The third-generation semiconductor market is causing a stir, riding the wave without needing to focus solely on the growth of Invesco Fund.

Hongzhou Weekly Author | Wang Xiaoming

Recently, the semiconductor sector has caused another stir in the secondary market, with third-generation semiconductors becoming the focus of investors' attention. As a result, popular funds like Noan Growth have become types with fast-growing net asset values in the short term.

The logic of price increases exceeds material iteration.

From the perspective of supply and demand, the new energy vehicles and the MCU, power devices, analog chips, storage, and other demands brought by 5G are experiencing a huge surge. At the same time, influenced by the competition between China and the United States in technology and various aspects of the industry chain, the domestic expansion and import of overseas semiconductor equipment delivery cycles are generally prolonged or faced with uncertainty. Therefore, the structural tension of semiconductor production capacity is likely to continue in the next year.

Taking the new energy vehicle sector as an example, in the first quarter of 2021, China sold a total of 430,000 new energy vehicles, doubling from 2019, with pure electric vehicle models accounting for 84% of the overall new energy passenger vehicles. As the core component of the electric drive system, the growth of the new energy vehicle market will drive the demand for power semiconductors. There is a broad market space for power semiconductors, and domestic manufacturers have also begun expansion plans. Driven by strong demand, in addition to the aforementioned power semiconductors, the global semiconductor design, packaging, testing, and equipment industries will all experience very rapid growth.

In terms of holdings, Yinhechuangxin Growth and Noah Growth have some differences. Noah Growth is more focused on the high profitability and high degree of self-reliance design sectors in the semiconductor industry chain; Yinhechuangxin Growth considers more short-term growth certainty and has increased its holdings in Naura Technology Group and Hangzhou Silan Microelectronics. Among them, the logic of Silan Microelectronics' holdings is mainly driven by the new energy's impact on upstream power semiconductors. In the first quarter, Silan Microelectronics raised product prices and achieved the highest single-quarter profit in history, with a quarterly net income attributable to the mother of 0.174 billion yuan.

The recent collective rise of the semiconductor sector is mainly influenced by the 'chip shortage', and the policy impact of third-generation semiconductors plays more of a catalyzing role. The 'third' refers to the change in semiconductor substrate materials, with materials such as SiC and GaN currently in use. The technology is still in the early stage of product introduction, with downstream applications mainly in optoelectronic devices, power electronic devices, radio frequency devices, etc. Taking the SiC industry chain as an example, due to the high pressure, high temperature, and high-frequency resistance characteristics of SiC substrate, the application leans towards medium to high voltages above 1000V, with downstream applications mainly in electric vehicles, photovoltaics, rail transit, and other fields. However, the market share of related domestic listed companies in SiC, such as China Resources Microelectronics, Hangzhou Silan Microelectronics, and Starpower Semiconductor, is relatively low. The main contribution to revenue for these companies is still from traditional products using silicon substrates.

Companies that can achieve domestic substitution should have a diversified layout.

Public funds, led by Noah Growth, prefer to invest in chip design companies, partly because design companies have higher profits, and on the other hand, the domestic design field has reached a world-leading level. However, from the perspective of the industry, semiconductor equipment and materials are the foundation of domestic semiconductor development, especially the greater reliance on mature processes domestically. Taking the 8-inch process as an example, SMIC's capacity is only 10% to 15% of TSMC's, which can hardly meet domestic demand. Fingerprint recognition of Goodix Technology, analog IC of SG Micro Corp, fingerprint recognition chips of Goodix Technology, power semiconductor chips used in electric vehicles are mainly concentrated in mature processes of 8-inch or 12-inch. Due to the surge in downstream demand and supply mismatch, the market's reliance on mature chips is even greater.

In the short-term layout perspective, benefiting from the shortage of chips, wafer fab capacities around the world are rapidly expanding. For China, the expansion of domestic wafer capacity mainly comes from major wafer fabs such as Yangtze Memory, SMIC, and Hua Hong Semiconductor. The core equipment and materials of the semiconductor industry chain upstream form the basis for the expansion of wafer capacity. Companies with high industry barriers like Naura Technology Group, Beijing Huafeng Test & Control Technology have higher performance growth certainty. In addition, with capacity being king in the context of chip shortages, wafer foundries or IDM manufacturers who can design and produce independently can stand out in the short term, such as Starpower Semiconductor, Jiangsu Jiejie Microelectronics, Wuxi NCE Power, etc. For example, Changjiang Jujia Innovation Growth, with a growth rate exceeding 30% in the past month, SMIC and Wuxi NCE Power, which have seen a growth rate of over 20% in the past 10 days, are being added to funds.

Of course, the semiconductor industry is a relatively long industry chain, with manufacturers having their own endowments and technical paths, making it difficult for public funds to grasp the current market trends. The demand for storage chips, analog chips (RF chips/power chips), and discrete devices (power devices) will increase significantly due to 5G base stations, data centers, ultra high voltage, and new energy vehicles. Coupled with the continued logic of domestic substitution, semiconductors will still be a sector worthy of long-term investment. Of course, when positioning, not only focusing on Noah Growth, but diversified investments may be a better choice.

(Stocks mentioned in the article are for illustrative analysis purposes only and are not trading recommendations.)

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