Chief Investment Strategist
Summary: The deglobalisation theme will drive everything in the economy over the next decade. Yesterday, the US government ordered Nvidia to halt sales of its most advanced AI chips to China because the US is fearing that they are increasingly used for military applications. This decision and the recent US CHIPS Act all point towards a future where the majority of semiconductors will be manufactured in the US and Europe for security reasons. While sentiment in semiconductor stocks is negative in the short-term we believe further declines will create a very attractive expected return path for the industry.
Nvidia’s new constraints in China is the canary in the coal mine
Yesterday, the US government instructed Nvidia to stop selling its top AI chips to China as it is feared they are not used solely for commercial purposes but increasingly in military applications. The US chipmaker has got some exceptions to the ban to provide support for certain US customers of its A100 chips through 1 March 2023, and it is also being allowed to finish its development of its H100. The immediate restrictions are impacting $400mn in revenue this quarter for Nvidia which is roughly 5% of revenue. It is clear that the US is intending to decouple its technology sector from China over the next five years and that jeopardizes 26% of Nvidia’s revenue in China.
Our semiconductor theme basket fell 1.9% yesterday and is down 31% this year compared to only 18% for global equity market. Sentiment is getting increasingly negative on semiconductors, but the industry is still valued 14% above the MSCI World on 12-month EV/EBITDA multiple suggesting higher growth expectations. However, with the energy cost shock sucking GDP out of the economy from consumption we could see further losses for semiconductors in the short-term due to lower demand from consumer electronics. This is also the reason why yesterday we shifted to being negative on the industry in our equity note.
However, longer term the falling share prices on semiconductors will create great opportunities and high expected returns for semiconductor stocks. Semiconductors will continue to be in high demand regardless of where they are produced. The US and Europe will end up producing a much larger share of the world’s semiconductors over the next five years which are part of the US’s industry policy described in its US CHIPS Act. The lower demand coming from the private sector in the short-term will be met by increases from the government side as the US and Europe are increasing military spending amid the ongoing war in Ukraine. Semiconductors will also continue to play an important role in the Internet of Things mega trend and generally our modern life, but it is also clear that Western semiconductor manufacturers will not be part of the future growth in China.
The table below shows the constituents in our semiconductor theme basket
| Name | Mkt Cap (USD mn.) | Sales growth (%) | EBIT margin (%) | Diff to PT (%) | 5yr return |
| Taiwan Semiconductor Manufacturing Co Ltd | 423,391 | 29.3 | 44.7 | 60.0 | 150.7 |
| NVIDIA Corp | 347,031 | 35.8 | 26.9 | 50.7 | 230.4 |
| Samsung Electronics Co Ltd | 251,567 | 18.6 | 19.0 | 50.9 | 16.0 |
| Broadcom Inc | 198,682 | 19.5 | 37.4 | 34.1 | 130.5 |
| ASML Holding NV | 191,618 | 15.6 | 33.3 | 38.1 | 275.2 |
| Texas Instruments Inc | 151,822 | 16.9 | 51.5 | 7.2 | 129.7 |
| QUALCOMM Inc | 145,900 | 29.4 | 35.8 | 39.8 | 187.4 |
| Advanced Micro Devices Inc | 132,907 | 61.7 | 16.8 | 44.5 | 524.2 |
| Intel Corp | 130,407 | -5.4 | 18.9 | 27.7 | 3.1 |
| Applied Materials Inc | 78,985 | 16.3 | 31.0 | 44.4 | 116.8 |
| Analog Devices Inc | 77,506 | 70.7 | 20.5 | 30.7 | 97.9 |
| Micron Technology Inc | 63,221 | 27.1 | 34.4 | 34.2 | 76.8 |
| Lam Research Corp | 59,184 | 17.8 | 31.2 | 32.5 | 180.3 |
| LONGi Green Energy Technology Co Ltd | 55,909 | 38.4 | 10.8 | 44.7 | 743.4 |
| Synopsys Inc | 50,841 | 21.4 | 22.9 | 25.6 | 313.5 |
| KLA Corp | 47,803 | 33.1 | 39.7 | 23.5 | 294.2 |
| Tokyo Electron Ltd | 47,657 | 31.8 | 28.4 | 26.4 | 220.8 |
| Cadence Design Systems Inc | 46,569 | 13.6 | 30.2 | 13.6 | 339.5 |
| NXP Semiconductors NV | 43,171 | 24.3 | 27.0 | 21.6 | 53.3 |
| Marvell Technology Inc | 39,194 | 59.7 | 2.0 | 60.0 | 168.6 |
| Microchip Technology Inc | 35,873 | 26.6 | 30.2 | 30.6 | 59.3 |
| STMicroelectronics NV | 31,456 | 18.7 | 23.8 | 46.9 | 146.3 |
| Infineon Technologies AG | 31,224 | 24.1 | 18.4 | 62.3 | 27.4 |
| GLOBALFOUNDRIES Inc | 31,020 | 35.8 | -0.9 | 16.6 | NA |
| ON Semiconductor Corp | 29,555 | 28.8 | 27.7 | 10.8 | 295.5 |
| TCL Zhonghuan Renewable Energy Technology Co Ltd | 22,270 | 96.6 | 10.7 | 46.3 | 484.4 |
| Kyocera Corp | 20,529 | 17.2 | 8.3 | 7.7 | 29.1 |
| Unigroup Guoxin Microelectronics Co Ltd | 19,026 | 45.3 | 40.7 | 33.4 | 668.9 |
| Skyworks Solutions Inc | 15,979 | 13.3 | 27.2 | 37.0 | 2.3 |
| Will Semiconductor Co Ltd Shanghai | 15,403 | -6.2 | 17.0 | 72.4 | 452.5 |
| Aggregate / median | 2,835,702 | 25.4 | 27.1 | 34.2 | 168.6 |
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