The profit window appears, the chip factory is going to place a big bet

1，Low budget for 2023

According to TrendForce statistics, in the first three quarters of 2023, the capacity utilization performance of each wafer foundry is not ideal, and the annual output value is reduced by about 4% year-on-year. As a result, wafer foundries have reduced capital expenditures for equipment procurement in 2023, and the rate of capacity expansion has slowed down. In the case of TSMC, the foundry leader lowered its full-year capital expenditure forecast in the second quarter of 2023, and again in the second half of the year, leaving its full-year expenditure at about $30 billion, down from $36.3 billion in 2022, which is the company's first annual capital expenditure decline in nearly eight years. In terms of plant expansion, TSMC's expansion projects in Kaohsiung, Nanke, Zhongke and Zhuke have slowed down and their production capacity has been redeployed. The original plan was to build two new plants in Kaohsiung, including 7nm and 28nm process production lines, but the 7nm plant in Kaohsiung was suspended due to weak demand in the smartphone and PC markets, and the relevant mechanical and electrical engineering specifications were postponed for one year, and the clean room and installation operations were subsequently postponed. In addition, 3nm has also changed from fast forward mode to slow expansion mode. Fab 18 Plant P7, originally scheduled for mass production in 2023, has been extended to 2024. Samsung advanced process customers below 7nm Qualcomm, Nvidia and other flagship new products transfer orders, there is no equivalent volume of new customers to fill the capacity, resulting in Samsung 2023 annual advanced process capacity utilization at a low of about 60%. Wang Shi, general manager of UMC, said that in 2023, as customers continued to digest inventory, UMC's business was affected by weak wafer demand, and wafer shipments fell 17.5% quarter-on-quarter in the first quarter, and capacity utilization dropped to 70%. In the second quarter, wafer shipments were flat as overall demand remained subdued and customers continued to adjust inventory. Throughout the year, UMC has adopted strict cost control measures and postponed some capital expenditures as much as possible to ensure profitability. In 2023, GlobalFoundries cut more than 800 jobs, or 5.3 percent of the company's 15,000 employees worldwide. As the global semiconductor industry was in a downward cycle, GF began to reduce capital expenditures and slow down the expansion process.

2，The first half of 2024 will see the light

In the fourth quarter of 2023, the situation began to improve, especially Huawei released a new flagship mobile phone, which set off a wave of purchases, which stimulated all aspects of the semiconductor industry chain, coupled with the hot AI server and related chips, at that time, the industry generally believed that in 2024, the capital expenditure of the electronic semiconductor industry will be significantly increased. Industry development will shift to an upward cycle. According to IDC, in the first quarter of 2024, global PC shipments increased 1.5% over the first quarter of 2023, the first positive year-over-year growth since the fourth quarter of 2021. The smartphone market rebounded earlier, turning positive in the fourth quarter of 2023 with an increase of 8.5%, the first positive year-over-year growth since the second quarter of 2021, and continued to grow in the first quarter of 2024 with a 7.8% increase. Despite the positive trend in the first quarter of 2024, IDC expects the PC and smartphone markets to grow modestly for the full year of 2024, at 2.4% and 2.8%, respectively. The second half of 2024 will be better than the first half of the year, and the market performance in the first half of the year is still somewhat weak, resulting in not obvious growth throughout the year.

The first half of 2024 has just passed, from the development of the industry, and the end of 2023 forecast is basically consistent, but the market is still some oscillation, more like a transition period, the second half of the year, the global overall market demand will pick up more obvious, the overall growth of chip sales, will drive the fab capacity utilization.

3，Foundry and memory chips lead the way

From the current development situation, among the various plates of the global chip manufacturing industry, the signs of recovery of wafer foundry and memory chips are the most obvious and the most representative. First of all, the foundry foundry industry report of jpmorgan Chase (small MO) Securities pointed out that the foundry destocking will end. Gokul Hariharan, director of the Research Department of Small MoTaiwan, analyzed that the first quarter has reached the bottom, as AI demand continues to rise, non-AI demand has gradually recovered, urgent orders have also begun to appear, large-size panel driver IC (LDDIC), power management IC (PMIC), WiFi 5 and WiFi 6 chips and other demands have heated up. It shows that the wafer foundry industry is beginning to turn to recovery. In terms of non-AI demand, vertical markets such as consumer, communications, and computing bottomed out in the first quarter of this year, but automotive and industrial demand may not recover until late 2024 or early 2025.

However, SEMI admitted that at present, the capacity utilization rate of wafer foundries is still low, especially mature processes, and there is no sign of recovery in the first half of 2024. Fab capex is highly correlated with capacity utilization, and overall, spending fell 17% year-over-year in the fourth quarter of 2023, also fell 11% in the first quarter of 2024, and is expected to return to growth in the second quarter, but only marginally by 0.7%. Memory-related capital expenditures are expected to grow 8 percent, faster than in the non-memory segment. According to TrendForce statistics, in the second quarter of the past, there was no significant change in the inventory level of memory suppliers and buyers, and in the third quarter, smart phone and CSP manufacturers still have space to replenish inventory, and will enter the production season. Smartphones and servers are expected to drive further growth in memory shipments. In the third quarter, the recovery of demand for general-purpose servers, coupled with the further increase in the production proportion of HBM by memory suppliers, is expected to continue to increase PC DRAM prices, with an average price increase of 3% to 8%. General-purpose servers benefited from peak season stock demand, resulting in DDR5 contract price increases of 8% to 13%. In terms of NAND Flash, in the third quarter, enterprises will continue to invest in server construction, SSD will benefit from the expansion of AI applications, and related orders will continue to grow. However, the consumer electronics market demand continues to be sluggish, and the original factory production in the second half of the year is positive, it is expected that the proportion of NAND Flash oversupply will rise to 2.3%, and the average price increase of NAND Flash will converge to a quarterly increase of 5%-10%. Looking at the price trend of NAND Flash this year, due to the control of the original factory in the first half of the year, the price accelerated rebound, but with the major manufacturers began to expand production in the second half of the year, but the retail market has not recovered, wafer spot prices will fall.

The above are digital, logic chips, in contrast, the analog chip market is much worse, which is mainly caused by the industrial and automotive application market, as mentioned above, I am afraid to recover until the end of this year. The performance of Texas Instruments, the leader in analog chips, provides one indication of the state of the market. In the first quarter of 2024, Texas Instruments' revenue decreased 16% year-over-year (10% quarter-over-quarter) to $3.661 billion, and revenue decreased 34% year-over-year. Texas Instruments has the longest customer list and most diverse product categories in the chip industry, making it a barometer for the entire analog chip industry.

4，In preparation for 2025, major fabs increase capital expenditures

At present, the semiconductor industry has entered a new upward cycle, and the major fabs have finally come to a new growth window, and have begun to increase capital expenditure and expand production capacity, typical representatives are TSMC, Samsung, SK Hynix, Micron, as well as SMIC and Huahong Semiconductor. Due to the continuous increase in the development and production of the most advanced process such as 2nm, TSMC said that capital expenditure in 2025 will reach US $32 billion to US $36 billion (US $28 billion to US $32 billion in 2024), the second highest in the past year, an annual increase of 12.5% to 14.3%. It is reported that customer demand for TSMC's 2nm process capacity is stronger than expected, in addition to Apple previously took the lead in contracting TSMC's 2nm first production capacity, non-Apple application customers are also actively planning to adopt AI due to its booming development.

Therefore, TSMC continues to promote the 2025 2nm mass production target, previously, the 2nm production line of Baoshan First plant moved equipment in April 2024, Baoshan Second Plant is also following up, Kaohsiung plant plans to expand 2nm production capacity, the fastest in the third quarter of 2025 to move into related equipment, Nanke will also join the production. The relevant capacity will continue to be expanded from the end of 2025 to 2026. South Korea's top two companies, Samsung and SK Hynix, are also raising funds to significantly expand production by 2025. On July 1, according to the Korea Economic Daily News, Samsung Electronics and SK Hynix are considering applying for loans from the Korea Development Bank to further promote their business expansion. According to reports, Samsung Electronics plans to apply for a loan amount of up to 5 trillion won, SK Hynix is targeting 3 trillion won, equivalent to 26.38 billion yuan and 15.828 billion yuan. It is reported that the main purpose of SK Hynix's loan is to fill the gap between its huge investment plan and existing capital reserves. The company plans to invest more than 120 trillion won in Yongin Semiconductor Cluster in Gyeonggi Province, and $4 billion to build an AI server memory chip packaging plant in Indiana. However, its cash reserves stood at just Won8.2tn at the end of the first quarter. SK Hynix will begin construction of its massive fab complex called the Longin Semiconductor Cluster in March 2025, which will consist of four separate fabs, and once completed, it will likely be the largest fab complex in the world. Micron's capital expenditure plan for fiscal 2024 is approximately $8 billion, and in the fourth quarter of fiscal 2024, the company will spend approximately $3 billion on fab construction, new fab equipment, and various expansions and upgrades. In fiscal 2025, Micron plans to significantly increase capital expenditures, targeting about 30% of revenue, totaling approximately $12 billion, to support the renewal of various technologies and facilities, and the company's significantly increased spending in fiscal 2025 will be used to build new fabs in Idaho and New York, while funding the assembly and testing of high bandwidth memory (HBM). As well as the construction of manufacturing and back-end facilities, it also includes investments in technology transformation. Micron adopted EUV technology later than Samsung and SK Hynix, and increased investment is also necessary to achieve mass production of EUV DRAM by 2025. Micron President and CEO Sanjay Mehrotra said that although Micron is slightly behind in the use of EUV lithography equipment, the trial production of 1γ process DRAM chips using EUV is progressing well and is on track to achieve mass production in 2025. Micron has high hopes for 1γ process DRAM, hoping to make the industry's cheaper and more energy-efficient memory chips. Pilot production is currently underway at Micron's plant in Hiroshima, Japan, where the first DRAM using the 1γ process will also be manufactured as part of the pilot production program. Intel plans to boost capital spending by 2% to $26.2 billion in 2024, as the company increases capacity for contract customers and in-house products.

Let's take a look at the performance of Chinese mainland wafer foundry Duo Xiong

In the first quarter of 2024, SMIC's sales revenue was $1.75 billion, an increase of 4.3% quarter-on-quarter and 19.7% year-on-year, and its monthly production capacity increased from 805,500 8-inch wafers in the fourth quarter of 2023 to about 814,500 wafers, and its capacity utilization rate increased to 80.8%. During the quarter, SMIC's capital expenditure was 15.873 billion yuan, compared with 16.708 billion yuan in the previous quarter. Looking ahead to the second quarter, SMIC's planned capital expenditure was flat. In the first quarter of 2024, Huahong Semiconductor's sales revenue was $460 million, down from $631 million in the same period last year, but a 1% increase compared to $455 million in the previous quarter. Huahong Semiconductor's net profit attributable to shareholders of the parent company was $31.8 million, down 79.1% from the same period last year. The company attributed the drop in net profit to a decline in average selling prices. During the quarter, Huahong Semiconductor spent $302.6 million on capital expenditures, compared to $331 million last quarter. Overall, in the next year or so, the capital expenditure of large factories, especially those based on advanced processes, will generally increase, while the capital expenditure of fabs based on mature processes will not change much.

5，A rising tide of semiconductor equipment lifts all boats