How Far Are Crazy Chip Stocks from True Domestic Substitution?
"Technology is anything that didn't exist when you were born."
American computer scientist and 2003 Turing Award winner Alan Kay once defined technology and the future in this way. At present, technology stocks have become the hottest topic in the global capital market.
On one hand, in the U.S. stock market, TSMC and Nvidia have repeatedly hit new highs. On the other hand, against the backdrop of a general decline in major indices in the Hong Kong stock market, chip stocks have shown strength in adversity. On October 21, the Hang Seng Index fell by 1.57%, and the Hang Seng Technology Index plummeted by 2.37%, but chip stocks surged against the trend. Among them, the share price of Hong Kong Semiconductor once rose by more than 20% and eventually closed up 9.2%, leading the chip stock sector.
In this round of divergent market trends in the Hong Kong stock market, why have chip stocks been able to rise against the trend?
Semiconductors successfully "take over" real estate and securities firms, potentially becoming the main line of the next round of market trends.
After several days of sharp increases, the Hong Kong stock market has ushered in a new round of adjustments and fluctuations.
Looking at the index trends, the three major indices in the Hong Kong stock market have shown different degrees of pullback. As of the close on October 22, the Hang Seng Index has fallen from its highest point of 23,241.74 on October 7, with a cumulative decline of 9.84%. The Hang Seng Technology Index also pulled back from its highest point of 5,541.53 on October 7, with a drop of more than 13%.
Advertisement
As the two major indices fall into a general decline, the securities and real estate sectors, which had the most significant increases in the previous surge, have almost completely receded, with stocks such as Vanke, Sunac, and CICC all falling by more than 20% since the National Day holiday.
The reason for this adjustment in the Hong Kong stock market is related to market profit-taking.
Zhongtai International pointed out that after the Hang Seng Index's previous surge, it has approached the high point at the beginning of January 2023, and the short-term valuation repair has been very sufficient. It is expected that the volatility of the Hong Kong stock market will significantly increase, and there is a possibility of high-position profit-taking pressure.Xingye Securities' Global Chief Strategy Analyst, Zhang Yidong, stated that in the short term, the historical mission of the short squeeze rebound has been completed. After experiencing the short squeeze rebound, the Hong Kong stock market has led the world in gains in 2024. Therefore, it is highly likely that there will be a short-term profit-taking.
In contrast to the sluggish performance of financial and real estate stocks, the strong performance of the technology innovation sector, represented by the semiconductor industry chain, stands out. On October 21st, leading companies such as SMIC, Hua Hong Semiconductor, and Fudan Microelectronics all experienced a synchronized "A+H" stock price increase. This reflects the market's expectation that, amidst high-level fluctuations in real estate and financial directions, semiconductors and other technology lines will take over.
Driving this trend is a multitude of favorable news on the messaging front. On October 18th, at the 2024 Financial Street Forum Annual Conference, the Banking Regulatory Bureau pointed out that financial asset investment companies are encouraged to play a greater role in supporting technological innovation. At the same time, China Securities Regulatory Commission (CSRC) Chairman Wu Qing also stated that the focus will be on supporting high-quality innovative enterprises, leading and driving various advanced production factors to gather towards the development of new quality productive forces.
From this perspective, on one hand, short-term policy support is tilting funds towards the technology industry, and on the other hand, the semiconductor industry has a strong attribute of technological innovation and is an important part of new quality productive forces. The hard technology sector, represented by semiconductors, has both "economic cyclical" and "new quality productive forces" characteristics in the policy orientation of "stabilizing growth and adjusting structure," and may become a major theme in the next bull market.
Industry production and sales recovery, domestic semiconductor companies usher in valuation repair
In addition to the macro-level policy benefits, the semiconductor industry has also seen a recovery from the perspective of the meso-level industry and the micro-level fundamentals:
On one hand, previously, TSMC released its third-quarter financial report. The data shows that TSMC's revenue for the third quarter was approximately NT$759.69 billion, a year-on-year increase of 39.0%, and a sequential increase of 12.8%; after-tax net profit (net profit) was approximately NT$325.26 billion, a year-on-year increase of 54.2%, and a sequential increase of 31.2%.
The excellent revenue and profit data far exceeded analysts' expectations. On the day of the financial report release, TSMC's stock price soared by 9.79%, setting a historical high, and also boosted the entire semiconductor sector. Analysts pointed out that after TSMC's quarterly performance exceeded expectations, it raised its revenue growth target for 2024, alleviating market concerns about the sustainability of global chip demand and the prosperity of artificial intelligence hardware, indicating to investors that demand for chips remains strong.
At the same time, data released by the Semiconductor Industry Association (SIA) also shows that global semiconductor sales in August 2024 reached $53.1 billion, a year-on-year increase of 20.6%, and a sequential increase of 3.5%, achieving sequential growth for five consecutive months. This indicates that global semiconductor demand continues to recover.
On the other hand, looking at the latest third-quarter performance forecasts disclosed by several A-share semiconductor companies, such as Allwinner Technology, Dinglong Shares, and Hu Die Shares, these companies are expected to see a significant increase in revenue and profits for the first three quarters, indicating a recovery trend in the production and sales performance of the semiconductor industry. The International Semiconductor Industry Association (SEMI) estimates that from 2025 to 2027, global 300mm wafer fab equipment spending will exceed $400 billion for the first time, with China maintaining the top position, with investment exceeding $100 billion.At the same time, several institutions have released research reports suggesting that downstream demand for AI computing power and consumer electronics is frequently favorable, which will continue to boost the recovery of the Chinese semiconductor industry's prosperity.
Galaxy Securities stated that after consecutive adjustments, various signs indicate an upward trend in the semiconductor industry cycle. Regarding the semiconductor materials, equipment, and testing and packaging sectors, Galaxy Securities believes that they currently have configuration value.
Huatai Securities also pointed out that against the backdrop of localized production and the repair of domestic consumer electronics demand, domestic wafer foundry companies were in a relatively full load state in the second quarter, with the capacity utilization rates of SMIC and Hua Hong being 85.2% and 97.9%, respectively. Moreover, driven by the peak season for consumer electronics demand such as smartphones in the third quarter, this figure is expected to maintain an upward trend.
Therefore, from this perspective, when the market expectation of a cyclical recovery is confirmed by the fundamentals, there is reason to believe that the semiconductor industry may be on the verge of a revaluation.
How far is the localization and substitution of the semiconductor industry chain in the context of great power competition?
As the focus of Sino-American trade disputes and technological disputes, "China's core" and the domestic semiconductor industry chain behind it have always been the highest priority issue in the industry.
Since 2020, from Trump to Biden to Harris, the US's semiconductor control over China has shown a trend from "limited exports" to "comprehensive export control," from "5G" to "AI," and from "vertical fields" to "full chain prohibition." This industry chain-level restriction once made almost all domestic chip and semiconductor field products and research and development disappear.
Although some people do not want the world to get better, they cannot stop China's pace of progress.
Data from the General Administration of Customs shows that in the first four months of 2024, China's chip export volume reached 355.24 billion yuan, a year-on-year increase of 23.5%, setting a historical record. At the same time, compared with 2018, the export quantity of China's integrated circuits increased from 39.65 billion to 88.68 billion, and the value of a single chip increased from 1.7 yuan to 4 yuan.Over the span of 6 years, the export quantity of integrated circuits has increased by 2.23 times, and the export value has surged by 5.25 times. The Chinese chip industry has also made a qualitative leap in terms of quantity, value, and unit price. This is a clear indication of industrial upgrading with both volume and price increasing.
Looking at specific sectors, in the power semiconductor industry, according to statistics from NE Times, from January to August 2023, the domestic supply of power modules for new energy passenger vehicles in China exceeded 59%. At the same time, the global market share of domestic power modules in new energy vehicles has reached 37%. In the CIS field, according to Yole data, in 2022, the market share of Wei Er Shares in the mobile phone industry was 11%, ranking just after Sony and Samsung. Furthermore, in the fields of memory interface chips and NOA intelligent driving chips, Chinese companies such as澜起科技 and Horizon Robotics have maintained a market share of over 40% for many years.
It is evident that China's strategy for domestic substitution in the semiconductor industry chain starts from the downstream terminal consumer market, gradually nurturing the foundation and opening up market space upstream, then replacing each link in the upstream one by one.
Although this strategy has achieved considerable success, starting from an objective standpoint and tracing back, the upstream of China's semiconductor industry chain still relies heavily on foreign technology and equipment. Essential precision optical equipment such as defect scanners and CD measurement tools, as well as equipment for failure analysis like SIMS and FIB, are entirely dependent on European and American companies like KLA.
From this perspective, to achieve a positive cycle of alternating enhancement of capabilities and scale in China's semiconductor industry, it is destined to be a protracted war for Chinese semiconductor companies.
Leave a comment