Trade disputes between world superpowers US and China have been going on since the days of the Trump Administration.
One arguably important area of the technology battle lies in semiconductor chips as they are critical in use cases such as smartphones, electric vehicles, and artificial intelligence (AI).
In this article, we examine how the recent flurry of activity in the semiconductor industry will impact our local players.
Micron ban and Nvidia’s rise
There were two noteworthy developments in the month of May.
The first is China imposing a ban on the sale of products from Micron Technology (NASDAQ: MU).
Given China’s dependence on foreign memory chip manufacturers, other memory chip makers such as Samsung Electronics (KRX: 005930) and SK Hynix (KRX: 000660) may stand to benefit as they backfill the chip shortage left behind by Micron.
The second development is Nvidia Corporation (NASDAQ: NVDA) becoming the first chipmaker to achieve a US$1 trillion market capitalisation.
Nvidia is extremely far ahead of its competitors, registering an 80% market share in the AI processor market historically with analysts forecasting this to reach 90% by next year.
Many technology powerhouses such as Microsoft Corporation (NASDAQ: MSFT) use Nvidia’s chips and more global names could potentially be dependent on the chipmaker as it rolls out newer applications.
With the spotlight on Nvidia, its chief executive Jensen Huang voiced his opposition to the chip war by claiming that export controls pose “enormous risks” to the US technology industry.
He subsequently emphasised the irreplaceable nature of the Chinese market.
Outside of these two impactful events, the semiconductor industry is forecasted to have a challenging 2023 due to inflation and depressed consumer spending.
In particular, Asia Pacific and Americas are expected to experience the steepest decline of -15.1% and -9.1%, year on year, respectively.
The silver lining is that the semiconductor market is projected to rebound strongly in 2024, led by the memory segment, which is right up Micron’s alley.
Asia Pacific and Americas stand to be the largest gainers, recovering by 10.7% and 17.7% in 2024 after experiencing a weak 2023.
Taken together, the above seems to have several implications for local semiconductor firms in Singapore.
To begin, domestic players with a larger proportion of semiconductor revenues are expected to deliver a stronger set of results in 2024.
Moreover, even though the Chinese market looks attractive, excessive exposure to the countries embroiled in the chip war (specifically US, China and arguably Taiwan) may hint at elevated business risks.
Those with outsized contracts in Asia Pacific and Americas, particularly in the memory chip segment, may brace themselves for a tumultuous 2023, followed by a robust 2024.
Within Singapore, there are four major semiconductor stocks listed on the Singapore Exchange (SGX: S68).
These include UMS Holdings (SGX: 558), Venture Corporation (SGX: V03), AEM Holdings (SGX: AWX), and Grand Venture Technology (SGX: JLB).
Each of them serves a slightly different market.
We take a closer look at their respective areas of focus to determine whether they stand to gain from the changes in the industry’s landscape, namely from the geographic and industry standpoints.
With the exception of Venture Corporation, the three other companies break down their customers by countries.
Among them, AEM looks to be the most diverse in terms of the countries it serves on top of being the least dependent on US and China as total revenues from these two markets sum up to 22%.
In contrast, Grand Venture derives the largest share of revenue from US and China at 29%, although it is more diversified across Malaysia and Singapore as compared to UMS Holdings which depends heavily on the Singapore market.
Even though Venture Corporation does not detail which other countries it serves apart from Singapore, the company mentioned that the majority of its operational sites are located within Singapore and Malaysia, serving over three quarters of revenues.
Of the four companies, UMS Holdings has the largest revenue contribution from the semiconductor segment at 87%.
The outlook seems bright for AEM Holdings, which lists fast-growing customer markets such as AI and automotive.
This suggests a larger, expanding addressable market as test spending increases.
In comparison, the remaining two companies have approximately half of their revenues coming from segments other than semiconductor.
For instance, Venture Corporation’s Technology Products & Solutions Group (TPS) focuses on biotechnology, constituting half of the company’s revenues.
Grand Venture Technology lists life sciences, electronics, aerospace, and medical among the segments that it serves.
In aggregate, these non-semiconductor segments make up almost half of its revenue.
Get Smart: A higher exposure to the semiconductor industry can be a double-edged sword
Being less reliant on the semiconductor segment is not necessarily a bad thing.
While it does imply that the companies may miss out on longer-term uptrends associated with the semiconductor space, in the shorter term, it does mean that they are not as vulnerable to geopolitical risk surrounding the ongoing chip war.
It is further important to note that while these four companies are involved in the semiconductor industry, a healthy share of their business is also diversified into other areas such as precision engineering, assembly, and testing.
The impact of the chip war is debatably less direct on them as opposed to chipmakers such as Soitec (Euronext: SOI), Applied Materials (NASDAQ: AMAT), or GlobalFoundries (NASDAQ: GFS).
These three companies had increased their plant capacities by investing anywhere between US$430 million to US$4 billion in Singapore.
Their aim is to beef up supply chain diversification in response to the US-China chip rivalry.
Nonetheless, the chip war will affect the four SGX-listed entities to varying extents.
Investors casting a watchful eye on them will certainly find that keeping abreast with the latest semiconductor happenings continues to remain highly relevant.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.
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