To The Moon

CITIC Securities recently released a research report on semiconductors - "What's the current status of the US semiconductor cycle?" and claimed the sector has hit the bottom. This article will explain the key points of this report.

1. Semiconductors are cyclical - with a cycle of 3-4 years

The cyclicality of semiconductors mainly comes from the mismatch between supply and demand.

When market demand is high, chip design companies will increase manufacturing orders. But the fab expansion capacity needs to debug equipment, which takes a long time. After the increase in capacity, the consumer electronics market may begin to weaken, which triggers design companies to cut orders.

The following chart shows the quarterly sales of the global semiconductor market, which presents a clear cyclicality.

Quarterly sales of global semiconductor market and growth yoy

2. How to judge the bottom of the cycle?

The best indicator is inventory, followed by stock price decline and valuation situation.

1) Inventory

There is a significant negative correlation between $Philadelphia Semiconductor Index(SOX)$ and industry inventories, i.e. the top of inventory corresponds to the bottom of $Philadelphia Semiconductor Index(SOX)$ .

CITIC Securities believes that semiconductor inventories have peaked in the third quarter of this year. (Source: Company earnings reports, CITIC Securities Research Department)

$Qualcomm(QCOM)$ : Q4 revenue is expected to decline by double-digits, mainly in response to the impact of terminal inventory de-stocking

$Media Tek Inc.(MDTKF)$ : expects chip business revenue to return to YoY growth starting in 2023Q1

$Taiwan Semiconductor Manufacturing(TSM)$ : Expect Q3 to be inventory high point, expected to return to normal after 2023Q2

Lenovo: Inventory levels have begun to decline, PC inventory will drop from the current 10 weeks to 5-6 weeks at the end of the year

Acer: Inventory in the third quarter lower than the ring, the third quarter is expected to further reduce

CITIC Securities' research report is consistent with my previous views. In terms of Nvidia inventory and share price trend, in the first quarter of fiscal 2020 (corresponding to the natural year for the quarterly report on April 28, 2019), Nvidia inventory began to reduce, and then the share price started to rally:.

data from company's earnings

2) Share price decline

From the top of this cycle, the $Philadelphia Semiconductor Index(SOX)$ was down 44%, approaching all previous down cycles:.

3) Valuation near historical lows

The SOX's PE (NTM) has now fallen to around 14X and is approaching the bottom of the 2018/2019 cycle.

Data from bloomberg and CITIC

3. Risk Warning

Although CITIC Securities believes that the semiconductor hits the bottom, this down cycle is different. In addition to a high inventory, demand also declined due to economic headwinds.

PC market sales are expected to decline 20%, and also a 5%-10% decline in 2023.

As the fundamentals are still on the downside, the rebound slope of semiconductor stock prices may not be as good as the last cycle.

4. CITIC: Semiconductor companies to watch

The best time to invest in semiconductors is to buy when the industry is at its lowest, and sell when the industry is surging.

CITIC Securities recommends the following companies:

$Taiwan Semiconductor Manufacturing(TSM)$ $NVIDIA Corp(NVDA)$ $AMD(AMD)$ $Qualcomm(QCOM)$ $Micron Technology(MU)$ $Lam Research(LRCX)$ $ON Semiconductor(ON)$ $Wolfspeed Inc.(WOLF)$