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Semiconductor Players Riding The Chip Upcycle

Last updated on May 3rd, 2021 at 06:42 am

The semiconductor upcycle is underway spurred by increasing demand for smartphones, PCs, game consoles and other devices as people around the world, forced to remain indoors as a result of the Covid pandemic, turned to technology for reasons such as remote working, remote learning, entertainment etc. After posting double digit growth of 6.8% growth in 2020, WSTS projects global semiconductor demand to accelerate in 2021, with global semiconductor sales growth of 10.9% for the year.

World semiconductor sales 2019 - 2021 (forecast)

The CEO of the world’s largest foundry – Taiwan Semiconductor Manufacturing Company (TSMC) – said in a letter to customers that its fabs are running at 100% capacity over the past year, but demand still exceeds supply. U.S. chip giant Qualcomm reported a 52% jump in revenues on an annualized basis for the quarter ended March 2021 driven by strong smartphone sales. Meanwhile the gradual increase of electric vehicle production (which had been curbed at the start of the pandemic) triggered an ongoing chip shortage resulting in a number of automotive companies being forced to temporarily suspend production.

Longer term, emerging technologies such as 5G, IoT, AI, Industry 4.0 are expected to drive increasing quantities of semiconductors presenting a long term structural uptrend for the semiconductor industry, presenting growth opportunities for players along the entire value chain from design to fabrication. 

Against this backdrop, some notable chip players to watch include Taiwan’s MediaTek, Dutch lithography giant ASML, and Singaporean precision tools player Micromechanics, and Singaporean test solutions provider AEM Holdings.  

MediaTek (聯發科)

Taiwanese chip supplier MediaTek overtook U.S. chip giant Qualcomm to emerge as the world’s largest mobile chip supplier in 2020, driven by the U.S. government’s sanctions on Chinese smartphone company Huawei which turned to MediaTek chips to power its smartphones. Meanwhile, Chinese smartphone manufacturers Xiaomi, Vivo, and Oppo, also turned to MediaTek in an effort to diversify their supply chains to avoid becoming the next Huawei. The supply chain reshuffle saw MediaTek emerging as the number one spot mobile chip supplier in China while Qualcomm settled for second place. Data from CINNO Research revealed that Qualcomm’s shipments in China shrank 48.1% year-on-year, while its market share dropped to 25.4% in 2020 compared with 37.9% in 2019. 

MediaTek’s rise to pole position in China, the world’s biggest smartphone market appears to have helped it capture the number one spot worldwide as well. According to data from consultancy firm Omdia, MediaTek commanded a 27% market share of the global smartphone chipset market in 2020,  while Qualcomm held 25%. MediaTek’s worldwide shipments rose 48% YoY in 2020, compared with an 18% decline for Qualcomm’s Snapdragon.

Chipset series 2020 2019 Market share (2020) YoY 
MediaTek 352 238 27% 48%
Snapdragon 319 386 25% -18%
Apple 204 195 16% 5%
Kirin 147 177 11% -17%
Exynos 115 177 9% -35%
Unknown 100 146 8% -32%
Exynos or Snapdragon 36 55 3% -35%
UNISOC 23 12 2% -89%
Armada 0 0 0% -100%

Grand Total

Data: Omdia

1,295 1,387 100% -7%

MediaTek’s stellar market performance showed up its financials as well; revenues rose to a record high of TWD 322 billion in 2020 for the financial year ended December 2020, representing a YoY growth of 30.8%, while operating income shot up to TWD 43.2 million, a 91.5% growth YoY. By contrast Qualcomm (whose financial year ends September 2020) saw revenues contract 4.8% YoY.  The momentum carried on to 2021 with the Taiwanese player reporting a 77.5% YoY increase in first quarter 2021 revenues (which reached TWD 108 billion) and net profits of TWD 25.77 billion, up 347% YoY. MediaTek expects revenues to grow 40% this year and expects the momentum to remain strong going into 2022.

Micromechanics

Singapore-listed Micromechanics makes high precision tools and parts used in process critical applications for wafer fabrication and assembly. Apart from its portfolio of proprietary consumable tools , the company also offers contract manufacturing services of high precision parts to OEMs in the semiconductor, aerospace, laser, and medical industries. Its diverse customer base includes IDMs, wafer fabrication equipment manufacturers, and semiconductor assembly and test service providers in more than 10 countries around the world.

Amid the current geopolitical turmoil, Micromechanics stands out as one of the few Southeast Asian players with a broad production range, scale, and geographical presence. And that unique positioning amid growing chip demand, along with prudent financial management is reflected in its financials; Micromechanics posted record revenues of SGD 36.9 million (up 16.9% YoY) and record net profits of SGD 9.1 million (up 31% YoY), pushing ROE to 32% for the first half of 2021, an exceptional performance for a company with zero borrowings.

To further strengthen its market positioning amid a rapidly changing chip market, Micromechanics is working towards becoming a “Next Generation Supplier” which sees the company investing in developing its product portfolio to serve chip manufacturers’ needs at 10nm and below. In fact, Micromechanics’s R&D team in Singapore has already produced several proprietary materials that are essential for 10nm and below device geometries.  

ASML

Dutch lithography giant ASML dominates the global lithography market with a market share of more than 80% in the mature DUV market and a market share of 100% in EUV – the next generation lithography technology that is seeing rising penetration as more chip makers move to leading edge process technologies driven by anticipated demand growth for advanced chips such as those used in 5G smartphones and other high-performance devices such as those with AI capabilities. About 80% of TSMC’s USD 28 billion capex allocated for this year will be spent on the company’s most advanced chip making  processes – 7nm, 5nm, and 3nm. Meanwhile Samsung is racing to catch up to TSMC in terms of leading edge manufacturing process capacity; TSMC claims to have more than 50% of the world’s EUV base and 60% of the world’s cumulative EUV wafer production. With 5G increasingly gathering pace, Samsung has ramped up orders of ASML’s EUV machines placing a multi-billion dollar order of 20 machines when Samsung vice-chairman Lee flew to ASML’s headquarters last year to press the Dutch giant for early delivery of the machines. DRAM giant SK Hynix plans to use EUV in volume production in the coming years having signed a five-year contract worth USD 4.3 billion with ASML for the supply of EUV systems. SK Hynix’s DRAM rival Micron Technologies aims to use EUV a few years ahead.  

Given that ASML currently has a production and installation capacity of about 50+ machines annually, the company appears to be sitting pretty with demand potentially outstripping supply in the coming years as demand for advanced chips continues its upward march. The impact on ASML’s financials are significant; revenues jumped 18% YoY to nearly EUR 14 billion for the financial year ended December 2020, while net profits rose 37% YoY to 3.5 billion, helping push up the company’s return on equity (ROE) to 25.6%. 

Rising EUV sales also boosted profitability with gross margins rising from 44.6% in 2019 to 48.6% in 2020. Rising gross margins helped push up net profit margins as well which rose to 25.4% in 2020 from nearly 22% a year earlier. As sales of EUV sales continue to trend upwards in the coming years, there is potential for continued margin improvement. 

Meanwhile the potential for top-line growth is significant as well. ASML shipped 31 EUV machines last year (generating  EUR 4.5 billion) and Cowen expects ASML’s EUV shipments to rise to 40 units in 2021, 53 in 2022, and 56 in 2023. Not only does this drive EUV revenues, but DUV revenues are should benefit too as every order for an EUV system drives demand for DUV systems as well. Indeed ASML’s DUV business (a market that ASML dominates with a market share of more than 80%) is large and going strong; ASML generated EUR 5.38 billion in revenues from its DUV business (accounting for 52% of 2020 revenues) which included 68 immersion systems – the most advanced DUV machines – which accounted for EUR 4 billion in revenue alone in 2020.

ASML net system sales per technology - 2018 - 2020

A growing installed base of EUV machines could further add to top line growth in the form of service revenue which rose to EUR 3.6 billion in 2020, up from EUR 2.8 billion in 2019, a 28% increase YoY. 

AEM Holdings Ltd

Semiconductor and electronics packaging and test services company AEM Holdings is headquartered in Singapore but has a global presence with offices and manufacturing plants located in Asia, Europe, and America. Riding on strong demand for IC testing, AEM Holdings generated record revenues of SGD 519 million (up 60% YoY) and net profits of SGD 97.6 million (up 84.9% YoY) which translated into a whopping 46% return on equity (up from 39% in 2019) for the financial year ended December 2020. 

The company isn’t resting on its laurels however; with an eye on future growth, AEM Holdings has been making strategic acquisitions to expand its technical capabilities and product solutions in an effort to better serve existing customers, capture new customers, as well as penetrate into new markets such as China. In 2020, the company scooped up two companies, with more acquisitions expected going forward as the company leverages its balance sheet (AEM Holdings sits on a cash pile of about SGD 134 million while total long term liabilities stood at just 13.3 million as at December 2020, equivalent to less than 7% of equity) to make strategic acquisitions aimed at strengthening its capabilities and market positioning.

In early 2020, AEM Holdings acquired Mu-TEST, a French semiconductor test solutions provider for EUR 7.5 million (about SGD 11.3 million). Following on that in mid 2020, the company acquired California-based DB Design Group, a world-renowned supplier of automation fixtures, device kits and other test-related products. The purchase price of USD 3.3 million (about SGD 4.5 million) is comfortably affordable for AEM Holdings and could potentially drive top line growth as the acquisition expands AEM Holding’s Serviceable Available Market to include the automation fixture and device kit markets. 

“We are now able to offer almost 24-hour R&D services to our customers leveraging our US and Asia based teams, as well as rapid prototyping and supply chain resiliency via high mix production run support in the US.” – Loke Wai San, Executive Chairman AEM Holdings

The momentum continued in 2021 with the company acquiring Lattice Innovation, an American company offering design, simulation, and process services in the thermal control space. The acquisition is expected to further strengthen AEM’s semiconductor test solutions. AEM also announced the acquisition of majority stakes in CEI Limited and ATECO Inc this year. Apart from the potential strengthening of market positioning, these acquisitions also help reduce AEM’s customer concentration risk (Intel which has been AEM’s biggest customer for years, accounted for 95% of AEM’s revenues in 2020). 

AEM Holdings is a crucial partner of global semiconductor giant Intel, supplying it next generation test handlers. Intel’s recently announced IDM 2.0 strategy, which sees Intel expanding its chip manufacturing capacity, is expected to be a positive for AEM Holdings as expanding chip capacity from its sole major customer should result in greater demand for AEM’s semiconductor testing solutions as well.  While AEM’s heavy dependence on one major customer for bulk of its revenues presents a customer concentration risk, there is little reason to expect Intel to switch to an alternative test vendor given AEM’s competitive advantage as a longstanding partner and cost competitive supplier for Intel;  AEM and Intel have worked together for years to design, and manufacture test handlers which are well customized for Intel’s needs and according to analyst estimates from Singaporean financial services giant DBS, Intel incurs a 10% manufacturing cost when using AEM’s solutions versus 20% during traditional testing.

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