Resistance or assistance, how can the semiconductor sector reverse the trend of "downward pressure"?

The recent strong rise of the semiconductor sector encounters "sniping"? Recently, the continuous strong rise of the semiconductor sector has become a hot topic of discussion in the secondary market. Taking the semiconductor sector in the Hong Kong stock market as an example, the sector recorded gains of 30.18%, 20.83%, 15.44%, and 6.25% on October 4th, October 7th, October 18th, and November 5th respectively. This news is no less than a clear signal of a bottom reversal for the semiconductor sector that fell into a "valley" from the end of 2023 to the beginning of 2024. However, this good trend did not last. Along with the market's retracement today (November 12th), the semiconductor sector in the Hong Kong stock market also showed a significant decline - with a 7.42% drop in the sector's closing on November 12th, ranking high in terms of declines. Most of the concept stocks within the sector turned green, with CONTEL (01912) leading the decline with an 11.51% drop, and Semiconductor Manufacturing International Corporation (00981) and SHANGHAI FUDAN (01385) both dropping by over 7%. In terms of news, according to Reuters, the U.S. Department of Commerce has written to TSMC, requesting them to stop supplying 7-nanometer and more advanced AI chips to customers in mainland China starting from the 11th of November. This export restriction mainly targets chips used for artificial intelligence accelerators and graphics processing units (GPUs). Sources mentioned that TSMC has informed the affected customers that chip shipments will be suspended starting from the 11th. Could this be the end of the rebound trend in the semiconductor industry? The "multiple logic" of accelerating the substitution of domestic chips Objectively speaking, after Trump took office, the domestic semiconductor industry may face a development opportunity with both challenges and opportunities. The challenge lies in the fact that during Trump's previous term in office, he has been keen on using trade restrictions and sanctions to curb China's technological progress. If Trump is re-elected, he is likely to continue this tough policy towards China, as he has previously mentioned imposing tariffs of 60%-100% on Chinese imports. If further sanctions are imposed on China's semiconductor industry, it will pose greater challenges for Chinese semiconductor companies. However, for the substitution of domestic chips, the opportunities may outweigh the challenges. This may accelerate the substitution of domestic chips and usher in a new cycle of growth. Looking at the current development trends in the domestic semiconductor industry, there are several key growth logics as follows: Firstly, from the perspective of domestic substitution, with Trump in office, the United States may further restrict technology to China, thereby stimulating the development of China's domestically controllable semiconductor technology. It is well known that in the field of AI and GPUs, the advanced level of process technology directly affects the performance of products, leading to increased costs and delays in product launch. In the context of restrictions on equipment and foundry services, Chinese semiconductor equipment manufacturers urgently need to increase the research and development of high-end equipment to support the expansion of local advanced process production capacity and achieve domestic production of the semiconductor industry chain. Regardless of restrictions on advanced process foundries for domestic chip design companies or inspections and tightening of exports of semiconductor materials and equipment to China, this will help accelerate the progress of domestic substitution and is expected to foster investment opportunities for the entire semiconductor equipment, manufacturing, advanced packaging, and chip customization services industry chain. Haitong pointed out that with the escalation of external influences, it is expected that the flow of advanced process chips will become more strict, and the resistance to building advanced process lines domestically in China will increase. However, the rules cannot override the real demand of overseas chip manufacturers in China. Except for a few links in the Chinese semiconductor industry chain that still need time to overcome, the overall industry chain is already improving. It is expected that the trend of domestic substitution in key areas such as semiconductors will continue. Secondly, from the perspective of policy support, semiconductor is the primary industry that the country's policy strongly supports. In the current complex and changing global situation, promoting the domestic independent and controllable development of the semiconductor industry is one of the most certain development trends. On May 24th of this year, the National Integrated Circuit Industry Investment Fund Phase III was established with a registered capital of 344 billion yuan, exceeding the total capital of the first two phases. The establishment of Phase III of the fund indicates that China's semiconductor industry is about to enter a new development stage. Compared to the previous two phases, Phase III has a larger investment scale, focusing on investments in advanced wafer manufacturing, key equipment, and components, accelerating the domestic substitution of upstream equipment materials. This initiative will help address the bottleneck in key technology areas of the domestic semiconductor industry and enhance the industry's independent and controllable capabilities. With the registered capital of Phase III of the fund reaching 344 billion yuan, it is expected to leverage over one trillion yuan of investment in the semiconductor field, demonstrating strong support from the country for the semiconductor industry. This level of investment not only provides sufficient financial support for the semiconductor industry but will also attract more social capital into the semiconductor industry, creating a favorable investment environment. Based on the above, it is not difficult to see that under the continuous support of policies and external environmental drives, the domestic substitution of the semiconductor equipment and components, semiconductor materials, AI computational power chips, and other directions are expected to continue to maintain a high growth rate. Industry cycle reversal drives strong performance recovery Due to factors such as sluggish consumer electronics demand, concentrated release of production capacity, and high specification products still awaiting verification, it is an undeniable fact that the semiconductor industry experienced a trough period from 2022 to 2023. However, with the restocking demand for semiconductors in the first half of 2024, the industry has gradually emerged from the trough and is experiencing a cyclical reversal. Let the data be the evidence. According to SIA data, global semiconductor industry sales reached $55.3 billion in September 2024, an increase of 23.2% year-on-year and 4.1% month-on-month. The global semiconductor market continued to grow in Q3 2024, with the quarterly sales growth rate reaching the highest since 2016, and September's sales reaching the highest monthly total sales in history, driven by a 46.3% year-on-year growth in the Americas region. Looking at the regions, Japan (5.3%) and the Asia-Pacific region.All other (4.5%), Americas (4.1%), Europe (4.0%), and China (3.6%) monthly sales have all seen an increase.The cyclical reversal of the semiconductor industry is also evident in the performance of related companies. According to relevant research reports, with the clearance of inventory and the recovery of downstream demand, the operating income of the semiconductor industry (China) in the first three quarters of 2024 was 429.641 billion yuan, a year-on-year increase of 22.57%, and net profit attributable to shareholders was 27.211 billion yuan, a year-on-year increase of 42.91%. Specifically, during the same period, the revenue of the integrated circuit, discrete device, semiconductor equipment, and semiconductor material sectors increased by 19.83%, 19.39%, 43.92%, and 25.36% respectively; the net profit attributable to shareholders of the integrated circuit, discrete device, semiconductor equipment, and semiconductor material sectors increased by 125.80%, -44.80%, 26.73%, and -3.42% respectively. Looking at the performance of the "two giants of semiconductor foundry" Semiconductor Manufacturing International Corporation (00981, 688981.SH) and HUA HONG SEMI (01347, 688347.SH) in the third quarter, we can also see the trend of the industry turning around. According to financial report data, in the third quarter of 2024, Semiconductor Manufacturing International Corporation's revenue was 15.61 billion yuan, a year-on-year increase of 32.5%, a 14% increase from the previous quarter, and the quarterly revenue exceeded 2 billion US dollars for the first time, reaching a historical high. At the same time, net profit in the third quarter reached 1.06 billion yuan, an increase of more than 56% year-on-year. HUA HONG SEMI also saw a significant increase in profit, with the company's revenue reaching 530 million US dollars in the period, a decrease of 7.4% year-on-year but an increase of 10% quarter-on-quarter; net profit attributable to the parent company reached 44.8 million US dollars, more than doubled year-on-year and more than 5 times quarter-on-quarter. More importantly, the capacity utilization rates of the two major foundry giants have been steadily increasing since the beginning of this year. In the third quarter, Semiconductor Manufacturing International Corporation's capacity utilization rate reached 90.4%, compared to only 77.1% in the same period last year. HUA HONG SEMI's capacity utilization rate further increased to 105.3%, compared to 86.8% in the third quarter of last year. As a key indicator of whether factory production capacity is fully utilized, capacity utilization directly determines the profitability of wafer foundry factories. With the significant increase in capacity utilization, the profitability of these two companies has also increased significantly. Overall, the cyclical reversal of the semiconductor industry has clearly led to an increase in valuation and performance. According to further estimates by Huafu Securities, with the continuous upgrading of external restrictions and the catalyzation of investment opportunities for domestic substitutes, local equipment companies are expected to continue to thrive, and related equipment manufacturers are expected to expand their market share. It is estimated that the domestication rate will reach 50% by 2025. 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.