Accessible version AMEC (A) Leading etching toolmaker; initiate at Buy on solid WFE demand and localization Initiating Coverage: BUY | PO: 352.00 CNY | Price: 289.20 CNY Leading etching tool maker in China; initiate at Buy We initiate coverage on AMEC, a leading semiconductor equipment company based in China, with Buy rating and price objective (PO) of CNY352 (22% upside potential). Our bullishness on the stock is based on 1) the robust wafer fabrication equipment (WFE) demand in China, esp. given a potenti ...

Summary of Key Points from the Conference Call Industry Overview - **Industry**: Chinese Semiconductors, specifically focusing on AI-related Wafer Fab Equipment (WFE) and Outsourced Assembly and Test (OSAT) companies [1][3][17] Core Insights and Arguments - **Positive Outlook on AI Development**: The development of China's AI ecosystem is expected to drive sustained investment in 28nm and below logic and memory technologies, particularly in AI-related applications [1][3][17] - **Earnings and Revenue Forecasts**: - Earnings and price targets for covered WFE and OSAT companies have been raised for 2026-27, reflecting a revenue CAGR of 34% from 2025-27 [1][3][17] - Combined revenue for covered WFE companies is projected to reach US$11.7 billion by 2027, implying a 30% market share in China [17] - **Valuation Comparisons**: Current valuations for leading WFE and OSAT companies remain below historical averages, indicating potential for re-rating as AI technology advances [21][23] Notable Developments - **Huawei's AI Roadmap**: Huawei has publicly presented its AI accelerator roadmap through 2028, showcasing a series of AI chips and a super-cluster solution, marking a significant shift in its semiconductor capabilities [2][9][10] - **Investment in AI Accelerators**: Other Chinese companies, including T-head, Baidu, and MetaX, have also unveiled new AI accelerators, indicating a robust competitive landscape [2][10] - **Supply Chain Improvements**: The localization of AI accelerators is expected to ease supply constraints by 2026, benefiting domestic semiconductor manufacturers [2][10] Stock Picks and Recommendations - **Top Picks**: Recommended stocks in AI infrastructure include AMEC, NAURA, and JCET, with a preference for Horizon Robotics in edge AI [4] - **Price Target Adjustments**: - AMEC's price target raised from Rmb255.50 to Rmb351.50, reflecting a higher earnings forecast and improved valuation metrics [27] - NAURA's price target increased from Rmb470 to Rmb564, driven by a higher mid-term ROE forecast [35] - ACMR's price target raised from Rmb163.50 to Rmb222, based on improved earnings expectations [40] Additional Insights - **Geopolitical Risks**: The impact of geopolitical tensions, particularly related to export controls, is becoming more manageable, allowing for better domestic supply chain reliance [23] - **Long-term Growth Drivers**: Generative AI is expected to be a structural growth driver for Chinese semiconductor companies over the next decade, with significant room for localization and technological advancement [23][24] Financial Metrics and Changes - **Earnings Revisions**: - AMEC's earnings for 2025-27 have been adjusted upwards by 1% to 5% [26] - JCET's domestic revenue for 2026-27 has been raised by 7.6% to 10.6% due to stronger demand from AI-related chips [20][50] - **Valuation Metrics**: - Current PE ratios for AMEC and NAURA are significantly below their historical peaks, suggesting potential for future valuation expansion [21][24] This summary encapsulates the key points discussed in the conference call, highlighting the optimistic outlook for the Chinese semiconductor industry driven by advancements in AI technology and the associated financial implications for leading companies in the sector.

Summary of Conference Call on China Semiconductors Industry Overview - The focus is on the **semiconductor industry in China**, particularly the developments surrounding **SMIC (Semiconductor Manufacturing International Corp)** and **Hua Hong Semiconductor Ltd** [1][3]. Key Points and Arguments 1. **Positive Catalysts Ahead of National Day**: Anticipation of further positive developments in semiconductor localization in China before the National Day on October 1st, including testing of EUV tools by Sicarrier and DUV machines by SMIC [1]. 2. **AI Chip Self-Sufficiency Goal**: China aims for **70% self-sufficiency in AI chips by 2027**, which is expected to positively impact local foundries, especially SMIC [1]. 3. **Technological Advancements**: Continuous positive news regarding local equipment and semiconductor supply suggests that SMIC may produce chips at **7nm/5nm** using multi-patterning techniques [1]. 4. **EUV Machine Development**: There are reports of progress in self-supply of EUV machines, with trial production expected to start in the second half of 2025 [1]. 5. **Valuation of Hua Hong Semiconductor**: Target price set at **HK$45**, based on **1.6x 2026E BVPS**, reflecting an improving demand outlook and stable pricing [3]. 6. **Valuation of SMIC**: Target price set at **HK$53.0**, based on **2.4x 2026 P/B**, justified by sustainable momentum from US-China decoupling and gradual industry recovery [6]. 7. **Upside Risks for Hua Hong**: Potential for greater-than-expected demand in the semiconductor market and less capacity expansion by competitors [4]. 8. **Downside Risks for Hua Hong**: Risks include lower-than-expected demand and stronger capacity expansions by competitors [5]. 9. **Upside Risks for SMIC**: Better-than-expected margins from efficiency improvements and strong policy support could enhance profitability [7]. 10. **Downside Risks for SMIC**: Risks include heavy depreciation burdens affecting margins and weaker-than-expected demand impacting earnings [8]. Additional Important Information - The report emphasizes the importance of local developments in the semiconductor industry as a significant factor for investment decisions in SMIC and Hua Hong [1][3]. - The target prices for both companies reflect a bullish outlook based on anticipated market conditions and technological advancements [3][6]. - The report also highlights the potential conflicts of interest due to the firm's business relationships with the companies discussed [2].

Summary of Key Points from the Conference Call Industry Overview - The conference focused on the rapid development of China's AI and semiconductor localization efforts, particularly highlighted at the World AI Conference (WAIC) in Shanghai [1][5] - There is a strong demand for AI inference in China, with consumer-facing applications evolving beyond traditional chatbots [2] Core Company Insights - **Huawei**: - Unveiled the CloudMatrix 384 (CM384) server rack prototype, which is designed for AI large language model (LLM) training and competes with NVIDIA's offerings [3] - The CM384 integrates 384 Ascend 910C AI accelerators, delivering 215-307 PFLOPS of FP16 performance, surpassing NVIDIA's NVL72 [8][11] - Future plans include the next-generation CM384 A5, powered by Ascend 910D processors [8] - **Other Domestic AI Processors**: - Companies like MetaX, Moore Threads, and Alibaba T-Head are also making strides in AI processor development [4] - MetaX launched the C600 accelerator, fabricated using SMIC's 7nm process, supporting FP8 precision [8] - Moore Threads' AI processor enables LLM training at FP8 precision [8] Market Dynamics - The demand for AI inference is expected to grow, especially after the lifting of compute capacity restrictions [2] - Despite local advancements, Chinese AI developers still prefer NVIDIA's GPUs for training due to better software support [10] Semiconductor Equipment Trends - China's semiconductor equipment import value was $3.0 billion in June 2025, reflecting a 14% year-over-year increase [24] - The self-sufficiency ratio of China's semiconductor industry is projected to rise from 24% in 2024 to 30% by 2027, driven by advancements in local production capabilities [42][44] Stock Implications - Morgan Stanley maintains an Equal-weight rating on SMIC, noting that the launch of CM384 could enhance demand for SMIC's advanced nodes [10] - The performance of key Chinese semiconductor stocks has been strong, with SMIC and Hua Hong Semiconductor both seeing significant gains [29] Additional Insights - The CM384's architecture allows for pooled memory capacity, addressing constraints in LLM training [8] - The networking capabilities of CM384, while impressive, still lag behind NVIDIA's NVL72 in terms of speed [11] - The overall sentiment in the semiconductor market is positive, with expectations of stronger spending in the second half of the year [24] Conclusion - The conference highlighted significant advancements in China's AI and semiconductor sectors, with key players like Huawei leading the charge. The demand for AI inference is robust, and while local companies are making progress, they still face challenges in competing with established players like NVIDIA. The outlook for the semiconductor industry remains optimistic, with increasing self-sufficiency and investment opportunities.

Investment Rating - The report maintains an "Overweight" (OW) rating on Naura, AMEC, and ACMR, with revised target prices reflecting positive outlooks for these companies [6][37][55]. Core Insights - The outlook for China's wafer fab equipment (WFE) market remains strong, driven by better-than-expected demand from logic foundries and ongoing localization efforts [1][2]. - The total addressable market (TAM) forecast for China WFE has been raised from $36.6 billion (down 12% year-over-year) to $40.3 billion (down 3% year-over-year) for 2025, and from $35.1 billion (down 4% year-over-year) to $36.2 billion (down 10% year-over-year) for 2026 [3][9]. - China is expected to continue gaining market share in WFE, with approximately 25% of foundry capital expenditures allocated to domestic WFE in 2025, up from 20% in 2024 [4]. Market Demand and Supply Dynamics - Strong demand for logic foundries in China is anticipated in the second half of 2025, with expectations of increased spending related to AI applications [2][9]. - Despite concerns regarding oversupply in mature nodes, the report suggests that government initiatives may prioritize localization over economic rationale in the second half of 2025 [5]. - The report indicates that imports of semiconductor equipment into China may recover starting in July 2025, following a decline in early 2025 [21]. Company-Specific Developments - Naura has expanded its product portfolio, launching new ion implant equipment, and is expected to benefit from the increasing localization of semiconductor manufacturing in China [4][37]. - The report highlights that leading Chinese WFE players are likely to capture larger shares of the market due to their expanding product pipelines and advanced R&D capabilities [6][37]. - Naura's revenue growth is projected to be supported by increased capital expenditures from logic foundry and memory customers in 2025 [37][51]. Financial Projections - The report revises Naura's earnings estimates upward for 2025-2027, reflecting strong demand and market share gains [51][52]. - Naura's net sales are projected to increase from Rmb 41.88 billion in 2025 to Rmb 61.42 billion by 2027, with corresponding net income growth [63][66].

Core Insights - Arm Holdings (ARM) faces increasing risks of slower growth in China due to the country's shift towards RISC-V architecture, which contributed 19% of ARM's total sales in fiscal 2025, with revenues from China rising only 7.5% year over year [1][7] Group 1: Market Dynamics - China's ambition to localize its semiconductor ecosystem is driving the promotion of RISC-V as an alternative to Arm's proprietary models, offering cost advantages and design flexibility [2] - Major Chinese tech firms, including Alibaba Cloud, Huawei, Tencent, and ZTE, are backing RISC-V, which raises competitive pressure on ARM's presence in China [3][7] Group 2: Competitive Landscape - NVIDIA and AMD are closely monitoring China's shift to RISC-V, as it poses a threat to their market positions in AI hardware and server chips [4][5] - AMD's EPYC server chips directly compete with China's new Lingyu RISC-V server chip, indicating potential market share erosion for AMD if RISC-V adoption accelerates [5] Group 3: Financial Performance - ARM's stock has gained 18% year to date, outperforming the industry's 5% rally, but it trades at a forward price-to-sales ratio of 31.5, significantly higher than the industry's 8.1 [6][8] - The Zacks Consensus Estimate for ARM's earnings has been declining over the past 60 days, reflecting potential challenges ahead [10]

Investment Rating - The report maintains a positive outlook on selected Chinese semiconductor companies, particularly those focused on consumer electronics and mature semiconductor localization [1][4]. Core Insights - The US and China have announced a 90-day pause on tariffs, reducing US tariffs on Chinese imports from 145% to 30% and Chinese tariffs on US imports from 125% to 10%, which is viewed as a slight positive for the Chinese semiconductor sector [1][2]. - The tariff reprieve is expected to reduce demand uncertainties for consumer electronics in the second half of 2025, benefiting companies like Silan and CR Micro [1][3]. - China's commitment to suspend rare-earth export controls may negatively impact investor sentiment towards RF front-end vendors such as Maxscend, which were previously seen as beneficiaries due to their access to rare earth materials [3][4]. - The report emphasizes that China's mature semiconductor localization efforts will continue, with companies like SG Micro and Will Semi positioned to benefit from this trend amid supply uncertainties [4][5]. Summary by Sections - **Tariff Impact**: The 90-day tariff pause is expected to lower tariffs significantly, which could positively influence demand for consumer electronics and related semiconductor manufacturers [1][2]. - **Company Performance**: Companies with higher exposure to consumer electronics, such as Silan and CR Micro, are likely to benefit from the tariff changes, while RF front-end vendors may face challenges due to changes in rare-earth material export controls [3][4]. - **Localization Trends**: The report highlights the ongoing trend of semiconductor localization in China, with a focus on mature semiconductor technologies, indicating a robust market for companies like SG Micro and Will Semi [4][5]. - **Future Monitoring**: Upcoming events to watch include the US Section 232 investigation and potential new AI export restrictions, which could impact the semiconductor industry [5].

Investment Rating - The report maintains a "Buy" rating for several companies including Xiaomi, Cowell, DSBJ, AAC, Lens Tech, Will Semi, SG Micro, and Chroma ATE, indicating a positive outlook on their growth potential and market positioning [13][14][16]. Core Insights - The semiconductor and hardware sectors in China are experiencing a mixed performance, with some companies benefiting from AI-related demand and localization efforts, while others face challenges due to geopolitical risks and inventory management [1][2][3]. - The report highlights a recovery in consumer electronics driven by China subsidies and AI deployment, with smartphone shipments growing by 1.5% YoY and PC shipments up by 4.9% YoY in 1Q25 [6][7]. - Inventory levels for downstream hardware are generally healthy, with certain segments like CCL, TV, and Networking & Server showing higher than average days inventory outstanding (DIO), while others like LED and Optical Fiber are at lower levels [3][6]. Summary by Sections 4Q24/1Q25 Results Wrap - Among 37 tech hardware and semiconductor stocks, 19% of results beat expectations in 4Q24, while 20% did so in 1Q25, with notable performance from U.S.-exposed AI names and China subsidy-driven companies [2][17]. - The report downgraded BYDE to Neutral due to fair valuation concerns and priced-in growth expectations for 2025 [2]. Inventory Tracker - The inventory tracker indicates that DIO for downstream hardware segments like LED and Optical Fiber is below the 5-year average, while segments like CCL and TV are above average [3]. - Upstream semiconductor DIO shows a decline in several categories, with Processor DIO reaching a 3-year high, indicating a shift in demand dynamics [3]. Sector Views and Top Picks - DSBJ is expected to achieve a 30% earnings CAGR from 2023-2026, driven by content value increases and market share gains [13]. - Xiaomi is highlighted for its long-term growth potential in EVs and smartphones, with a target price of HK$73.5 based on a sum-of-the-parts valuation [14]. - Cowell is noted for its strong earnings visibility and expected share gains in the iPhone supply chain, with a target price of HK$27.0 [14]. - Lens Tech is anticipated to benefit from iPhone upgrades and new product rollouts, with a target price of Rmb25.0 [14]. Semiconductor Sector Insights - Chinese semiconductor makers are seeing improved inventory balances, with strong demand growth in domestic AI infrastructure and computing applications [16]. - Will Semi and SG Micro are positioned to benefit from localization trends and increasing demand for automotive components [16]. - Chroma ATE is expected to capture significant market share in AI-related orders, with a positive long-term outlook despite short-term market concerns [16].

Investment Rating - The report maintains a "Buy" rating for AccoTest and a "Hold" rating for SG Micro and Maxscend [4][8][56]. Core Insights - The latest import tariff regulations on US semiconductors are expected to create a supply shortage, price hikes, and import substitution, particularly benefiting domestic analog and RF markets [8][10]. - The localization trend in the semiconductor industry is anticipated to accelerate due to China-US tensions, enhancing the bargaining power of domestic companies [11][22]. - The report highlights that analog (over 20%) and RF (approximately 50%) segments will benefit significantly from higher tariffs on US suppliers, while memory and advanced logic categories are less affected [3][10]. Summary by Sections Company Ratings and Estimates - AccoTest is projected to have a target price of RMB 182.50, reflecting an 18% upside from its current price [5][56]. - SG Micro's target price is adjusted to RMB 100.60, indicating a 10% downside from its current price, maintaining a Hold rating due to tariff tensions [4][34]. - Maxscend's target price is revised to RMB 79.70, also maintaining a Hold rating, with a 4% downside from the current price [41][45]. Market Dynamics - The report indicates that the localization ratio for analog ICs was 24% in 2024, with expectations for further increases due to tariff impacts [11][22]. - Domestic suppliers are expected to gain market share in the RF segment, particularly in mid- to high-tier smartphone models, as tariffs incentivize localization [15][16]. - The report notes that while discrete and power semiconductors have achieved high localization rates, further upside in these areas is limited compared to analog and RF segments [22][24]. Financial Projections - SG Micro's revenue estimates for 2025 are increased by 2% to RMB 4,101 million, with net profit estimates raised by 7% to RMB 706 million [30][31]. - Maxscend's revenue estimates for 2025 are lowered by 2% to RMB 5,340 million, with net profit estimates reduced by 18% to RMB 551 million [41][44]. - AccoTest's revenue is projected to reach RMB 1,186 million in 2025, with a net profit of RMB 471 million [57].

Investment Rating - The report rates SG Micro as a "Buy" with a target price of Rmb115, reflecting a positive outlook for the company amid ongoing market dynamics [32][45]. Core Insights - The report identifies China's mature semiconductors, particularly analog, as defensive investments due to the recent 34% retaliatory tariff on US imports, which is expected to enhance local supply and reduce competition from US firms [1][3][14]. - SG Micro is highlighted as the top beneficiary of the tariff, with expectations of improved earnings and market share gains as US competitors face cost disadvantages [5][21]. - The report anticipates that the tariff will accelerate the localization of semiconductor supply in China, benefiting companies like SG Micro, Will Semi, and Maxscend [3][14][21]. Summary by Sections Market Overview - The US tariffs have limited direct impact on Chinese semiconductors, as most are shipped to ODM/EMS outside the US and are not subject to tariffs. However, there is an indirect effect on demand due to increased selling prices [2][11]. Company Analysis - SG Micro is projected to expand its market share as the cost advantage of Texas Instruments is eliminated by the tariff. The company is expected to benefit from an ongoing recovery in the analog segment and tariff protection against US competitors [4][5][21]. - Will Semi is also rated as a "Buy," with expectations of strong growth driven by its CMOS Image Sensors (CIS) business, particularly in the automotive sector [48][49]. - Maxscend is rated as a "Sell" due to concerns over rising investment costs and potential profitability pressures despite its leadership in the RFFE market [39][40]. Financial Projections - SG Micro's revenue forecasts for 2024E and 2025E have been adjusted to Rmb3,301 million and Rmb4,188 million respectively, reflecting a year-on-year growth of 26% and 27% [22]. - The report indicates that SG Micro's gross profit margin is expected to stabilize around 51.3% in 2025, with net profit projected to reach Rmb828 million [22][32]. Valuation - The target price for SG Micro is based on a forward P/E of 65x for 2025E EPS, justified by the anticipated recovery in the analog semiconductor market and reduced foreign competition due to tariffs [45][46].