Investment Rating - The report maintains a positive outlook on the Taiwan Electronics and Semiconductors sector, particularly favoring TSMC as the most preferred stock in the semiconductor space [1][2]. Core Insights - April sales in the technology sector were robust, with TSMC reporting NT$349.6 billion in revenue, reflecting a 48% year-over-year increase and a 22% month-over-month increase [2][10]. - The semiconductor supply chain is expected to face challenges in the second half of 2025 due to early order pull-ins and tariff uncertainties, although supply constraints are easing [1][2]. - Companies like Gold Circuit and Quanta are highlighted for their strong sales momentum and improving product mix and margins, particularly in the AI ASIC and server supply chain segments [1][3]. Summary by Sections Semiconductor - TSMC's April revenue was significantly above expectations, driven by solid AI demand and a healthy order flow, with a year-over-year growth of 48% [2][10]. - UMC and other fabless companies are also showing steady recovery, with April revenues tracking positively [2]. Server and ODMs - Server sales in April increased by 167% year-over-year, with companies like Wiwynn and Accton outperforming expectations due to strong ASIC server demand [3][14]. - ODMs reported a 1% month-over-month increase and a 33% year-over-year increase in sales, indicating a positive trend in the server supply chain [3]. Component and PCB - Largan is noted for its 28% year-over-year growth, attributed to market share gains and resilient ASP trends [5]. - Gold Circuit is expected to benefit from rising AI ASIC demand, while Unimicron is projected to capture a significant market share in AI GPU applications [6][10]. Overall Market Trends - The overall revenue trend for the Taiwan technology supply chain shows a 24% year-over-year increase, with significant contributions from the semiconductor and server sectors [14]. - The report anticipates a decline in sales for May due to NTD appreciation, but the long-term outlook remains positive as demand for AI-related products continues to grow [2][3].

Summary of Conference Call on ABF Substrate Industry Industry Overview - The ABF (Ajinomoto Build-up Film) substrate market is expected to experience oversupply conditions until the second half of 2026, with a projected 7% oversupply in 2025 [1][11][25]. - The total addressable market (TAM) for ABF substrates has been revised down by 12% and 10% for 2025 and 2026, respectively, due to lower-than-expected AI server GPU substrate shipments and increased pricing pressure [2][22]. Key Insights - **Demand Dynamics**: The demand for AI server substrates has been cut by approximately 50% for 2025, reflecting a significant decrease in AI server rack shipments, which are expected to decline by 35% [2][60]. - **Pricing Pressure**: The average selling price (ASP) for AI GPU substrates has decreased from over US$120 earlier in the year to US$100, indicating a challenging pricing environment [2][60]. - **Impact on Suppliers**: Tier-2 suppliers like Unimicron and Kinsus are expected to face significant challenges due to their exposure to legacy ABF products and weaker-than-expected spillover orders from tier-1 suppliers [2][9][24]. Supplier Performance - **Unimicron**: Downgraded to Neutral from Buy due to weaker AI spillover orders and a slow PC demand outlook. Target price revised from NT$170 to NT$90 [9][10]. - **Kinsus**: Downgraded to Sell from Neutral, with a new target price of NT$63, reflecting less favorable growth in the mid-to-low-end ABF substrate market [9][10]. - **Ibiden**: Maintained Buy rating with a target price of ¥6200, benefiting from its leading position in the high-end substrate market [10][22]. - **Zhen Ding Technology (ZDT)**: Initiated with a Buy rating, expected to benefit from ABF demand expansion from Chinese IC design houses [8]. Future Catalysts - The mid-to-long-term outlook for Taiwan ABF suppliers is expected to improve with the localization of AI IC production in China, projected to grow at a CAGR of 53% from 2025 to 2027 [3][4]. - Adoption of CPO (Chip-on-Package) technology is anticipated to double the consumption of switch IC ABF substrates compared to general 2.5D packaging substrates [3]. Capacity and Utilization - The overall industry capacity is expected to increase by approximately 40% from 2024 to 2027, with a significant portion of new capacity planned before 2024 [29][53]. - Utilization rates for ABF substrate suppliers are projected to improve in 2025, but overall industry utilization will remain below 80% [27][24]. Risks and Challenges - Potential risks include higher electricity costs in Taiwan and the impact of tariffs, which could increase costs as a percentage of revenue significantly [46][45]. - The overall cash margins for ABF substrate suppliers are expected to remain under pressure until at least the second half of 2025, with a potential recovery starting in 2026 [44][59]. Conclusion - The ABF substrate industry is currently facing a challenging environment with oversupply and pricing pressures, particularly affecting tier-2 suppliers. However, long-term growth opportunities exist through technological advancements and increased demand from AI-related applications. The market is expected to stabilize post-2026, with significant growth driven by AI and server upgrades.

Summary of Key Points from the Conference Call Industry Overview - The discussion primarily revolves around the **semiconductor and IT hardware industry**, with a focus on the implications of increasing U.S. content in products to mitigate tariffs [1][2]. Core Insights and Arguments - **U.S. Content Requirement**: To qualify for tariff exemptions, products must contain at least **20% U.S. content**. This necessitates significant production shifts to the U.S., which is challenging for companies like Apple [2][3]. - **Impact on iPhone Production**: The iPhone 16 Pro Max's Bill of Materials (BOM) shows that **SoC (14%)**, **memory (7%)**, and other components account for approximately **50%** of the BOM. Transitioning production to the U.S. could take several years, with estimated tariff increases of around **50%** due to the high percentage of assembly in China [3][19]. - **AI Server Production**: Unlike iPhones, the production of AI servers can be more easily shifted to the U.S. due to their assembly primarily in Mexico, which is exempt from new tariffs. This transition is seen as economically viable due to the higher profit margins associated with AI servers [4]. - **Intel's Position**: Intel's CPUs, primarily produced in the U.S., may benefit from lower tariffs, while companies like TSMC and AMD could face negative impacts due to their reliance on assembly in China [5][41]. - **MediaTek's Resilience**: MediaTek is less affected by tariffs as its supply chain is primarily based in Asia, allowing it to maintain market share despite the ongoing tariff disputes [5][14]. Additional Important Insights - **Cost Implications**: The cost of producing components in the U.S. could rise significantly, potentially exceeding **50%**, which may not justify the fixed costs of relocating production [3][4]. - **Supply Chain Dynamics**: The supply chain for camera modules and other components is heavily concentrated in Asia, with a transition to U.S. production expected to take around **two years** [24]. - **Investment Ratings**: Various companies in the semiconductor space received ratings, with **MediaTek** rated as outperform with a target price of **NT$1,820**, and **TSMC** also rated outperform with a target price of **NT$1,430** [7][13][14]. Conclusion - The semiconductor and IT hardware industry is navigating complex challenges related to tariffs and production shifts. Companies are assessing the feasibility of increasing U.S. content in their products while managing cost implications and supply chain logistics. The competitive landscape is influenced by these dynamics, with varying impacts on different players in the market.