Record High for Semiconductor Equipment Sales

In the landscape of global technology, the semiconductor industry has always held a pivotal role, serving as the backbone of various sectors ranging from consumer electronics to automotive industriesAccording to SEMI, a prominent industry organization, global sales of semiconductor equipment from original manufacturers are projected to reach a remarkable $109.47 billion in 2024—a modest increase of 3.36% from $105.91 billion in 2023, surpassing 2022's value of $107.4 billion, thus marking a historic highThis resurgence comes after a challenging period characterized by high inventory levels, low demand, reduced investments, and diminished production capacity that spanned over a year.

The turning point for the industry is evidentPrice hikes, a primary indicator of market recovery, are already taking shapeIn 2024, the price adjustments have begun with power semiconductors leading the charge; companies such as San'an Optoelectronics have announced increases of between 10% to 20% across their entire product lineNotably, several leading firms like CR Micro, Jiangsu Yangjie, and others have initiated pricing discussions in June as well, further indicating a tightening supply and growing demand.

This pattern of rising prices is not limited to discrete components but has begun to permeate the foundry sector, as wellRecent market updates suggest that TSMC's 3nm foundry services will see price increases exceeding 5%, with advanced packaging services expected to rise by 10% to 20% next yearThe ripple effects are palpable; on June 18, TSMC’s shares soared to unprecedented heights on the Taiwan stock exchange following these announcements, validating investor confidence in the sector's viability.

Companies within the semiconductor ecosystem are uniquely positioned to perceive the fluctuations in market conditionsFor instance, SMIC reported a notable year-on-year revenue growth of 23.36% in Q1 2024, amounting to 12.594 billion yuan, along with an encouraging forecast of a further 5% to 7% growth in Q2. Similarly, other testing and packaging firms like Changjiang Electronics Technology have shown robust revenue increases, reinforcing the notion that the semiconductor market is regaining its momentum.

Examining inventory turnover metrics reveals a significant shift; leading Chinese chip manufacturers like GigaDevice and Weier Micro's average inventory turnover days fell from 351 in Q1 2023 to 240 by Q1 2024. This decline underscores a meaningful contraction in stockpiles, signifying a transition to a more balanced market where supply meets demand more effectively.

These various indicators—price trends, inventory levels, performance, and capacity utilization—collectively affirm the cyclical upturn that characterizes the semiconductor industry

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Historically, the semiconductor market exhibits cyclical behavior, characterized by periods of expansion followed by contraction, with downturns typically lasting between four to six quartersLooking back at the past decade, expanding phases and contracting phases clearly illustrate this rhythm, suggesting that another cycle of growth is imminent.

Furthermore, the burgeoning demand for artificial intelligence (AI) technologies is a significant driver of this resurgence, as organizations across sectors increasingly rely on advanced computing abilities facilitated by semiconductorsThe computational requirements for AI models, especially those based on Transformer architectures, are growing exponentially—averaging a staggering 750-fold increase every two yearsThis escalating need for computational power, coupled with predictions from Gartner that the global AI chip market will soar from $44.2 billion in 2022 to approximately $120 billion by 2027, highlights the pivotal role of semiconductors in shaping future technologies.

Furthermore, the World Semiconductor Trade Statistics (WSTS) recently adjusted its market size predictions, raising its estimation for the semiconductor sector in 2024 from $588.36 billion to $611.23 billionThis adjustment signals a projected year-on-year growth of 16% in market size, further underlining the optimism that surrounds the sector.

Investing in semiconductor equipment appears poised to be one of the most resilient moves amid this newfound certaintyAdvanced process technologies necessitate significantly more complex manufacturing equipmentFor instance, the requirements for etching, film deposition, metrology, and thermal processing equipment for advanced logic devices are heightenedData gathered from industry surveys indicate that a 12-inch advanced process line producing 10,000 wafers monthly requires up to 1.9 times the equipment compared to mature process lines, suggesting an expansive growth opportunity in the equipment segment.

Despite the sizeable market for semiconductors in China, domestic production remains at a disadvantage, with a self-sufficiency rate as low as 12% in high-end chips

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This heavy reliance on imported chips, especially from industry leaders like NVIDIA, showcases the vulnerabilities within China's semiconductor ecosystemIn fiscal year 2023, NVIDIA generated $5.8 billion in revenue from the Chinese mainland, accounting for 21.45% of the company's overall income.

Given the constraints on overseas foundry services for high-end chips, China's semiconductor industry faces an uphill battle to enhance its manufacturing capabilities in high-performance processors and memoryTo achieve this, increased investment in domestic equipment manufacturing is criticalYet, the strict regulations surrounding the importation of high-end semiconductor manufacturing equipment pose significant barriers.

However, there lies a silver lining: the dawn of domestic equipment manufacturing is on the horizonAccording to SEAJ, global semiconductor manufacturing equipment sales reached $26.42 billion in Q1 2023—a slight decline of 2% year-on-year—but commendably, China's mainland market surged by 113%, emerging as the world’s largest semiconductor equipment market for four consecutive quartersEstimates project that this figure could escalate from $36.6 billion in 2023 to $65.77 billion by 2027, reflecting a compound annual growth rate (CAGR) of 15.8% driven by increased capital expenditure in advanced memory logic wafer fabs and rising domestic equipment integration.

With significant market potential and a favorable competitive landscape, leading firms in China’s semiconductor equipment sectors are few yet powerfulCompanies like Northern Microelectronics and Advanced Micro-Fabrications hold sway in the thin film deposition segment, while other players like Zhongwei and Northern Microelectronics dominate the etching spaceShanghai Micro Electronics stands out in photolithography, while Huahai Qinge Technology excels in CMP equipment, showcasing specialized strengths amid a concentrated competitive environment.

As the market dynamics evolve, the concentration of demand among a handful of key players is likely to create explosive growth opportunities for these firms

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