PhillipCapital research analyst Yeap Jun Rong says he remains positive on the semiconductor sector’s long-term outlook, even as the sector is currently experiencing a global shortage at the moment.
On Feb 24, US President Joe Biden has authorised a 100-day review of supply chains – with the focus especially on a global semiconductor shortage – with the aim of eventually increasing domestic production of these materials.
Intel, the largest US supplier of semiconductors by revenue, may be a potential beneficiary should the US government decide to accelerate its domestic production of chip manufacturing, says Yeap in a March 3 report.
“In order to bring back domestic production, Intel has to catch up with other chipmakers’ manufacturing technologies. It is thus possible that it would be a recipient of US government incentives. Intel’s forward price-to-earnings ratio (P/E) of 13.18 times lags its peer average of 19. This makes its valuations attractive,” he writes.
Semiconductor-equipment makers such as Applied Materials and Lam Research are also ones to watch, he says.
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“They could benefit directly from production ramp-ups to meet demand. Wafer fabrication equipment spending is projected to swell to US$60 billion – US$70 billion in 2021, up 20-40% from 2020 levels. Lam Research’s new etching tool, 'Sense.i,' is equipped with intelligent sensors. This can potentially reduce defect rates and chip costs, providing a competitive edge against peers,” he adds.
TSMC, a semiconductor manufacturing company in Taiwan, is another “ostensible beneficiary” of the shortage in chips.
“With overwhelming orders, TSMC may prioritise manufacturing space for higher-margin products such as gaming processors. It also intends to raise automotive chip pricing by 15%, citing global shortages,” says Yeap.
TSMC says it expects to spend around $25 billion to $28 billion in 2021 to make advanced chips, 45% to 63% higher than $17.2 billion in 2020, which points to longer-term growth opportunities.
That said, Yeap believes that a “quick fix” in the near-term should not be expected, as expanding production capacity may take months or years.
“The lead time from equipment orders to actual output is estimated to be 9-12 months. We also expect Biden’s tough policy on China to stand. This implies that production constraints could continue to weigh on chipmakers’ sales potential through 2021,” he writes.
However, Yeap feels a backlog in orders – once production ramps up over time – should lift sales.
“Inventory-building by customers to safeguard supplies may also spur demand. Some chipmakers such as TSMC and NXP Semiconductors are already raising prices due to tight supply. We believe their price hikes may be sticky and hard to reverse even when supply constraints ease. This may then translate to higher margins,” he adds.
In the longer-term, global semiconductor sales registered a 5.1% y-o-y growth in sales, a by-product of social distancing restrictions and remote working measures.
He has thus projected global semiconductor sales to increase by 8.4% y-o-y to US$4.69 billion ($6.24 billion) from US$4.33 billion in 2020, sustained by ongoing demand from new-users.
“We expect chip growth to be sustained by the following segments: automobile, communications and computing,” he says.
On the automobile market, Yeap foresees two growth catalysts, including ongoing government subsidies that may bring about more entrants in the eco-friendly cars market, as well as advancements in technology, that have raised the level of vehicle digitalisation.
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The above factors, he says, may potentially increase the automobile sector’s share of semiconductor demand to 11% from 8.3% by 2025.
In computing, Yeap sees that the strong demand for computers as at end-2020 will spill into 2021.
“Global shipments of PCs grew 26.1% y-o-y in 4Q2020, going by IDC estimates. As virtual conferencing and cloud migration continue, server unit sales are expected to increase by 6.5% y-o-y in 2021. This would generate the need for more processor chips,” he says.
In addition, the greater demand for cloud services and their associated computing nodes, as well as 5G smartphones, which are all expected to register increases in 2021, is expected to ramp up demand in the semiconductor industry, notes Yeap.
As at 12.57pm, shares in TSMC, Intel, Applied Materials and Lam Research are trading at NT$605 ($28.95), US$59.90, US$115.44 and US$551.23 respectively.
