Sector Deep Dive | Semiconductors Experience Sharp Volatility – Brief Commentary on Three Markets

💡 Key Takeaways

– Catalysts:The decline over the past month was essentially the market’s phased repricing of AI investment returns. On the evening of July 27 through July 28, two developments emerged in quick succession: Changxin Technology’s massive first-day IPO surge and progress in China’s domestically developed DUV lithography machines.This prompted the market to immediately trade on a 'China breakthrough' narrative, leading to a synchronized downward adjustment in valuation anchors for both memory and equipment segments.。

– U.S. Stocks:memory segment ( $SK hynix (SKHY.US)$ 、 $Micron Technology (MU.US)$ 、 $SanDisk (SNDK.US)$ ), equipment segment ( $ASML Holding (ASML.US)$ ), and AI hardware pricing anchor ( $NVIDIA (NVDA.US)$ ) were all simultaneously sold off,Reflects the market’s continued de-risking amid concerns over China’s supply chain breakthroughs and AI-related return uncertainties。

– Divergence between Hong Kong and Korean equities: Hong Kong equities $SMIC (00981.HK)$ 、 $HUA HONG GRACE (01347.HK)$ have declined consecutively primarily due to global beta compression and internal sectoral capital reallocation,not because the market is rejecting domestic equipment breakthroughs per se; Korean equities, on the other hand, have seen the steepest declines among the three markets due to the index’s high concentration, significant net foreign selling, and retail leverage risks, prompting regulators to tighten rules on leveraged ETFs.

– Outlook and conclusion: This round of declines is still driven by sentiment rather than fundamental deterioration, and the medium-term outlook hinges critically on the pace of interest rate policy implementation, geopolitical developments, and whether equipment validation and capacity expansion progress can be realized.

I. U.S. Equities

🔍 Over the past month or so, the sell-off in the Philadelphia Semiconductor Index (SOX) has been driven by market skepticism about AI investment returns:The SOX peaked at 14,635 on June 22 and retreated to 11,674 by July 17 (a 20.2% drawdown).，NVIDIA B200 GPU rental prices dropped 30% within three weeks., Meta is also discussing leasing out excess computing capacity,This corresponds to the first phase of repricing,The market needs to assess whether AI investments can generate revenue, profits, and free cash flow. From the evening of July 27 to July 28, overseas markets declined further, beginning to directly price in two Chinese breakthrough narratives: first, $CXMT Corporation (688825.SH)$Shares surged approximately 460%–466% on their listing day, reaching a total market capitalization of about RMB 3.28 trillion,China's DRAM capacity will be significantly ramped up; second, according to Reuters, Chinahas started manufacturing its own immersion DUV lithography machines,with around five units expected to be delivered in 2026 and annual production increasing to 20 units by 2027,potential customers include SMIC, Hua Hong Semiconductor, and ChangXin Memory。

The combination of these two factors has altered overseas market pricing for memory-related stocks such as SK Hynix, Micron, and Western Digital.China's rising memory supply capacity is putting downward pressure on its future market share and price levels.：On July 27, Western Digital dropped 11%, and SK Hynix’s ADR fell 7.47% to $143.02, slipping below its IPO price.. For ASML and the equipment supply chain, the impact lies inthe previously most stringent equipment restrictions in the Chinese market showing signs of easing.，ASML’s European-listed shares fell more than 7%.. Although NVIDIA’s core business is neither memory nor lithography equipment, it serves as the central pricing anchor for AI hardware trades,and the market continues to de-risk amid concerns over China’s supply chain breakthroughs and doubts about AI investment returns.，NVIDIA closed down 4.99% on July 27, marking its steepest single-day decline since June 5.。

💡 The semiconductor industry has already undergone significant deleveraging.The valuation anchor can only stabilize again once interest rate policy is finalized or a structural shift occurs in market expectations (e.g., geopolitical conflict).。

II. Hong Kong Equities

But why did SMIC and Hua Hong Semiconductor in the Hong Kong market fall for two consecutive days after news of domestic breakthroughs emerged? There are three reasons:Firstly，The market first follows global semiconductor beta, then assesses China-specific alpha.—When the Philadelphia Semiconductor Index (SOX) hits a new near-term low and memory and equipment stocks face concentrated selling pressure, global tech risk appetite declines in tandem. This initially suppresses A/H semiconductor holdings via sector-wide beta, especially for companies that have significantly outperformed. Moreover, when global peers simultaneously enter a deleveraging phase, it’s difficult to fully decouple from beta immediately.Second, CXMT’s listing has altered internal capital allocation within the sector.Stocks previously serving as proxies for domestic memory exposure are now partially substituted—SMIC and Hua Hong often carry multiple premiums simultaneously, including those tied to domestic manufacturing leadership and scarce foundry capacity under equipment restrictions. After CXMT’s listing, part of this scarcity premium flows directly to the memory manufacturer itself. Of CXMT’s fundraising proceeds, RMB 29.5 billion is earmarked for wafer fab upgrades and cutting-edge R&D, potentially prompting short-term capital rotation toward trading CXMT or equipment/component suppliers directly benefiting from this investment.Thirdly,If domestically produced DUV tools truly enter small-batch production and validation with top-tier clients, this would clearly be a long-term positive for SMIC and Hua Hong. However,in short-term trading,，the market often makes a highly reflexive inference.Easing of equipment constraints has increased certainty around capacity expansion, leading to higher supply and potentially reduced price elasticity in foundry and memory segments, ultimately compressing the near-term upside potential priced into high-valuation manufacturing assets.。

In many cyclical industries,stock prices first trade on scarcity premiums under supply constraints, then shift to trading actual earnings realization once supply is unlocked.SMIC and Hua Hong’s premium over the past few years stemmed from China’s demand being constrained by limited access to advanced equipment, making existing domestic capacity appear scarcer. Once the market believes this equipment constraint is starting to ease, the near-term scarcity premium will decline—but domestically sourced DUV tools won’t immediately translate into reported revenue increases, as equipment qualification could take several months or even longer—if the market sells wafer foundry stocks ahead of others recently, it is essentially selling the narrative of 'expectations materializing too quickly while reality lags behind.'Viewed another way, valuation frameworks are shifting from strategic premiums toward considerations like depreciation, capacity ramp-up pace, ASP, and gross margin realization timing. Hua Hong’s investment case in recent years has leaned more on mature nodes and specialty processes, benefiting from price hikes and full utilization. However, if investors begin questioning whether prices can stay elevated amid faster future capacity expansion, we may see temporary 'sell first, watch later' behavior,as evidenced by its steeper decline compared to SMIC on July 27.。

The current pullbackis still driven by expectations rather than reality,and markets often overreact. Looking at the medium term, if equipment validation proceeds smoothly and capacity expansion becomes more certain, SMIC’s strategic positioning in local AI chips, mature nodes, and alternative order fulfillment will strengthen. Even the production of just 5 to 20 units could challenge the prevailing view that lithography tools will always remain the final bottleneck. This could prompt a downward shift in the valuation anchor of overseas high-multiple leaders—as the discount rate applied to their existing moats rises, reflecting heightened market demands for compensation against future uncertainties.

💡The declines in SMIC and Hua Hong are not a market rejection of domestically produced DUV tools, butshould be understood as capital favoring sectors further upstream and more directly benefiting—after all, once DUV tools are available, the key lies in achieving commercial operation and technological iteration,overall outlook remains neutral with volatility。

3. South Korean Equities

The Korean market is vulnerable also because its index composition is highly concentrated;once marginal expectations for demand for HBM, DRAM, and AI servers shift, the Korean index struggles to hedge through other sectors。On July 28, foreign investors net sold KRW 33.99 billion worth of KOSPI stocks, with selling pressure heavily focused on the tech sector; meanwhile,retail investors net bought approximately KRW 29 billion against the trend, while domestic institutions only net bought a modest KRW 4.26 billion, ⚠️ The latter is particularly prone to being embedded in leveraged ETFs, margin trading, and high-turnover structures. According to Korean regulatory guidance, if demand for single-stock leveraged ETFs does not cool down, authorities will consider capping individual investors’ exposure to leveraged products on a single stock at a percentage of their total financial investments20%or below;Starting July 31, the minimum margin requirement for single-stock leveraged ETFs will be raised from KRW 10 million to KRW 30 million, and new listings of single-stock leveraged products will be temporarily suspended.

Like the U.S. equity market, Korea’s stock market is also driven by the AI theme, but the two markets differ fundamentally in terms of depth, breadth, and capacity to absorb volatility. Market depth essentially refers to a market’s ability to absorb capital inflows and outflows, withstand trading shocks, and accommodate shifts across diverse investment styles:In June, the IT sector’s weight in the KOSPI index reached as high as 71%, and remained at 63% in July; since 2026,the IT sector’s gains surged by as much as 230.8%, and even after the July correction, still stood at 141.8%, far exceeding Financials (+31.3%) and Industrials (+22.4%), with the top 10 constituents accounting for 78% of the index; by comparison,the IT sector accounts for only about 35% of the U.S. equity market, with the top 10 stocks making up 37% of the index., creating a stark contrast. Breadth determines whether the market rally is supported only by a few stocks: Korean equities are still primarily propped up by the two semiconductor giants and a handful of tech heavyweights, whereas in the U.S. market, as of July,the S&P 500 earnings revision breadth remains in the strong range of +19% to +24%, and earnings expectations for the S&P 493 have already seen upward revisions ahead of time. Market leadership rotation is expanding beyond just the Magnificent 7/semiconductors into sectors such as industrials, materials, financials, and consumer discretionary.

⚠️ The U.S. market is overly concentrated but still has internal rotation as a buffer, whereas the Korean market suffers from even higher concentration, narrower breadth, and a thinner cushion., requiring continuous monitoring of deleveraging trends and institutional position risk management policies.

Sources: Citi, Morgan Stanley, Xinhua News Agency, WIND, Nomura

[Investment Advisory Information]

Yu Shilin, Licensed Representative, CE Number: ATQ882

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