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Asia’s chip sector has been following Nvidia’s rally in the past year. But while the region’s largest AI and chipmaker stocks have continued to gain, companies further down the semiconductor supply chain, including suppliers of chipmaking equipment, chip materials and chemicals, have been lagging behind global peers in recent months. There is still plenty of room for upside.
Shares of chipmaking equipment manufacturer Tokyo Electron are down a tenth since early April. Local peer Towa is a tenth lower since last Thursday. Companies making machines that test and measure chips in the manufacturing process are also losing, with Advantest down a quarter since a March high. Shares of Screen, which makes wafer cleaning and etching materials for chip devices, have also fallen.
Part of the reason is due to high earnings expectations for everything chip related. As several companies missed these optimistic estimates in the March quarter, a sell-off ensued. Another reason is steep valuations. Rapid gains before the recent sell-off pushed stocks such as Advantest to 48 times forward earnings, a premium of more than a third to global peers and more than double levels from early last year.
On top of global investor enthusiasm for AI-related companies, Japanese chip sector shares had also enjoyed an additional boost from foreign investor interest in the local equity market, after the Tokyo Stock Exchange called on companies to improve capital efficiency. This theme has pushed the broader benchmark Nikkei 225 index up 50 per cent since the start of last year, reaching a record high in February.
All of this, combined with weaker-than-expected demand and weaker prices of memory chips — a chip glut from last year drags on — has set the stage for a correction. But longer term, demand for chipmaking gear, semiconductor materials and testing devices should remain high as capital investment in servers is growing around the world.
Businesses involved in making silicon wafers and chemicals used in chip manufacturing and chip testing are sometimes overlooked by investors when compared with more glamorous businesses such as AI chip designers.
Yet one positive in favour of these suppliers is a lack of rivalry in the space. For example, just four local companies account for nearly three-quarters of the world’s supply of photoresist, a material used to add patterned coatings on the surface of silicon wafer during the chip manufacturing process. This should protect their healthy margins and provide a layer of protection against cyclical swings.
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