In recent days, the semiconductor index and related concept stocks have surged, with stocks such as Unisplendour Microelectronics, Tongfu Microelectronics, Huatian Technology, Northern Microelectronics, AkzoNobel, and Beijing Memory Technology all reaching their daily trading limits.

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.

According to industry organization SEMI, global sales of semiconductor equipment from original equipment manufacturers (OEMs) are projected to reach $109.47 billion in 2024, up 3.36% from $105.91 billion in 2023 and higher than the $107.4 billion in 2022, setting a new record.

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 across its entire product line by 10-20%, Lancai Electronics increasing prices by 10-18%, Gaogexinwei hiking prices by 10-20%, and Jiejie Microelectronics adjusting TrenchMOS prices upwards by 5-10%. In May and June, major power semiconductor manufacturers such as CR Microelectronics and Yangjie Technology initiated new pricing negotiations.

The price increase trend has even begun to spread from components to wafer foundries.

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

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

In the wafer fab sector, Semiconductor Manufacturing International Corporation (SMIC) reported revenue of RMB 12.594 billion in Q1 2024, up 23.36% year-on-year and 3.63% quarter-on-quarter. The company also guided for a 5%-7% quarter-on-quarter increase in revenue for Q2. In the packaging and testing sector, Changdian Technology reported revenue of RMB 6.842 billion in Q1 2023, 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 Semiconductor, Zolix Microelectronics, Will Semiconductor, Montage Technology, Amlogic, Rockchip, Beijing Memory Technology, and Holtek Semiconductor had an average inventory turnover days of 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 levels, financial performance, and capacity utilization rates all point to an upturn in the semiconductor industry cycle. Whether viewed from a historical perspective or based on current realities, this recovery is strongly supported by logical foundations.

Firstly, the semiconductor industry inherently exhibits pronounced cyclicality, with periods of prosperity alternating with downturns. Historically, the downturn phase (when year-on-year sales growth decelerates from its peak to its trough) typically lasts 4-6 quarters.

Taking the past decade as an example, the period from Q1 2013 to Q4 2014 saw an upturn, followed by a downturn from Q1 2015 to Q2 2016. The industry then entered another upturn from Q3 2016 to Q2 2018, only to decline again from Q3 2018 to Q3 2019. From Q4 2019 to Q4 2021, sentiment improved, but weakened again from Q1 2022 to Q1 2023. According to data from the Semiconductor Industry Association (SIA), the year-over-year growth rate of global semiconductor quarterly sales bottomed out in Q1 2023 and has since narrowed, turning positive by Q4. Based on historical patterns, a new upturn is already brewing.

Furthermore, the widespread adoption of AI has significantly increased the demand for computing and storage capabilities across society, demands that ultimately rely on semiconductors.

The computing power required by Transformer-based AI models has increased 750-fold every two years on average. According to Gartner's estimates, the global AI chip market was valued at $44.2 billion in 2022 and is projected to grow to approximately $120 billion by 2027. Storage capacity is also expected to expand concurrently, with Micron Technology forecasting a compound annual growth rate (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 global semiconductor market size upward from $588.364 billion to $611.231 billion for 2024, while adjusting the 2023 figure to $526.885 billion.

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

If there's one area within the current semiconductor cycle that deserves particular attention, it's equipment, given its combination of resilience and certainty.

Firstly, it's essential to note that advanced process logic devices significantly increase the demand for various types of equipment, including etching, thin-film deposition (especially ALD and EPI), metrology, and thermal processing, compared to mature processes. This increase is evident in both the total number of equipment units required and the value of individual units. Field research data indicates that a monthly production capacity of 10,000 12-inch wafers for advanced processes necessitates 41.5 oxidation/high-temperature/annealing equipment units, 1.9 times more than for mature processes, and 87 metrology equipment units, 1.7 times more.

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 domestic production 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 chip market, with a significant portion of orders going to NVIDIA. In fiscal year 2023, NVIDIA's revenue in China reached $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 memory to keep pace with global development. This necessitates increased investment in equipment, which is heavily regulated for imports of high-end semiconductor manufacturing equipment.

Thus, the spring for domestic semiconductor equipment is approaching.

According to the latest statistics from SEMI, global sales of semiconductor manufacturing equipment reached $26.42 billion in Q1 2024, a year-on-year decrease of 2%. In contrast, China bucked the trend with a significant increase of 113%, making it the world's largest semiconductor equipment market for the fourth consecutive quarter. Additionally, Kaiyuan Securities estimates that, driven by increased capital expenditures for advanced memory and logic fabs and higher domestic equipment utilization rates, China's semiconductor equipment sales are expected to grow from $36.6 billion in 2023 to $65.77 billion in 2027, with a CAGR of 15.8%.

With a vast market space and a favorable competitive landscape, only a handful of companies dominate each segment of the domestic semiconductor equipment industry. Key players in thin-film deposition equipment include Northern Microelectronics and Topsil Semiconductor, while key players in etching equipment are Advanced Micro-Fabrication Equipment Inc. (AMEC) and Northern Microelectronics. In the lithography sector, Shanghai Micro Electronics Equipment (SMEE) leads the way, while Huahai Qingke excels in CMP equipment.

When a small number of companies share a large market pie, it inevitably leads to explosive growth in performance.

In Q1 2024, Northern Microelectronics 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 stood at RMB 9.251 billion, an increase of 11.23% from the end of 2023. Topsil Semiconductor reported revenue of RMB 472 million, up 17.25% year-on-year, with sales orders (excluding demo orders) amounting to RMB 6.423 billion, an increase of RMB 1.821 billion or nearly 40% year-on-year. 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 fabs and the localization of fab equipment. Since last year, domestic advanced fabs have accelerated their procurement and increased their efforts to validate and introduce domestic equipment. AMEC's CCP and ICP etching equipment have achieved 94% and 95% process coverage in logic and memory devices, respectively. Northern Microelectronics' ICP equipment has achieved breakthroughs in 12-inch technology nodes, and its CCP equipment covers multiple critical processes in logic, memory, and power semiconductor applications.

With both demand and the capability to meet that demand, a new round of concentrated volume increases 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 companies in accordance with legal requirements (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 Observer assumes no responsibility for any actions taken based on this article.

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