In the wave of technology industry, lithography giant ASML has always been the leader, but the recently released financial report has poured cold water on this industry leader.

On April 17, 2024, ASML disclosed its first quarter financial report, but the story behind the numbers was deeply chilling.

The decline in revenue and profits is like a cold wind in the winter, making people shiver. In the first quarter of 2024, ASML achieved net sales of 5.29 billion euros. Although this number is huge, it dropped a full 21% year-on-year and only reached the midpoint of the company's previously forecast revenue range. Although the gross profit margin was 51%, slightly higher than the expected 48% to 49%, the net profit was only 1.224 billion euros, a sharp decline of 38% year-on-year.

All this points to a fact that cannot be ignored: ASML is facing serious challenges. Behind the challenge is the decrease in orders from mainland China customers and the reduction in orders from TSMC and Korean customers. The amount of new orders was only 3.6 billion euros, of which EUV orders accounted for 656 million euros. This figure is bleak compared to the same period last year.

Looking back on 2023, ASML has prospered due to the strong demand in the Chinese market. Annual sales reached 27.6 billion euros, and gross profit margin and net profit also reached 51.3% and 7.8 billion euros respectively. However, the good times did not last long. Entering 2024, the situation took a turn for the worse. The company originally expected revenue this year to be the same as in 2023, but the actual performance in the first quarter was far lower than the previous performance guidance of 5 billion to 5.5 billion euros.

01 The truth revealed in financial reports

In the global semiconductor industry chain, ASML has always been a leader in the field of lithography machines. However, the recently released financial report shows that this industry leader is facing unprecedented challenges. What kind of story is hidden behind the numbers?

In the first quarter, ASML achieved net sales of 5.290 billion euros, but upon closer analysis, 1.3 billion euros came from the installed management business, while net system sales were 3.966 billion euros. It is worth noting that EUV systems accounted for 46% of net system sales, an increase of 6 percentage points from the previous quarter. This may seem like a positive sign, but the truth behind it is not that simple.

From an application perspective, logic process manufacturers account for as much as 63% of sales, while storage manufacturers account for only 37%. This data reveals that memory chip manufacturers are becoming more and more conservative in equipment spending. In the shadow of overcapacity, they have to proceed with caution.

Let’s look at the sales volume of lithography systems. In the first quarter, 11 EUV systems were sold, while sales of ArFi and KrF systems fell by 30% and 50% respectively. What is even more worrying is that the amount of new orders was only 3.6 billion euros, far lower than the 9.2 billion euros in the same period last year. The change in this number undoubtedly casts a shadow on the future of ASML.

Faced with this dilemma, ASML executives tried to give an optimistic explanation. They pointed out that if the cumulative new orders in the fourth quarter of 2023 and the first quarter of 2024 are considered, there will be nearly 13 billion euros, which is a considerable number. However, such an explanation obviously cannot conceal the fact that ASML is facing a serious overcapacity problem.

Overcapacity means a decline in demand for lithography machines. ASML cannot deny this. They predict that demand for lithography machines will only grow after 2025. Prior to this, ASML's shipments were likely to be on an overall downward trend compared to 2023. The surge in shipments in 2023 is more due to the large number of deliveries in the Chinese market before the license expires.

The decline in performance of wafer foundries such as TSMC, Samsung, and SMIC has cast a shadow on ASML's prospects. These large manufacturers have slowed down the pace of procurement because overcapacity in advanced processes has become an indisputable fact. Even with the rise of AI chips, TSMC's 5nm process has been able to operate at full capacity, but this cannot change the overall overcapacity situation.

Against this background, the future of ASML is full of uncertainty. Can they survive this winter of overcapacity? Will the demand for photolithography machines increase in 2025?

In this regard, ASML President and CEO Peter Wennink said: "ASML expects net sales in the second quarter of 2024 to be 5.7 billion to 6.2 billion euros, with gross profit margins between 50% and 51%. Estimated R&D costs Sales and administrative expenses were approximately 1.07 billion euros, and sales and administrative expenses were approximately 295 million euros. As the semiconductor industry continues to recover from the downturn, our outlook for the full year of 2024 remains unchanged, and performance in the second half of the year is expected to be stronger than in the first half. . We regard 2024 as a year of adjustment and continue to invest in capacity improvement and technological advancement to prepare for the industry's cycle turning point."

However, the issues are currently unresolved. But one thing is certain, ASML is facing unprecedented challenges and pressure. They must find new breakthroughs and growth points to get out of the current predicament.

In fact, the answer has already been given in the financial report.

02 China remains the largest customer

Judging from the latest financial report, ASML's sales performance in the first quarter can almost be said to be a concentrated expression of "China dependence syndrome."

Sales in mainland China accounted for 49%, a 10 percentage point increase compared to the previous quarter. At the same time, the once main markets such as Taiwan and South Korea appear to be sluggish, with their proportions falling to only 6% and 19% respectively. This change, like a weather vane, clearly points out ASML's shift in focus in the global market layout.

Behind all this is the need for customers in mainland China to continuously expand production capacity. They continue to purchase products such as ArFi, which has become an important support for ASML’s performance. However, this high reliance on the single market also makes ASML’s future full of uncertainty.

In fact, ASML's close connection with the Chinese market was not achieved in a day. As early as after the tripartite agreement was signed, ASML insisted on shipping to China. Even after the agreement expired, it still worked hard to obtain a four-month license period and continued to supply 2000i and other models of lithography machines to the country. This persistence not only reflects ASML's emphasis on the Chinese market, but also highlights its helplessness and compromise in the layout of the global industrial chain.

However, the expiration of the license is like a wake-up call, reminding ASML of the delicate relationship between ASML and the Chinese market. As the license ended, ASML's revenue, profits and lithography machine shipments all declined in the first quarter.

This undoubtedly verifies ASML President Wen Ningke’s previous prediction: ASML will face huge challenges without the Chinese market.

The huge demand for lithography machines in the Chinese market is in sharp contrast to ASML's shipments. Although ASML has accelerated shipments to China in the past year and even delivered almost all prepaid lithography machine orders, according to three-party survey data, this still only meets half of China's domestic market demand.

This imbalance between supply and demand puts ASML in a dilemma: on the one hand, they are eager to meet the huge demand in the Chinese market; on the other hand, they are restricted by various export controls and cannot ship freely.

This situation has also made people begin to examine the development of China's local lithography machine industry. Authoritative institutions such as CITIC Securities believe that as domestic investment and support for the lithography machine industry chain continues to increase, the development of domestic high-end lithography machines, especially 14-28nm DUV lithography machines, is expected to rapidly achieve new breakthroughs.

This prediction undoubtedly puts great pressure on ASML, because once China's local lithography machine industry makes a breakthrough, ASML's position in the Chinese market will face severe challenges.

In such a complex market environment, ASML's future is full of uncertainty.

They predict that as much as 15% of sales in mainland China will be hampered by export controls this year. However, even in the face of such a severe situation, ASML Chief Financial Officer Roger Dason is still optimistic about the demand in the Chinese market. He believes demand from mainland China will remain "strong" for the rest of the year, despite the tough economic environment.

As an industry that fully enjoys the dividends of globalization, the last thing the chip industry needs is trade protectionism. However, the U.S. strategy has been extremely clear: from equipment to technology itself, the U.S. wants to contain China in all aspects involving the chip industry. , blocking China’s ability to obtain advanced chip manufacturing technology from the global industrial chain. Even at the cost of financial losses.

Asmai, who couldn't bear it, had already begun to "resist."

03 Asmai started to resist

Out of its own considerations, the United States has recently launched a new round of plans to suppress Chinese companies in the chip field.

According to Bloomberg, the U.S. government is pressuring allies such as the Netherlands, Germany, South Korea and Japan to further restrict China’s access to semiconductor technology. But the U.S. action met with resistance in some countries, especially the Netherlands and Japan, which reacted coolly and apparently did not want to take new measures that might harm the interests of manufacturers.

In this turmoil, ASML's attitude is particularly eye-catching. The company's leadership has made it clear on multiple occasions that the so-called pressure policy of the United States has had an adverse impact on the company's business. CEO Peter Wennink even emphasized that it is absolutely necessary for ASML to continue to gain market access in China.

Faced with pressure from the United States, Asmer did not choose to give in. Instead, they fought back with a tenacity.

Supervisory board chairman Niels Smedgaard bluntly said the company faced "damaging" and "unfortunate" restrictions on exporting chip manufacturing equipment to China. He warned that the restrictions could hurt ASML's R&D budget in the long term.

The dispute even sparked rumors that ASML might move out of the Netherlands. However, the Dutch government acted quickly and announced that it would invest 2.5 billion euros (approximately RMB 19.5 billion) to improve infrastructure and reduce corporate tax burdens, aiming to retain ASML. This move shows the Dutch government's importance and support for ASML.

Although the outcome of ASML's negotiations with the Dutch government is still unclear, many experts believe that ASML is more likely to ultimately stay in the Netherlands. Even if negotiations between the two parties break down or a new right-wing government comes to power, the location chosen by ASML for its new headquarters may still be in an EU country.

The recent visit to China by Dutch Prime Minister Mark Rutte is seen as a move to consolidate relations between the Netherlands and China.

Asmer's tough stance has brought some new opportunities to relations between the Netherlands and China. The Dutch government may develop alternative strategies to deal with U.S. pressure out of considerations of protecting the commercial interests of domestic companies. For example, measures such as allowing the export of specific models of products or extending the grace period before the ban bill takes effect to mitigate the adverse impact on ASML.

However, the United States has not given up further pressure. Alan Estevez, the U.S. Undersecretary of Commerce for Industry and Security, proposed that ASML be prohibited from providing maintenance and after-sales services for lithography equipment that has been sold to mainland China, especially when it comes to critical parts. Components, this is undoubtedly another major challenge for ASML.

But ASML is undeterred, with President and CEO Peter Wennink making clear: "I think based on the conclusions we have reached there is nothing that prevents us from servicing existing installed systems in China." The remarks demonstrated Asmai's firm stance and determination.

In fact, the prerequisite for the ability to "travel through the cycle" is that ASML continues to maintain its technological leadership in the field of lithography machines. After all, latecomers are likely to overtake the giants at certain key nodes of technological iteration, as ASML itself has done. Wennink said that pressing ahead is likely to make China "eventually learn to manufacture semiconductors that cannot be imported equipment".

To stay ahead, ASML must continue to double its research and development expenses, which requires ASML to have stable and predictable revenue.

This is Asmai's courage to "no longer have to endure".

Because if we don't resist, ASML will eventually lose not only a market, but also an era.

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