China’s semiconductor stocks showing some signs of immunity as coronavirus rips through the rest of

Date: 2020-04-17
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Workers in dustproof clothing conduct operations at an Semiconductor Manufacturing International Corporation (SMIC) plant in Beijing. Photo: Imagine China

The coronavirus pandemic has torn apart businesses and supply chains across the globe. But stock analysts say one sector is showing some signs of immunity: Chinese semiconductor manufacturers.

The Chinese makers of the tiny data-processing brains used in everything from laptops to cellphones and washing machines are getting a boost from surging demand at home, as domestic manufacturers turn to them to replace products they normally get from virus-stricken suppliers in the US and Europe.

Because China appears for now to have successfully beaten back the virus, most of its factories are already firing back up. While the rest of the world is under siege, leading to uncertain foreign demand, China’s domestic semiconductor makers are getting a major boost from Huawei. The Chinese tech giant began sourcing more of its semiconductor needs back home amid blacklisting by the US, which claims its products can be used for spying – a charge Huawei denies.

Meanwhile, the Made in China 2025 has been additional rocket fuel. Officials want the semiconductor industry to reach US$305 billion in output by 2030, and meet 80 per cent of domestic demand. Estimates put that ratio at between 10 per cent to a third currently.

“The whole technology sector will benefit from the deep push to replace imported products with China-made ones, and the semiconductor industry will be the biggest beneficiary,” said Chen Ping, fund manager at HSBC Jintrust Fund Management. This upwards cycle could last for five years to a decade, he added.

In a positive sign, several top Chinese semiconductor manufacturers recently lifted their revenue expectations for the first quarter. While leading players have climbed from their share price fall caused by the outbreak, most of them still offer strong run-ups for investors over the coming year, analysts say.

Earlier concerns about weakening export demand are fading in the market, and investors are turning optimistic that broadening quarantine measures and dropping production capacity in Europe and the US will lead to orders being shifted to China, Chen said.

“Gains in market shares by mainland companies may cushion the decline in global aggregate demand,” he said.

Tianfeng Securities recommends companies like Semiconductor Manufacturing International Corporation (SMIC), listed in Hong Kong, and GigaDevice Semiconductor and Naura Technology Group, Chinese-listed companies that trade on the Stock Connect trading link between the city and mainland China.

“Semiconductor stocks will probably have a rebound in April because of resilient first-quarter results, loose liquidity and a potential inflection point of the global pandemic,” said Tianfeng analyst Pan Jian.

Despite the coronavirus, orders were still ample in the upstream supply-side of China’s semiconductor sector, Great Wall Securities analyst Zou Lanlan said in a report published last week.

“We are hopeful the industry will be able to meet the high expectations for the first-quarter earnings and achieve significant growth. In addition, the industry had a low earnings base in the first half of 2019, which was at its lowest point in nearly a decade,” Zou said.

The brokerage recommends mainland-listed stocks including Will Semiconductor, China Wafer Level CSP, and Tianshui Huatian Technology, for their advanced technology and ample order volume. (The three stocks trade on the Stock Connect.)

To be sure, there is some disagreement about whether the sector is destined to outperform.

Notably, SMIC, has more “sell” than “buy” ratings from analysts tracked by Bloomberg, as they worry its upbeat earnings forecast mainly reflected government subsidies while it is not investing enough in research and development. Last week, SMIC, which generates two-thirds of its revenue from its mainland China factories, raised its revenue growth forecast to 6 per cent to 8 per cent in the first quarter, from zero per cent to 2 per cent previously.

“The Chinese would like to localise the semiconductor supply, so that is why they have a quite rosy picture right now. But I would not buy them because I prefer buying those US counterparts,” said Alex Wong, director of asset management at Ample Capital. “The manufacturers still lag behind in technology level. This is not a very sure thing that they can catch up or not because they lag behind quite seriously,” he said.

But, against the backdrop of a global slump in demand, Guosen Securities analysts led by He Lizhong say Chinese chip companies are emerging as the winner.

“We expect Chinese chip designing firms will try their best to shift their manufacturing orders back to China, and SMIC is capable of shouldering the rise in order based on its production capacity and technology,” the analysts said.

SMIC shares have risen 14 per cent this month, after tumbling by 19 per cent in March.

Apart from SMIC, several China-listed chip makers have also released upbeat estimates about their business in the first quarter.

Maxscend Microelectronics last week predicted its net profit will jump as much as 266 per cent from the same period last year, citing higher demand for China-made parts in replacement of imported ones. Shares of Maxscend have surged 17 per cent so far this month, after plunging by 27 per cent in March. (This stock does not trade on the Stock Connect.)

Zhejiang Jingsheng Mechanical & Electrical Company said it expects its first-quarter profit to rise by as much as 10 per cent, as it managed to maintain production while taking measures to prevent the spread of the coronavirus.

Zhejiang Jingsheng has gained 5 per cent since the beginning of April, on the back of a brutal 19 per cent loss last month.

The encouraging result “was driven by Huawei’s localisation efforts because it cannot buy 5G-related components from US companies any more,” said Edison Lee, head of telecom and telecom equipment research at Jefferies. The US Commerce Department placed telecom and smartphone giant Huawei Technologies under an export ban last year, as its trade war with China escalated.

Maxscend provides switches and tuners for mobile phones and is an important supplier to all major handset makers, including Huawei, Lee said. Meanwhile, SMIC’s advanced chip manufacturing technology known as 14nm FineFET will attract more Chinese customers in addition to Huawei, covering products from handsets to Internet of Things devices and personal computers, he said.

The semiconductor firms were able to resume production quickly despite the impact of the deadly pandemic, because the manufacturing process is highly automated, Lee said.

A gauge of Chinese technology companies on the CSI 300 Index has risen 6.3 per cent this year, compared with an 13 per cent loss on the Philadelphia Semiconductor Index of the biggest makers trading in the US, including Intel Corporation and Qualcomm Inc.

But Lee said investors should still be cautious.

“There is some concern that if the end demand for products such as consumer electronics and handsets will remain weak owing to a global economic recession, there could be order cuts going into [the second and third quarters of 2020],” he said.


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