Optimistic About Industry Cycle Recovery and New Demand Driven by AIGC Applications
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As 2023 passes its midpoint, although the semiconductor industry's fundamentals have bottomed out except for a few sub-sectors, the recovery in key consumer demand markets remains unclear, leading investors to anticipate a 'moderate recovery' phase for the semiconductor industry. Meanwhile, the A-share semiconductor sector showed a 'rise first, then fall' trend in the first half of the year. The decline since April has fully priced in the weaker-than-expected demand recovery at the beginning of the year, with the sector's TTM P/E ratio returning to the median level since 2017, similar to early 2019 levels. Over the next six months, we are optimistic about the industry's cyclical recovery and new demand driven by AIGC applications. In the medium to long term, the investment theme of localization remains valid.
On the recovery front: We maintain our view that the industry will emerge from the bottom in the second half of 2023, focusing on marginal improvements in sub-sectors such as packaging and testing, CIS, RF, and memory.
According to WSTS, global semiconductor sales reached $40.7 billion in May 2023, marking three consecutive months of slight sequential growth. For commodities, recent positive news includes overseas memory giants like Samsung and Kioxia announcing production cuts and TrendForce predicting that Q3 DRAM prices may bottom out and stabilize. With the peak season for smartphone restocking and the launch of MR/AIoT products in the second half of the year, the semiconductor industry is expected to enter a phase of moderate recovery. We prioritize the profit elasticity from capacity utilization recovery in capital-intensive companies and the earnings rebound of design firms with smoother inventory digestion, especially in sub-sectors combining 'cyclical beta + sector alpha,' such as packaging and testing (advanced packaging), CIS (automotive), memory (niche to mainstream), and RF (high-end modularization). For analog and power sectors, however, some stocks may face short-term pressure from intensifying competition.
On the innovation front: We are optimistic about the demand for computing chips, memory, and data interconnect chips driven by AIGC applications.
We believe that the large-scale model training and inference behind AIGC applications will drive significant growth in computing power demand, benefiting the cloud AI accelerator chip market and high-performance memory market, while also boosting volume for edge-side SoCs. Additionally, large-scale cluster computing is expected to drive simultaneous growth in volume and price for supporting demand in switch chips and interface chips.
The localization theme for equipment and materials remains valid:
Although weak demand and trade frictions may negatively impact domestic wafer fab expansion in the short term, the logic of accelerated substitution for domestic semiconductor front-end equipment and materials persists, given the still-low localization rates and ongoing technological advancements. For back-end equipment, domestic companies have made significant breakthroughs in testing and sorting.
Risks: Trade frictions/intensified industry competition, slower-than-expected consumer recovery/localization/wafer fab expansion.