, and further to 240 days in Q1 2024.

Prices, inventory, performance, and capacity utilization rates – all these indicators confirm the upward trend in the semiconductor industry cycle. Whether viewed from historical patterns or based on current realities, this recovery is strongly supported by solid logic.

Firstly, the semiconductor industry inherently exhibits significant cyclicality, with periods of boom followed by bust and vice versa. Historically, downturns (measured by year-on-year sales growth from peak to trough) typically last 4-6 quarters.

Taking the past decade as an example, the industry experienced an upswing from Q1 2013 to Q4 2014, followed by a downturn from Q1 2015 to Q2 2016. It then entered another upswing from Q3 2016 to Q2 2018, followed by a downturn from Q3 2018 to Q3 2019. Growth resumed from Q4 2019 to Q4 2021, only to weaken again from Q1 2022 to Q1 2023. According to SIA data, the year-on-year growth rate of global semiconductor quarterly sales bottomed out in Q1 2023 and has since narrowed, turning positive in Q4. Following historical patterns, a new upswing is brewing.

Secondly, the widespread adoption of AI has generally increased society's demand for computing and storage power, which ultimately relies on semiconductors.

The computing power required by Transformer-based AI models has increased by an average of 750 times every two years. According to Gartner's estimates, the global AI chip market was worth USD 44.2 billion in 2022 and is projected to grow to approximately USD 120 billion by 2027. Storage capacity across various sectors will also increase concurrently; Micron Technology predicts a CAGR of 14-19% for DRAM capacity and 26%-29% for NAND capacity from 2021 to 2025.

In its latest Spring 2024 Semiconductor Market Forecast, the World Semiconductor Trade Statistics (WSTS) revised its projection for the 2024 semiconductor market size upward from USD 588.364 billion to USD 611.231 billion, while adjusting the 2023 global semiconductor market size to USD 526.885 billion.

This implies that the semiconductor market will grow by 16% year-on-year in 2024.

For resilience and certainty, if there's one segment of the new semiconductor cycle deserving the most attention, it's equipment.

Firstly, it's important to note that advanced process logic devices significantly increase the demand for various equipment types compared to mature processes, including etching, thin-film deposition (especially ALD and EPI), metrology, and thermal processing. This increase manifests in both the total quantity of equipment required and the value per unit. Field research data indicates that a 12-inch advanced process line producing 10,000 wafers per month requires 41.5 oxidation/high-temperature/annealing tools, 1.9 times more than a 12-inch mature process line, and 87 metrology tools, 1.7 times more.

Currently, there is significant room for expansion in the semiconductor equipment market, particularly in China.

Despite its large market size, China's semiconductor industry has a low localization rate. In 2023, China's chip self-sufficiency rate was only about 12%, with a heavy reliance on imports for high-end digital chips. According to China Insights Consulting, China's AI chip market accounts for approximately 30%-40% of the global AI market, with a significant portion of orders going to NVIDIA. In fiscal year 2023, NVIDIA's revenue in China reached USD 5.8 billion, accounting for 21.45% of its total revenue.

Given the restrictions on overseas foundry services for high-end chips, China's semiconductor industry must enhance its domestic manufacturing capabilities for high-performance processors and memories. This necessitates increased investment in equipment, which is subject to strict import controls for advanced semiconductor manufacturing equipment.

Therefore, the spring for domestic equipment is nigh.

According to SEAJ's latest statistics, global semiconductor manufacturing equipment sales amounted to USD 26.42 billion in Q1 2024, down 2% year-on-year, while China bucked the trend with a whopping 113% increase, making it the world's largest semiconductor equipment market for the fourth consecutive quarter. Furthermore, based on increased capital expenditures for advanced storage logic fabs and the rising localization rate of fab equipment, Kaiyuan Securities estimates that China's semiconductor equipment sales could grow from USD 36.6 billion in 2023 to USD 65.77 billion in 2027, representing a CAGR of 15.8%.

With a large market space and a favorable competitive landscape, only a handful of players dominate each sub-segment of the domestic semiconductor equipment market. Key players in thin-film deposition equipment include NAURA Technology Group and TOPSILON Technology. In the etching equipment segment, the main participants are AMEC and NAURA Technology Group. Shanghai Microelectronics Technology leads in lithography, while HuaHai Qingke excels in CMP equipment.

When a few companies share a large pie, it inevitably leads to explosive growth in performance.

In Q1 2024, NAURA Technology Group reported revenue of RMB 5.859 billion, up 51.36% year-on-year, with net profit attributable to shareholders of RMB 1.127 billion, up 90.4% year-on-year. The company's contract liabilities amounted to RMB 9.251 billion, a 11.23% increase from the end of 2023. TOPSILON Technology reported revenue of RMB 472 million, up 17.25% year-on-year, with sales orders (excluding demo orders) totaling RMB 6.423 billion, a year-on-year increase of nearly 40% or RMB 1.821 billion from the previous year-end. AMEC reported revenue of RMB 1.605 billion, up 31.23% year-on-year.

From 2018 to 2022, domestic semiconductor equipment companies benefited primarily from the expansion of mature process capacity and the localization of fab equipment. Since last year, domestic advanced fabs have accelerated their procurement and verification of domestic equipment. AMEC's CCP and ICP etching equipment achieved 94% and 95% process coverage in logic and memory devices, respectively. NAURA Technology Group's ICP equipment has made breakthroughs in various 12-inch technology nodes, while its CCP equipment covers multiple critical processes in logic, memory, and power semiconductors.

With demand and the capability to meet it, a new round of concentrated volume growth for domestic semiconductor equipment is fully anticipated.

Disclaimer

The content related to listed companies in this article is based on the author's personal analysis and judgment of information publicly disclosed by the listed companies in accordance with their legal obligations (including but not limited to temporary announcements, periodic reports, and official interaction platforms). The information or opinions contained herein do not constitute any investment or other business advice. Market Value Watch shall not be liable for any actions taken as a result of adopting this article.

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