China Merchants Electronics: the semiconductor boom is driven by short supply and demand, and the closed test factory is expected to be the first to benefit.

In the second half of 20 years, the semiconductor industry showed a shortage of goods and rising prices, with 8-inch wafer factories full of capacity, especially in December, when contract manufacturing, design and closed testing companies issued product adjustment notices one after another, driving the industry up in short supply:

1. The demand side continues to warm up. 1) after the epidemic, the upgrading of new products such as automobiles has accelerated and sales have recovered, the demand for terminals such as PC/NB has not decreased, and the demand for servers has picked up, which has gradually warmed up the industry demand. 2) Huawei urgently pulled goods before the ban took effect and the supply of chips was cut off, rather than the Huawei camp strategically increased the upstream stock volume to increase its share, which led to the increase of industry demand. 3) Apple has continued to sell well since the launch of the new 5G phone, and its overall product innovation has been further strengthened, driving the demand for semiconductors in areas such as smartphones and wearables.

2. Channel inventory is at a low level, and the warming of demand drives inventory replenishment. As a result of the epidemic, the inventory of designer / IDM manufacturers is at a low level. As the demand picks up, the industrial chain prepares goods actively, the inventory turnover of designer / IDM manufacturers and channel vendors is accelerated, and the industry as a whole is in a new replenishment cycle.

3. Supply is limited and production capacity continues to be tight. Due to the downward period of the industry over the past 18 years, and the high intensity and threshold of capital expenditure of foundry foundry, the production of 8-inch factories has been suspended in the past few years, and the number of second-hand idle equipment is also limited, resulting in limited production expansion of 8-inch wafers. Since the second half of 2020, with the overall rebound in demand, the phenomenon of capacity shortage in foundry has become prominent, while the short-term shutdown of the semiconductor supply chain caused by Fukushima Earthquake in Japan and Texas Blizzard in the United States since February 2021 has led to a short-term shutdown of the semiconductor supply chain. the supply-side tension in the industry may be further intensified.

4. The positive changes in price also confirm the current contradiction between supply and demand. Since 20Q4, the prices of products of design, contract manufacturing and closed testing companies have all increased, and the delivery time of products has also been lengthened. Meguiar also guides the upward trend of DRAM prices.

5. In terms of sales, global semiconductor sales maintained positive growth in November, and the industry boom was confirmed.

Industry chain tracking: each subdivision shows an upward trend, and the upstream boom is the best.

1. In terms of design / IDM, with the rising cost of upstream wafers and closed testing, most design / IDM manufacturers notify customers of product increases in December, while the monthly revenue of Taiwan stock design plate remains high, verifying the high prosperity of the industry; at the same time, the delivery time of some products has been lengthened, paying attention to the deferred effect of the quarterly performance of design companies.

2. In terms of foundry, the industry may gradually change from a shortage of structural 8-inch wafer capacity to a tense situation on the whole production line. For example, in December, UMC raised the contract manufacturing price of 12-inch fab. We believe that the increase in foundry prices has led to the shift of foundry performance from capacity utilization to profitability.

3. In terms of closed testing, closed testing links, including Sunlight and other company closed testing products, have increased prices. From the perspective of 20Q4 performance, the demand boom is driving the semiconductor closed testing link to improve capacity utilization and profitability.

4. In terms of equipment and materials, North American semiconductor equipment shipments have maintained a high growth rate since the beginning of 20 years, and the guidance on capital expenditure of fabs has been positive. The latest January shipments have reached US $3.04 billion, compared with + 13.4%, and + 29.9% compared with the same period last year, setting an all-time high. We believe that in the future, due to the expansion of mainland wafer factories, domestic equipment and materials companies have a wide space for import substitution.

5. In terms of EDA and IP, demand for semiconductors such as AI, HPC, cloud computing, 5G and electric vehicles drives up the demand for EDA/IP.

Investment advice:

Since January, leading overseas semiconductor companies have successively announced their performance and industry outlook for 2021, giving generally optimistic guidance. At the same time, we have tracked the monthly operating data of Taiwan semiconductor companies. The industry has continued to enjoy a high level of prosperity since 20Q4. The capacity utilization rate of contract manufacturing, closed testing and other enterprises is still running at a high level, demand continues to pick up, supply expansion is limited, and supply and demand resonance drives the industry upwards. The current gap between supply and demand has given rise to two problems: first, the price of most semiconductor products has risen; Second, the wafer production capacity is limited, the demand can not be met, resulting in the semiconductor industry has a priceless situation.

Based on the above two points, we believe that in the short term, foundry and closed test plants may be the first to benefit from the tight supply situation, while designers need to focus on their ability to give priority to wafer capacity; in the medium term, the relief of capacity shortage depends on the capital expenditure of wafer factories, and semiconductor equipment and material manufacturers are expected to benefit from global wafer capacity expansion. In the long run, the shortage of production capacity is expected to accelerate the trend of localization of the semiconductor industry, whether in the equipment, materials, contract manufacturing and other links of the industrial chain, or from the subdivision of products such as power semiconductors, simulation, radio frequency and other fields. Therefore, we suggest that we should pay attention to the following directions and targets for domestic semiconductors:

1. Design / IDM: demand trend and relatively guaranteed design subdivision leader Weir shares, Zhuo Shengwei, Zhaoyi Innovation, Lanci Technology, Ziguang National Micro, Shengbang shares, Jingchen shares, Silipu, Hengxuan Technology, Zhongying Electronics and other targets, and benefit from the upstream power semiconductors such as Starr Semiconductor, Xinjieneng, Huarun Micro, Wentai Technology, Yangjie Technology, Shilan Micro, Jet Micro, etc.;

2. OEM: SMIC, the leading manufacturer in the domestic process, Huahong Semiconductor, the leading foundry in the characteristic process, and Sanan Optoelectronics in the field of the third generation compound semiconductor OEM.

3. Closed testing: benefiting from the industry boom uplink cycle, the closed test leaders such as Changdian Technology, Huatian Technology, Jingfang Technology, etc., focus on the deep technology of storage packaging, Lexun Precision, which is newly cut into SiP/AiP packaging based on assembly advantages, and Huanxu Electronics, which specializes in Sip packaging, and MEMS microphone packaging leader GE shares, etc.

4, equipment / materials: domestic etching equipment leader China Micro Corporation, multi-equipment product layout of North China Huachuang, semiconductor testing equipment Huafeng measurement and control, as well as domestic polishing liquid leader Anji technology, CMP polishing pad release amount of Dinglong shares, IC board Shennan circuit and Xingsen technology and so on.

5. EDA/IP: domestic IP and design service leader core shares, pay attention to the EDA company to be listed.

Risk hints: the continuous impact of novel coronavirus's repeated epidemic on the global economy; intensified trade frictions; lower-than-expected terminal demand; 5G construction schedule is not up to expectations, and so on.