Wafer foundry destocking is coming to an end, and mainland fabs are recovering quickly

J.P. Morgan Securities pointed out in the latest "Wafer Foundry Industry" report that the destocking of wafer foundries will come to an end, and the industry boom will broadly recover in the second half of 2024 and further strengthen in 2025. Based on this, Xiaomiao praised three Taiwanese manufacturers, including TSMC, United Microelectronics, and Power Semiconductor Manufacturing Co., Ltd., all of which gave an "outperform" rating. The world's advanced and Chinese manufacturer SMIC recommended "neutral".

Gokul Hariharan, head of JPMorgan's Taiwan research department, analyzed that the economy hit bottom in the first quarter, and AI demand continued to rise, while non-AI demand also gradually recovered. More importantly, urgent orders began to appear, including large-size panel driver ICs (LDDICs), power management ICs (PMICs), WiFi 5 and WiFi 6 chips, all of which clearly showed that the wafer foundry industry has escaped the trough and turned to recovery.

It is worth noting that the utilization rate of mainland China's wafer foundries has recovered relatively quickly, mainly because mainland fabless semiconductor companies began to adjust inventories earlier. After active destocking in the first six quarters, inventories are gradually normalizing.

In addition, Hariharan pointed out that a small number of emergency orders have been observed, showing key signs of the beginning of the upward cycle, such as the continued influx of LDDIC, PMIC, WiFi 5 and WiFi 6 chips.

In terms of non-AI demand, vertical fields such as consumption, communications, and computing in the 3C field also bottomed out in the first quarter of this year; however, automotive and industrial demand may recover at the end of 2024 or early 2025, mainly due to the late adjustment of overall inventory.

In terms of individual stock analysis, as inventory replenishment expands and wafer prices stabilize, Hariharan expects stocks with higher beta values, such as United Microelectronics and Power Semiconductor Manufacturing Co., Ltd., to benefit from a recovery in capacity utilization rates (UTR).

As for Taiwan Semiconductor Manufacturing Co., Ltd., the “sacred mountain that protects the country”, Hariharan said that considering TSMC’s leading position in AI accelerators, strong pricing power, improved gross profit margin, improved utilization rate and unexpected dividend growth, the future prospects will continue to be promising.

The overall capital expenditure of non-mainland fabs will fall by about 25% in 2024, and will further decline by 35-40% in 2025. On the other hand, due to the accelerated construction of mature production capacity of mainland wafer factories, the revenue contribution ratio of the top five semiconductor equipment manufacturers (SPE) from the mainland market has increased significantly to 40-45% in recent quarters.

In addition, Hariharan remains cautious about world advanced technology, mainly due to the headwind of structural demand for 8-inch wafers and the possible depreciation burden caused by 12-inch expansion. Due to the heavy depreciation burden of 12-inch products and the weak gross profit margin, the Chinese manufacturer SMIC also remains "neutral".

The operations of mature wafer foundries have bottomed out. Driven by the rebound of the semiconductor industry, market demand in the second half of the year is expected to rebound significantly compared with the first half of the year. In addition, the US-China trade war has intensified, and the effect of order transfer from major international manufacturers has amplified. Mature wafer foundries Factory operations will pick up more significantly in the second half of the year. Recently, the stock price of Advanced Micro Devices has reached a 14-month high, and Power Semiconductor Manufacturing Co., Ltd. and UMC have also maintained their recent high levels.

Since the beginning of this year, TSMC has firmly sat on the throne of the world's leading wafer foundry due to its advantages in advanced process manufacturing, and has continued to play the role of the locomotive of the global wafer foundry industry's growth. However, since the beginning of this year, most market research agencies have also predicted that after the gradual liquidation of inventories, the global semiconductor industry is expected to rise. Although competition in mature processes is still fierce, the overall mature process wafer foundry is expected to perform better than last year.

Legal persons said that the momentum for the recovery of mature process wafer foundries' operations in the second half of the year is not only driven by the recovery of the global semiconductor industry, but more importantly, over the past year or so, China's mature process wafer production capacity has not only continued to be expanded, but the price has continued to fall. However, the impact on Taiwan's three major mature process factories has gradually converged. Judging from Taiwan's single-quarter wafer shipments and single-quarter average unit price (ASP), the operating bottom was around the fourth quarter of last year to the first quarter of this year. Taiwanese factories generally estimate that the shipment outlook and ASP in the second quarter of this year will be flat or have a slight increase.

The market legal person further pointed out that the overcapacity situation of many products in China has attracted global attention, among which mature process wafers are the focus of European and American countries. Taiwanese manufacturers have previously stated that many international manufacturers have experienced more active adjustments under trade barriers. The orders originally placed by Chinese wafer foundries due to low-cost wafer production will be transferred to Taiwanese factories. It is expected that the de-Chinaization of the semiconductor supply chain will accelerate in the second half of the year, and the impact of China's mature process factories on Taiwanese factories in the past two years will also gradually slow down.

Driven by TSMC's record highs, coupled with mature process plants, including UMC, World Advanced Micro Devices and Power Semiconductor Manufacturing Co., the operations in the second half of the year are also expected to be clearly off the bottom. Market funds have recently entered the market to lay out mature process wafer plants.

World Advanced's operating performance in the first quarter of this year has been significantly better than market expectations, and the stock price has been relatively strong recently. On the 16th, the stock price rose 4.32%, closing at 96 yuan, approaching the 100 yuan mark and setting a new high in the past 14 months. In addition, UMC and Power Semiconductor Manufacturing Company's stock price also maintains a relatively high-end position.

In addition, judging from the trends of foreign-invested legal persons, May has only been half a month, but foreign investors have bought more than 52,000 of the world's advanced stocks, setting a record for the largest single-month buying in the past 20 years.

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