Analysis of this semiconductor equipment sector(Applied Materials, SMIC, Micron Technology, Lam Research)
On Sept. 26 there were media reports that the U.S. Commerce Department has added China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC) (OTCQX:SMICY), to its entity list, after it determined there’s an “unacceptable risk” that equipment SMIC received could be used for military purposes
U.S. firms would now need a license to export certain products to China’s largest chipmaker because of an “unacceptable risk” that the goods could be used for military purposes.
My initial response was that I hoped this wasn’t in response to my July 17, 2020, Deep Dive Semiconductor article entitled “China: Who Needs TSMC When They Have SMIC,” noting that:
“Because of the U.S. sanctions against Huawei (and its chip subsidiary HiSilicon), TSMC will no longer be manufacturing Huawei’s Kirin modems, which have been historically manufacturing Huawei’s HiSilicon chips, ranging anywhere from its 14nm, 12nm or even 7 or 5nm chipsets.”
On Sept. 29, Micron Technology (MU) reported FQ4 revenue that grew 24% YoY to $6.06B and earnings that nearly doubled $0.56 to $1.08.
For NAND, Micron expects CY20 bit supplies well below industry demand (mid-20% range), CY21 supplies somewhat below the industry’s 30% forecast, and long-term bit supply CAGR in-line with the industry’s 30% demand. FY21 cost reductions will be in the low-to-mid-teens percent range.
In addition, Micron halted shipments to Huawei on Sept. 14 and expects to offset the impact by the end of Q2 FY21.
The sanctions will prevent global equipment suppliers from shipping equipment to SMIC in China. SMIC had been pre-emptive by buying equipment on the secondary market, such as an ASML stepper, and importing new equipment prior to a Sept. 15 deadline.
Table 1 shows that SMIC, which has a 45% share of 300mm foundry wafer capacity in China, had planned on increasing its capex spend 258.3% in 2020. It also shows how dominant SMIC planned to be in capex spending for equipment to make chips for Huawei, bypassing an earlier U.S. trade restriction.
For 2020 and 2021, SMIC had planned to spend $10 billion on equipment. Because of its pre-emptive buying spree, the company already imported more than $2 billion in equipment through August 2020. That leaves $8 billion in equipment that won’t be sold by equipment companies such as Lam Research (LRCX) and Applied Materials (AMAT).
Additional details on SMIC and its technical capabilities can be found in my July 17, 2020, Seeking Alpha article entitled “China: Who Needs TSMC When They Have SMIC?“
In connection with U.S. sanctions on SMIC and Huawei, China is playing tit-for-tat and refusing to approve the acquisition of Hitachi Kokusai by Applied Materials. I had discussed this previously in a May 17, 2020, Seeking Alpha article entitled “Applied Materials Could Be The First U.S. Victim China Sanctions.” This is the second time China refused to agree to the acquisition, and it has been extended for another 30 days.
As I said in that article, AMAT has been losing market share to competitors over the past five years, and needs this acquisition, as its organic growth is not sufficient to maintain share in the semiconductor equipment space.
The underlying problem with Micron and its memory peers, besides the restrictions imposed to prevent memory shipments to Huawei, is oversupply. This has resulted in high inventory overhang and ASPs that continue to drop.
I noted in my Aug. 24, 2020, Seeking Alpha article entitled “Micron Technology’s Troubles: It’s The Company Not The Economy:”
“In 2019, Samsung (OTC:SSNLF) cut capex 31%, SK cut 13%, and MU raised +3%. But the capex problem stems to 2018, when Samsung’s YoY capex spend was +77%, SK’s spend was +76%, and MU’s spend was +41%.”
Maybe Micron’s CEO Sanjay Mehrotra read my article, because he used the expressions “discipline” and “capex” in the same sentence 10 times, yes 10!
Chart 2 shows plans for capex spend for memory companies for 2019-2021. As the memory industry began dropping in 2018, companies cut capex spend to the tune of -26.8%. Recognizing the longer-than-expected recession in memory chip demand through 2019 and 1H 2020, memory companies plan to cut capex an additional 5.6% in 2020.
According to our report entitled Global Semiconductor Equipment: Markets, Market Share, Market Forecasts, total semiconductor WFE (wafer front end) revenues were $51,740 million in 2019, down 3.8% from 2018.
Table 3 shows that of the $21.3 billion in memory WFE equipment sold in 2019, Applied Materials held a 38% share of DRAM sales and Lam Research held a 42% share of NAND sales.
The memory and semi cap industry seemed to be recovering from the negative impact of COVID-19 despite a severe global recession. In the past week, however, investors learned that the U.S. Commerce Department issued sanctions against SMIC, China’s largest foundry making chips for Huawei.
We also learned that the specter of Huawei is still impacting the memory market, that has been battered with oversupply, inventory overhang, and dropping ASPs. Memory companies hopefully realized (possibly through my writings) that extensive capex spend in 2018 was a catalyst for the problems the industry is still feeling.
Based on these two disclosures, equipment imported to SMIC will be stopped. It could have resulted in $10 billion in lost revenues for equipment suppliers had it not been partially spared by a buying spree by SMIC of late.
Capex reductions in 2020 will impact equipment sales, with only an 8% increase in capex spend in 2021.
Applied Materials and Lam Research will be impacted most. Lam is one of the larger suppliers to SMIC and the largest supplier of equipment for NAND production. Applied Materials is the largest supplier of equipment for DRAM production.
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