Source: Content from Nikkei Chinese website

Japan's semiconductor manufacturing equipment stocks are recovering slowly. On October 11, the closing prices of Tokyo Electron (TEL) and SCREEN Holdings fell nearly 30% from the end of June, and DISCO fell nearly 40%, which is in sharp contrast to the Nikkei Average, which rebounded to nearly 40,000 points after the sharp drop in August. The uncertainty of the Chinese market, which purchases more than 40% of Japan's semiconductor equipment, has become an obstacle to the rise of semiconductor equipment stocks.

In February, Goldman Sachs Securities named seven outstanding Japanese stocks "Seven Samurai" based on the movie directed by Japanese director Akira Kurosawa, of which four stocks are semiconductor equipment stocks. It can be seen that the stocks of Tokyo Electron, DISCO, SCREEN and Advantest have attracted widespread attention from overseas investors.

However, the stock prices of these four companies, which have been leading the Japanese stock market, turned to decline in mid-July. The reason is that there are reports that the Biden administration of the United States will further strictly restrict companies from transferring semiconductor technology to China. On July 17, Tokyo Electron's stock price fell 7.4% from the previous day, SCREEN fell 6.4%, DISCO fell 4.4%, and Advantest fell 2.5%.

01 Japanese semiconductor data analysis

This is also a proof of the deepening dependence of Japan's semiconductor equipment industry on the Chinese market.

According to data compiled by the Semiconductor Equipment Association of Japan (SEAJ), China accounted for 46% of Japan's equipment sales from January to June 2024, significantly higher than 25% in the same period last year. China, which accounts for about 5% of the global semiconductor manufacturing share, is the buyer of nearly half of Japan's semiconductor equipment. It far exceeds South Korea (sales share of 18%) and Taiwan (same as above, 12%), which are "regular customers", forming a situation where equipment orders are influenced by the Chinese mainland market.

In fact, from the sales ratio of Tokyo Electron in various regions from April to June 2024, China accounted for 50%. This ratio is 51% for SCREEN, 32% for DISCO, and 26% for Advantest. Looking at the situation of overseas peers, the largest company ASML in the Netherlands has a mainland China ratio of 49%, and the second-ranked Applied Materials (AMAT) in the United States has a ratio of 32%.

02 Judging from the stock price

Judging from the stock price trend since August, only Advantest's stock price has rebounded on the back of the good earnings expectations announced on July 31. The company's test equipment has advantages in semiconductors for artificial intelligence (AI), and a high proportion of sales to NVIDIA in the United States has also supported Advantest's stock price.

As the US government considers strengthening restrictions on China, will China's semiconductor investment continue in the future?

SCREEN Executive Director Masato Goto said: "Chinese manufacturers may have purchased more equipment than actual demand, and the current 'special demand in China' may subside in the future."

JPMorgan Securities' Mio Kano said: "The trend of the Chinese market depends on the US restrictions, and performance will be greatly affected. The wait-and-see sentiment in the market continues."

The United States has adopted a number of rules to restrict China's semiconductor investment.

In addition to prohibiting China from introducing semiconductor equipment with processing accuracy exceeding a certain level, the United States has also included Chinese companies with security risks in the "Entity List" and prohibited them from trading with American companies and their allies. In addition, the United States has also restricted South Korean and Taiwanese companies that have set up factories in mainland China from making additional investments in mainland China on the condition of subsidies.

Due to these restrictions by the US government, leading Chinese companies are unable to obtain cutting-edge equipment from the United States, Japan and Europe.

China's main buyers are mostly emerging semiconductor manufacturers financially supported by local governments. Semiconductor factories across China have purchased a large number of previous-generation equipment. Some of these companies have begun to order equipment beyond actual demand as they see the United States tightening restrictions.

The risk of China's over-ordering and the risk of the United States tightening restrictions - these two risks are becoming the main factors for the decline of semiconductor equipment stocks.

On the other hand, in the medium and long term, companies that become competitors to equipment manufacturers such as Japan may also be cultivated in China. The reason is that the Chinese government regards the competition with the United States for semiconductor technology dominance as a protracted war and is cultivating powerful equipment and material manufacturers.

"If we don't consider the yield rate, China may be able to produce high-end equipment by the 2030s," said Ruiyu Zeng, senior director of SEMI, an association for semiconductor equipment industry. Kazunori Tsukada, executive director of KOKUSAI ELECTRIC, warned that "with strong government support, competitors may improve their technology faster than expected."

Semiconductor equipment stocks have always been affected by changes in the investment policies of the "three semiconductor giants" of Intel, Samsung Electronics and TSMC. Now, China's investment trends have become the biggest focus.

It is not clear how much the new US government, which will take office in January 2025, will take to restrict China. However, few industry insiders believe that the existing restrictions will be significantly relaxed. The situation in which semiconductor equipment stocks are affected by the market trends in China will continue.

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