Denon Securities: Semiconductors are an important investment direction in the bull market, and there may still be significant upside potential

According to the Wisdom Financial APP, Debon Securities published a research report stating that compared to the CSI 300 Index, the semiconductor industry index is in a lower position. Semiconductors are an important investment direction in a bull market, and there may still be significant room for further increase. Looking ahead, the team believes that the key directions for this round of semiconductor counterattack are: self-controllable + cyclical reversal + technological innovation. Currently, there is a significant capacity gap in the domestic semiconductor industry as external restrictions continue to increase, and the localization process in some areas is gradually accelerating. The current semiconductor sector may have reached the bottom of the cycle and is at the starting point of a new cycle. Currently, semiconductor-related companies' revenue and performance are gradually recovering, signaling a cyclical reversal. It is recommended to focus on sectors such as analog, storage, IoT, and power semiconductors. The technological cycle driven by AI + smart electric vehicles will be the largest addition in the new cycle.

Semiconductors are an important investment direction in a bull market, and there may still be significant room for further increase

As of September 23, 2024, the Shenwan Semiconductor Industry Index has fallen by about 61.2% from its five-year high. In comparison, the CSI 300 Index fell by about 45.0% during the same period. The semiconductor industry index is positioned lower than the CSI 300 Index. With market expectations reversing, on October 8, the Shenwan Semiconductor Industry Index closed at 4554 points, up 16.6% from the previous trading day and up 57.6% from September 23. The CSI 300 Index closed at 4256 points on October 8, up 5.9% from the previous trading day and up 32.5% from September 23.

Compared to the beginning of 2023 and 2024, the Shenwan Semiconductor Industry Index has only risen by 10.6% and 21.7% respectively, with a 63.6% increase from the five-year high. Therefore, it is believed that there is still significant room for further increase in the overall semiconductor industry.

Looking ahead, Debon Securities believes that the key directions for this round of semiconductor counterattack are: self-controllable + cyclical reversal + technological innovation

1. Self-controllable

Currently, there is a significant capacity gap in the domestic semiconductor industry as external restrictions continue to increase, and the localization process in some areas is gradually accelerating. Self-controllability is mainly divided into the following three directions:

1. Self-controllable advanced manufacturing: The U.S. Department of Commerce has placed Chinese semiconductor manufacturers such as SMIC on the Entity List, restricting their access to equipment and materials needed for semiconductor production at 10nm or below. Mainland China urgently needs breakthroughs in high-end equipment and materials, leading to a slow increase in advanced manufacturing capacity, with mainland China's advanced manufacturing capacity accounting for only 8% in 2023, leaving room for significant improvement.

2. Self-controllable artificial intelligence: In October 2020, the U.S. Department of Commerce completed revisions to the Export Control Regulations, specifically restricting China's access to advanced computing chips, and further restricting U.S. companies from investing in related areas in August 2022. Therefore, the domestic ability to obtain high-end AI chips from overseas manufacturers is limited, which Debon Securities believes may accelerate the rapid development of domestic AI chip manufacturers, nurturing a group of AI chip manufacturers with outstanding capabilities.

3. Self-controllable automotive chips: Similarly constrained by export restrictions from overseas manufacturers, domestic automotive supply chains have been severely affected. To avoid being at the mercy of others, the process of localization may accelerate. Debon Securities believes that the current process of domesticating automotive chips can be compared to the time point of consumer electronics chips in 2018, which is in the early stages of a breakout (With the US cutting off chip supplies to Huawei, it has directly catalyzed the process of domestic chip production, leading to a rapid penetration of chips in consumer electronics such as smartphones. If the automotive chip encounters related policies, it may also catalyze rapidly.)

1. Cycle Reversal

From a cyclical perspective, the semiconductor industry may currently be at the end of the "initiation, continuation, transformation, and integration" phase. Reviewing the previous cycle:

Initiation (2019): The US restricted local manufacturers from supplying chips to terminal manufacturers such as Huawei, directly stimulating domestic terminal manufacturers to tilt towards purchasing domestic chips;

Continuation (2019-2021): Technological innovations such as 5G and AIoT drove rapid growth in consumer electronics demand, while the pandemic affected the supply chain. As a result, downstream manufacturers adopted a conservative inventory strategy, leading to an increase in demand for semiconductor chips;

Transformation (2021-2023): Due to lower-than-expected demand and the previous downstream stocking strategy resulting in high channel and terminal inventories, industry competition intensified, prices declined, and the semiconductor chip industry transitioned to a downward cycle;

Integration (2024 and beyond): As inventories gradually deplete and with a moderate recovery in demand, the overall revenue and performance of semiconductor chip companies in the first half of 2024 are expected to significantly increase year-on-year. Under trends such as AI and smart electric vehicles, Debon Securities believes that the semiconductor chip industry is currently at the starting point of a new cycle. In addition, according to SEMI and TechInsights, IC sales in the third quarter are expected to grow by 29% year-on-year, breaking the historical peak set in 2021.

Debon Securities believes that the semiconductor sector may have reached the bottom of the cycle and is at the starting point of a new cycle. Currently, semiconductor-related companies are gradually recovering in revenue and performance, signaling a cycle reversal, with a focus on analog, storage, IoT, power semiconductor, and other sectors.

1. Technological Innovation

Debon Securities believes that technological cycles will be the biggest addition to the new cycle (AI + smart electric vehicles):

1. AI is expected to be one of the largest increments to the semiconductor industry, with demand expected to gradually shift from high-end computing chips, storage chips, and advanced packaging supply chains to consumer electronics terminals. With the landing of products such as AI phones and AI PCs, edge AI is expected to follow suit. Therefore, there is optimism for the demand for related AIoT chips, analog chips, and storage chips.

2. Smart electric vehicles will drive chip demand. According to the US International Trade Commission, the number of semiconductor components in hybrid and electric vehicles is already twice that of internal combustion engine vehicles. Fully autonomous vehicles use laser radar sensors, 5G communication, and image recognition system designs, with the number of semiconductor components expected to be 8 to 10 times that of non-autonomous vehicles. Driven by trends such as electrification, autonomous driving, interconnection, and mobility as a service, the automotive semiconductor market is expected to grow from $53.04 billion in 2021 to $103.85 billion in 2029, with an 8-year CAGR of 8.8%, according to Statista.

Recommendations

Wafer Foundry: SMIC (688981.SH), Huahong Semiconductor (01347), Huahong Microelectronics (688396.SH), JCET (688249.SH), Chipbond Technology (Stock code not found, may be a non-listed company or undisclosed stock code); Wafer testing: CETC (600584.SH), Tongfu Microelectronics (002156.SZ), YX Semiconductor (688395.SH), Vico Testing (688372.SH);

Equipment materials: North Microelectronics (002371.SZ), Zhongwei Corporation (688012.SH), Topview Technology (688072.SH), Core Micro (688037.SH), Shanghai Silicon Industry (688126.SH), Anji Technology (688019.SH), Dinglong Corporation (300054.SZ);

GPU/CPU/FPGA: Higoptek (688041.SH), Cambricon Technologies (688256.SH), Loongson Technology (688047.SH), Anlogic Technology (688117.SH);

Analog chips: Sino-Micro Power (300661.SZ), Naxin Microelectronics (688052.SH), Nanxin Technology (688189.SH), AWE Electronic (688798.SH), Surpassion Technology (688536.SH), Newplus Micro (688593.SH), JFMicro (688286.SH);

Storage chips: Zhaoxin Innovation (603986.SH), Beijing Junzheng (300223.SZ), Dongxin Corporation (688110.SH), Purui Corporation (688369.SH), Juchen Corporation (300498.SZ), Hengshuo Corporation (688416.SH);

SoC chips: Lanqi Technology (688008.SH), RuiChip (603893.SH), Hengxuan Technology (688699.SH), Fudan Microelectronics (688385.SH), Jincheng Corporation (688099.SH), Allwinner Technology (300458.SZ), Espressif Systems (688018.SH), National Technology (300077.SZ), Xinhe Technology (688595.SH);

RF chips: ZSW Micro (300782.SZ), Vanchip Microelectronics (301122.SZ), Huizhi Micro (688553.SH);

CIS: Wayland Corporation (603501.SH), SITRI (688213.SH), Goke Micro (688728.SH);

Power chips: StarPower Semiconductor (603290.SH), Yangjie Technology (300373.SZ), Jiejie Microelectronics (300623.SZ), New Energy Corporation (605111.SH), Dongwei Semiconductor (688261.SH).

Risk Warning

Lower-than-expected downstream demand, intensified industry competition, unexpected economic policy introduction, and less-than-expected effects of economic policies