The semiconductor sector is poised for a significant growth cycle, driven by TSMC's capital expenditure guidance exceeding expectations and the acceleration of domestic substitution in advanced process technologies.
TSMC achieved record-breaking performance in 2025, with a substantial increase in its 2026 capital expenditure guidance, highlighting the sustained benefits from AI computing power and advanced process nodes. Faced with a domestic advanced production capacity gap exceeding one million wafers per month, Chinese wafer fabs are embarking on a massive expansion wave, unlocking a market space potentially worth hundreds of billions of dollars for equipment suppliers. The localization rate is also expected to double. Driven by the dual engines of advanced process development and domestic substitution, we are optimistic about the investment opportunities in semiconductor equipment. We recommend focusing on leading enterprises with platform-based capabilities and high-growth segment leaders.
TSMC's 2025 performance was driven by AI and its 3nm process, achieving record growth, while its 2026 capital expenditure guidance of $520-560 billion surpassed market expectations. TSMC announced its 2025 results on January 15th. In 2025, fueled by the strong surge in its High-Performance Computing (HPC) business, which accounted for 58% of annual revenue amid the AI wave, and the full-scale ramp-up of its 3nm process, the company achieved exceptional results: revenue of $1220 billion (a significant 35.9% year-on-year increase) and a gross margin nearing 60%. Benefiting from robust AI computing demand, revenue from advanced processes (7nm and below) constituted 77% of the total, with the 3nm and 5nm processes together contributing 63% of wafer sales revenue. Net profit attributable to the parent company reached NT$1.72 trillion, increasing over 30% year-on-year to a record high. The company's capital expenditure for 2025 reached $40.9 billion. Looking ahead to 2026, TSMC provided an aggressive capital expenditure (Capex) forecast, projecting an increase to between $52 billion and $56 billion, far exceeding the previous market expectation of $45-48 billion. Within this, 70%-80% is allocated to advanced processes, and 10%-20% is earmarked for advanced packaging, testing, and mask manufacturing. This unexpectedly high investment not only signals an earlier-than-expected start to the 2nm process mass production cycle but also reflects the company's strategic determination to accelerate expansion in areas like CoWoS advanced packaging to meet the increasingly tight demand for AI computing chips.
TSMC's Capex exceeding expectations indirectly confirms that global AI computing demand remains in a strong upward phase, driving rapid growth in semiconductor equipment demand. According to EETIMES' forecast for the global semiconductor market from 2025 to 2035, global semiconductor sales are projected to rise from $68 billion in 2025 to $174.1 billion in 2035, representing a CAGR of 9.9%. Demand for semiconductors from servers, data centers, and storage is expected to surge from $15.6 billion in 2025 to $82.6 billion in 2035, with a CAGR of 18.6%, significantly higher than the overall semiconductor market. From a capacity perspective, EETIMES anticipates that global semiconductor manufacturing capacity will grow from 11.2 million wafers per month in 2025 to 19 million wafers per month in 2035, a CAGR of 5.4%. Driven by AI demand, advanced logic capacity for 7nm and below is expected to grow at a CAGR of approximately 15% from 2025 to 2035; DRAM capacity is forecast to grow at a CAGR of about 7% over the same period. This rapid capacity expansion fuels continuous growth in the global semiconductor equipment market. The market size exceeded $100 billion in 2024 (SEMI data), with a CAGR of 8.7% from 2018 to 2024. SEMI projects the global semiconductor equipment market to reach $121 billion in 2025, with further growth to $139 billion expected in 2026, primarily driven by advanced process upgrades, emerging market demands, and rapid expansion of domestic capacity in various countries.
A dual-driven landscape of "soaring AI computing demand" and "domestic substitution in advanced processes" is forming in China, with an advanced process capacity gap exceeding one million wafers. According to SEMI projections, global advanced logic process capacity for 7nm and below was approximately 850,000 wafers per month in 2024 and is expected to grow to 1.4 million wafers per month by 2028. TSMC and Samsung hold the vast majority of this share. Mainland China still lags behind the world's leading level in advanced logic. Based on SEMI data, we estimate that domestic capacity for 7nm and below currently accounts for less than 5% of the global share. However, given that China's semiconductor demand constitutes about 35% of the global total according to SEMI, we anticipate a gradual effort to fill this capacity gap, creating 5 to 6 times the expansion potential. According to TrendForce data, we estimate global memory chip capacity in 2025 to be between 3.5 and 4 million wafers per month, with domestic capacity accounting for only about 10%. As the world's largest market for smartphones, PCs, and servers, China consumes over 30% of global memory chips. Therefore, the capacity gap in the memory sector remains substantial, with a low self-sufficiency rate, indicating a potential 2 to 3-fold expansion space domestically. Consequently, we expect sustained expansion in domestic advanced processes in the future, gradually filling a gap of over one million wafers per month, corresponding to a equipment investment market worth hundreds of billions of dollars.
The current localization rate for semiconductor equipment is only about 30%, with potential for more than doubling in the future. Affected by the gradual strengthening of US restrictions on semiconductor equipment exports to China, mainstream domestic wafer fabs are actively building "non-American" equipment supply chains to mitigate supply chain risks. This provides a rapid growth window for domestic equipment manufacturers. Supported by local fabs, domestic equipment companies are gaining opportunities for production line verification and iteration. From mature segments like descum and cleaning to core areas such as etching, thin-film deposition, and chemical mechanical polishing, domestic equipment is accelerating from "usable" to "highly effective," continuously penetrating from mature processes into advanced memory and logic production lines, thereby increasing the localization rate. In terms of localization potential, based on equipment procurement data disclosed on China's bidding networks, the equipment localization rate was about 18% in 2022. We expect this rate to rise to approximately 30% by 2025, benefiting from rapid localization in DRAM and 3D NAND memory production lines, and potentially reaching around 35% by 2026. Looking further ahead, we anticipate the localization rate gradually increasing to 60%-70%, representing a doubling of the current rate.
Risk factors include global macroeconomic downturn risks; changes in the international political environment and intensifying trade frictions; weaker-than-expected downstream demand; slower-than-expected AI innovation; slower-than-expected progress in domestic substitution; slower-than-expected expansion by domestic wafer fabs; slower-than-expected development of advanced process technologies; intensified competition among downstream manufacturers; risks of raw material price increases due to inflation; risks of escalated sanctions; significant currency fluctuations.
Under the dual drivers of the AI wave and domestic substitution, we anticipate sustained, large-scale investment in Mainland China to fill the advanced production capacity gap exceeding one million wafers. Furthermore, bolstered by the core logic of "domestic substitution," demand for domestic equipment manufacturers has become more endogenous and persistent. Their growth is decoupling from the constraints of the global semiconductor cycle, demonstrating an ability to transcend cycles, and ushering in a golden development period of 5 to 10 years for domestic equipment companies. We recommend focusing particularly on leading enterprises that have achieved technological breakthroughs in core equipment areas such as etching, thin-film deposition, cleaning, and CMP, have obtained validation from major clients, and possess platform-based deployment capabilities. Also noteworthy are equipment companies in areas like lithography, coat/develop, metrology/inspection, and testing, which exhibit high elasticity for localization rate increases. These enterprises are poised not only to deeply benefit from this historic industry opportunity but also have the potential to grow into internationally competitive domestic players within the global semiconductor equipment market. It is advisable to monitor representative platform-type companies in the industry, as well as leading companies in specific segments and those with high potential for localization rate gains.
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