Signs of Bottoming Out

Following various upbeat outlook reports for global wafer capacity, semiconductor sales, equipment orders and personal computer (PC) sales, we are increasingly confident that the global technology down-cycle has bottomed out. The artificial intelligence (AI) boom has brought various technological breakthroughs into smartphones, applications, PCs and autonomous cars. Malaysian players have started seeing the spillover effects from the intensifying US-China trade sanctions as more technology-related investments are pouring into Malaysia while some Chinese players are considering passing some chip packaging orders to Malaysian peers. As sentiment improves, capex spending cycle has also resumed. Maintain Overweight call on Technology sector. Top picks are Inari and D&O.

• Robust growth for chip packaging in Malaysia. In a bid to diversify supply chain and hedge risks against intensifying US chip export and chip-making equipment controls, a growing number of Chinese semiconductor design companies are tapping on Malaysia’s advanced chip packaging services to assemble a type of graphic processing unit (GPU) that can be used in AI training. Sources cited that the requests only encompass assembly and does not involve fabrication of the chip wafers, which would not contravene any US restrictions. IDTechEx has identified four main application areas for advanced semiconductor packaging, namely, i) high-performance computing (HPC) application/ data centres, ii) communication networks, iii) autonomous cars and iv) consumer electronics. 
  
  There is a significant difference between advanced packaging and ordinary packaging. Ordinary packaging is a low-technology business, which is currently dominated by China. Advanced packaging refers to the technique of combining chips into a package that enhances performance. For example, a ”stack” of two 14nm chips can sometimes achieve the performance of a 7nm chip, though at the expense of high power consumption. Such “stacking” techniques are commonly used in the wafer-level packaging of memory chips. Key players in the advanced packaging industry include Intel Corp, Taiwan Semiconductor Manufacturing Company (TSMC), Advanced Semiconductor Engineering (ASE), Samsung Electronics and Amkor Technology. 
  
  According to SIA, China has 38% of the world’s assembly, testing and packaging market from low-end to high-end while Southeast Asia now has a 27% share with Malaysia accounting for 13%. The US accounts for only 3% of the world’s chip packaging capacity as it targets mainly the advanced packaging market due to its high labour costs.

• ASML’s 4Q orders surge to a record level. ASML, the only company that produces extreme ultraviolet (EUV) lithography machines that are needed to make the most sophisticated semiconductors, saw its orders triple last quarter, in a sign that the semiconductor industry is resurging. The company’s Group CEO commented that AI, which requires massive amounts of computing power, is going to be a big driver for its business.

• TSMC predicts strong growth. After bracing for a challenging year in 2023, the world largest chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC) believes that its business has bottomed out and expects revenue to grow in the low to mid-20% range this year, led by i) continued strong ramp up of its 3nm technologies, ii) strong demand for its 5nm technologies and iii) robust AI-related demand. It also expects the high-performance computing segment to have the highest growth. The firm’s capital spending is budgeted in the range of USD28bn-32bn, up from 2023’s USD30bn.

• Upbeat outlook on semiconductor sales. Gartner reported that the global semiconductor industry revenue experienced a setback in 2023, with a notable 11.1% decline in revenue totalling USD533bn. Intel regained its no 1 position in semiconductor revenue, leapfrogging Samsung, while Nvidia joined the top five with a 56.4% growth driven by AI silicon dominance. Memory products dropped 37% in 2023, attributed to weaker-than-expected demand and excess inventory in smartphones, PCs and servers. However, for non-memory products, revenue fared better and declined at a smaller quantum of 3% in 2023, benefitting from a comparatively stable pricing environment as demand was supported by growth in i) AI applications, ii) electric vehicles and iii) defense and aerospace industries. It projects that global semiconductor sales will grow 17% in 2024 to USD624bn, driven by all chip types in view of a strong recovery in the memory market. 
  
  Meanwhile, US-based Semiconductor Industry Association (SIA) announced that global semiconductor industry sales in Nov 2023 rose 5.3% YoY to USD48bn, the first YoY rise since Aug 2022, an indication that the global chip market has entered a growth phase. It is also the 9th straight monthly gain in semiconductor sales. With the exception of Japan (-2.8%), all key markets, namely, US (+3.5%), Europe (+5.6%), China (+7.6%) and others (+7.1%) delivered stronger YoY sales in Nov. It projects that global semiconductor sales will decrease 9.4% in 2023 but increase 13.1% to USD588.4bn.

Source: PublicInvest Research - 5 Feb 2024

Source: PublicInvest Research - 5 Feb 2024