Domestic chip shares surge as Pelosi's Asia tour spurs 'localization' opportunities

Ti Gong

Chinese mainland chip shares have surged in recent days following the visit of the US House of Representatives Speaker Nancy Pelosi to Taiwan, the home to the world's biggest chipmaker TSMC.

Among other strategic issues, Pelosi's visit is being seen as the latest attempt by the United States to block the Chinese mainland from accessing advanced techs after the push to set up the so-called Chip 4 Alliance, covering the US, Japan, South Korea and China's Taiwan.

The domestic chip industry is looking to meet surging demand in the Chinese integrated circuit market, which is still heavily reliant on imports. This brings opportunities for the domestic chip industry, analysts and investors said.

With strict (external) control and geopolitical uncertainty, "supply chain security" is crucial for the Chinese mainland's chip industry. "(The visit) is expected to accelerate research and development of domestic equipment and components and bring opportunities for their 'localization'," CITIC Securities said on Thursday.

Related chip shares have surged on the market.

Shares of SMIC, or Semiconductor Manufacturing International Corp, the Chinese mainland's biggest chipmaker, rose 2.14 percent to 42.49 yuan (US$6.54) on Thursday, a 10.4 percent rebound from 38.50 yuan, its lowest price in August.

Shanghai-based SMIC, which offers made-to-order chips for smartphone and automotive firms, is also the top company by market value on the Shanghai STAR Market, a Nasdaq-like board which aims to boost innovation.

AMEC, or Advanced Micro-Fabrication Equipment Inc, a top chipmaking equipment vendor in China, expanded 2.03 percent to close at 136.00 yuan, also a 14.3 percent rebound from its August low. AMEC's clients include SMIC and Huahong, top domestic chipmakers.

National Silicon Industry, which offers silicon materials, closed at 21.86 yuan on Thursday, a 11.8 percent rebound from its August-low. Cambricon, an artificial intelligence chip designer, jumped 3.33 percent to 63.53 yuan, also a strong rebound from its lowest price of 58.00 yuan this month.

Comparatively, TSMC or the Taiwan Semiconductor Manufacturing Corp, closed at US$86.51, up 0.53 percent, on Thursday on the New York Stock Exchange.

Amid this volatile geopolitical environment, domestic firms have an advantage in terms of equipment delivery, especially response speed; service level; and ecosystem security, according to TrendForce, a Taiwan-based research firm.

Chips are often seen as the "brain" of various devices, from smartphones to electronics and cars to industrial machinery. They are an upstream supply for many industries in today's digitalized society. China has the world's biggest downstream market for the chip industry. This brings enough market space for related firms, industry insiders said.

In 2021, China's semiconductor equipment market reached US$29.6 billion, accounting for 28.9 percent globally, compared with 14.5 percent in 2017, according to SEMI, a global integrated circuit industry association.

The chip shortage, especially in the automotive industry, has already boosted investment on wafer plants to produce chips globally.

Earlier this year, the Europe Union issued the European Chips Act, offering a US$48-billion support package for chip research and manufacturing in the region. Japan and South Korea also launched similar plans in 2022 to support related chipmakers, including TSMC, Samsung and SK Hynix. In December, India approved a US$10-billion stimulus package for chip and display firms to invest in India, public statements and media reports suggest.

Prior to Pelosi's Asia tour, the US Congress passed a massive US$280-billion chip subsidy bill known as the Chips and Science Act. The new act, which aims to support the domestic chip industry and attracts firms to invest in the US, is expected to make the US more competitive with China.

"The Congress's gift to the semiconductor industry could make things worse," a Bloomberg opinion report claimed.

The proposed Chip 4 Alliance is also a part of the long-term US strategy to contain the Chinese mainland semiconductor industry, using chips with "military usage" as a ploy.

A growing number of Chinese high-tech companies have been added in the US "Entity List." As the most famous one, Huawei was hit by US sanctions after former president Donald Trump put it on an export blacklist in 2019 and barred it from accessing critical technology from the US.

Even with the tech bans, which cover gears for 14 nanometer or advanced chip manufacturing and 128-layer memory chip production, China has a booming chip market with strong demand, fundraising channels like the STAR Market, a complete ecosystem for mature technologies such as 28 nanometer and growing opportunities like AI chips, analysts said.

A total of 61 integrated circuit firms, including SMIC and AMEC, had been listed on the STAR Market by June, covering the whole chip industry chain from equipment, design, manufacture to assembly and testing.

The 428 STAR-listed firms had applied for more than 140,000 patents by June, including over 40,000 invention patents. The STAR-listed firms' patent density, meaning invention patent volumes for each 100 million yuan revenue, is nine times compared with those listed on the main board, according to researcher PatSnap.

Shanghai has designated AI, integrated circuits and biomedicine as three strategic industries in its long-term development blueprint.

Shanghai has ideal conditions for AI chip development, with huge investment, leading firms like Alibaba's chip unit and Cambricon and various adoption applications, said Song Haiyan, vice secretary-general of the Shanghai Integrated Circuit Association or SICA.

In 2021, Shanghai's AI industry revenue hit 280 billion yuan, 18.3 percent growth year on year, much higher than the city's GDP growth.