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  • Industry spotlight
  • semiconductors

Which chip stocks will be affected by export controls?

As the US–China trade war ratchets up a notch, major chipmakers are giving mixed messages about their outlook for the rest of 2023. The industry could face further challenges into next year and beyond, as countries look to nationalise their supply chains.

  • Dutch chip giant ASML offsets concerns about China with a 27% rise in revenue for the three months to the end of June.
  • Expanding US export restrictions could impact Taiwan’s TSMC, but not South Korean companies.
  • How to invest in the Asia semiconductor industry: the Global X Asia Semiconductor ETF is up 3.22% in the past six months. 

As earnings season arrives, the worry hanging over the semiconductor industry is how restrictions on China’s access to advanced chips could affect demand.

Last week, the new Chinese ambassador to the US, Xie Feng, likened the Beijing–Washington chip war to a swimming competition in which the US wears Speedo while China wears outdated swimwear. Xie stressed that Beijing didn’t want a trade war, but said it would be forced to retaliate should president Joe Biden impose further restrictions.

“There’s a Chinese saying: ‘We will not make provocations, but we will not flinch from provocations.’ So China definitely will make our response,” Xie said at the Aspen Security Forum, as reported by Bloomberg. 

Last October, the US announced sweeping restrictions on the computing power of US-made chips or equipment exported to China. The Netherlands followed suit earlier this year, though at the time, Dutch semiconductor equipment maker ASML [ASML.AS] didn’t expect the controls to have any “material effect” on its forecast for 2023. Neither does NXP Semiconductors [NXPI], according to Reuters. 

ASML is a vital cog in the chipmaking machine. It is the sole manufacturer of so-called extreme ultraviolet lithography equipment required to make advanced semiconductors, which means nearly every major chipmaker, including Intel [INTC] and Taiwan Semiconductor Manufacturing Company (TSMC) [TSM], relies on its technology. 

ASML surprises but TSMC disappoints

ASML shook off any concerns related to China with its second-quarter 2023 numbers last week. Sales rose 27% year-over-year from €5.4bn to €6.9bn, while net profit jumped 37% from €1.4bn to €1.9bn. Analysts polled by Refinitiv had been expecting sales of €6.74bn on a profit of €1.82bn. The outlook for the full fiscal year has been revised, with net sales expected to grow 30%, up from a previous projection of 25%. 

“If ASML delivers on its 30% revenue growth target for 2023, the company will have weathered this downturn considerably better than its peers. This will strengthen its position as a top-quality semiconductor stock in investors’ minds,” wrote Josep Bori, research director of GlobalData’s thematics division.

TSMC’s results painted a completely different picture, showing the first quarterly net profit decline in four years. Revenue fell 13.7% year over year in US dollar terms despite hopes that the artificial intelligence (AI) hype may have fuelled an increase. 

Mark Liu, chairman of TSMC, said on the earnings call with analysts that it can’t be assumed that the short-term AI frenzy will continue in the long-term, so the company is unable to predict whether demand for AI chips will continue in 2024 or flatten out. 

TSMC is not confident about near-term demand and has forecast sales to decline 10% for the full-year. Demand for AI-related applications has led to a capacity shortage and the situation could be exacerbated if the Beijing–Washington chip war intensifies.

China looks to lock up supplies 

ASML’s sales in the three months to the end of June saw a marked increase in the proportion being shipped to China. Chinese shipments accounted for 8% of first quarter 2023 sales, but 24% of shipments in the second quarter.

The surge in orders is from Chinese customers looking to lock up critical semiconductor-making equipment to avoid being impacted by tightening export controls, with demand outstripping supply. 

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“Chinese customers say: ‘We are happy to take the machines that others don’t want’, because their fabs are ready. They can take the tools,” said Peter Wennink, president and CEO of ASML, in a video released alongside the earnings report. 

Expanding US restrictions pose challenges 

While ASML’s outlook is rosy, the broader semiconductor industry will continue to face a challenging supply–demand environment. Advanced Micro Devices [AMD], Nvidia [NVDA] and Micron [MU] all reported double-digit year-over-year revenue declines in their most recent earnings reported in May and June, GlobalData’s Bori pointed out in research published earlier this month. 

“The fundamental question in the coming months is the sustainability of ASML, TSMC, Samsung [005930.KS] and Canon’s [7751.T] compliance with expanding US restrictions on the export of advanced chips and tools to China,” noted Bori. 

According to a Fitch ratings note released last month, South Korean chipmakers, namely Samsung and SK Hynix [000660.KS], may benefit from higher chip prices as a result of the US–China chip war. 

“We do not think there would be a major long-term supply disruption, as it is likely that Korea will become the main location for the two companies’ expansionary investment and technology upgrades,” said Fitch. 

The rush to nationalise semiconductor industries 

Even if tensions between Beijing and Washington don’t intensify, the simmering geopolitical tension has created a heightened sense of urgency to nationalise semiconductor supply chains. This is the second-biggest issue that the industry will face over the next three years, warned consultancy KPMG in its 2023 semiconductor outlook. 

Heading into 2024, ASML expects very strong growth driven by not just the acceleration of AI, but the energy transition, the electrification of mobility and industrial internet of things. “It’s everything that’s driven by sensors and actuators,” said Wennink. 

How to invest in Asia’s semiconductor industry 

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: Global X Asia Semiconductor ETF 

The Global X Asia Semiconductor ETF [3119.HK] has Samsung, SK Hynix and TSMC in its top 10 holdings. As of 30 June, the portfolio was weighted overwhelmingly in favour of the information technology sector (81.08%). Consumer discretionary accounted for 10.73%, while industrials and healthcare had weightings of 4.36% and 2.92% respectively. The fund is up 6.70% in the 12 months to 25 July, and up 3.22% in the past six months. 

The iShares Asia 50 ETF [AIA] holds Samsung, SK Hynix and TSMC in its top 10 holdings as well. Semiconductor-related sectors information technology and communications services have been allocated 35.97% and 16.53% of the portfolio respectively. 

The Asia Technology Tigers ETF [ASIA.AX] is an alternative play on the theme, and offers broad exposure to the continent’s (excluding Japan) major technology companies. The semiconductor sector currently accounts for 20.6% of the portfolio. The fund is up 4.30% in the 12 months to 25 July, though down 1.83% in the past six months.

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