We believe the new US administration’s approach to policy setting will likely be more sensible compared with the previous administration, leading to a more accommodative landscape for the semiconductor sector. The Trump administration has not just disrupted China’s supply chain but also hurt US firms in turn as the current policy discourages companies from setting up new facilities. In fact, US firms are looking to relocate offshore to circumvent the export control restriction. Moreover, foreign companies may think twice before purchasing US-designed semiconductor manufacturing equipment, concerned that the delivery of US equipment may be unreliable. Therefore, with Biden taking over the new US administration, we expect to see easing of such unreasonable bans and erratic policy-making which would restore the semiconductor industry to its glory days.

China is seen to be firing on all cylinders as the Chinese government set up the “Big Fund Phase-2” with an investment sum of RMB204b (US$29.8b) to achieve technology selfsufficiency. SMIC has been revising its capex budget aggressively higher to US$5.9b, 3x higher than that of FY19 at US$1.9b. SMIC recently reported a 123% YoY jump in profit on record high revenue for 3QCY20. Its current utilisation rate is at 100% and it is guiding momentum to remain strong going into 1H 2021. DigiTimes reported that 8-inch wafer foundries in general are experiencing orders at 20% beyond their supply capacity. The imminent shortage will likely continue into 2021 and urgent orders will see a 10% increase in pricing

Local beneficiaries include the likes of KGB (Outperform; TP: RM1.92) who is securing more jobs from SMIC. We believe backend packaging and testing segment will grow along China’s frontend expansion, benefiting MPI (Outperform; TP: RM18.80) and UNISEM (Outperform; TP: RM5.15) who has plants in Suzhou and Chengdu respectively. In addition, OSAT equipment makers such as Mi Technovation (unrated) is poised to benefit from rising orders. Eyeing the positive trend, INARI (Outperform; TP: RM3.14) has recently formed a JV with Singapore-based MIT Semiconductor to develop OSAT equipment.

Source: Kenanga Research - 19 Nov 2020