JPMorgan Chase has released a research report indicating that after an 18% surge in May, the recent pullback in the Chinese technology sector presents a buying opportunity for select companies and segments. The firm expresses greater optimism for upstream enterprises, such as semiconductor equipment manufacturers, OSAT providers, and foundry suppliers, which are benefiting from increased order backlogs and rising average selling prices. However, it adopts a more cautious stance towards downstream companies, as rising costs are expected to pressure gross margins, particularly in consumer electronics applications where demand remains weak.
JPMorgan Chase has updated its ranking of sub-sectors within the semiconductor field, which is now as follows: semiconductor equipment > OSAT > foundry services > fabless semiconductor. The firm's top picks within the Chinese technology sector include ILUVATAR COREX (09903), Naura Technology Group Co.,Ltd. (002371.SZ), Advanced Micro-Fabrication Equipment Inc. China (688012.SH), Luxshare Precision Industry Co.,Ltd. (002475.SZ), and COWELL (01415).
Outlook for the Semiconductor Equipment Segment
Regarding semiconductor equipment, JPMorgan Chase anticipates that demand from local wafer fabs for memory and advanced logic will grow by over 50% and 30% year-over-year, respectively, by 2026, with further room for expansion in 2027. This growth is primarily driven by the advancing IPO timelines for ChangXin Memory Technologies and Yangtze Memory Technologies. Additionally, as the production volume of domestic AI chips increases starting in the second half of 2026, backend equipment suppliers are also poised to benefit from incremental demand for advanced packaging and testing. The firm believes that the extended growth visibility for semiconductor equipment companies will help support elevated valuations for the sector.
Perspectives on OSAT and Foundry Services
For the OSAT and foundry segments, JPMorgan Chase notes that it has witnessed continued strong price increases from foundries and OSAT suppliers in Q2 2026, benefiting from improved capacity utilization and the pass-through of rising material costs. While increased capital expenditures are expected to lead to higher depreciation, the price hikes are still projected to drive better gross margins for OSAT and foundry firms from the second half of 2026 onward. This is particularly true for OSAT companies with greater exposure to high-margin AI-related products like GPUs and power management ICs.
Assessment of Downstream Demand
Concerning downstream demand, JPMorgan Chase expects investments from cloud service providers to remain robust alongside the proliferation of AI applications. Demand for components in the automotive and industrial sectors has already begun to recover in Q2 2026. However, demand for consumer electronics such as Android smartphones and AIoT devices is weakening. The firm believes that the increase in local foundry supply will help accelerate sales growth for domestic GPU and AI ASIC companies, which are launching next-generation chips to meet strong demand from cloud service providers. On the other hand, rising upstream costs may pressure the gross margins of fabless design companies that are heavily reliant on consumer electronics and unable to pass on the incremental costs.
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