Semiconductor Market Shifts: Earnings Forecasts Show Profit Divergence

After the market fluctuated and "shifted gears," the semiconductor sector also experienced a rise followed by a decline. The China Semiconductor Chip Index surged by 60% from September 24 to October 9, with the highest increase in the range nearing 75%, and then corrected by 11.6% on October 10 and 11.

ETF funds related to semiconductors have seen significant gains, with a large influx of capital pushing up the sector's valuation. As profits are digested, semiconductors, as a representative sector of growth style, have undergone more than a year of valuation adjustments and are currently in a gradual recovery of industry prosperity. Investors' attention to whether it can play the role of a growth style leader is continuously increasing.

At present, the Shanghai and Shenzhen stock markets are in the time window for the release of performance forecasts and reports for the third quarter of 2024. As of the time of writing, more than 10 semiconductor companies listed on the stock market, including Will Semiconductor (603501.SH) and Rockchip Micro (603893.SH), have released performance forecasts. While the revenue of individual stocks has generally increased, the performance of net profits shows differentiation. How the sector and individual stocks will perform in the future may ultimately return to performance expectations.

Revenue generally rises, net profit differentiation

Wind data shows that by the evening of October 13, 12 semiconductor companies had released third-quarter performance forecasts, involving chip design, wafer foundry, IP services, and other links. The third quarter is the peak season for the global semiconductor industry, which has a significant impact on the annual performance. Overall, the semiconductor companies that have disclosed performance forecasts have all achieved revenue growth to varying degrees, while net profits have fluctuated.

As the industry's prosperity warms up, the profitability of asset-light chip design companies is rapidly restored. On the afternoon of October 13, Espressif Systems (688018.SH) disclosed a performance forecast, estimating that the company will achieve a revenue of about 1.46 billion yuan in the first three quarters, a year-on-year increase of about 42%, and an estimated net profit attributable to the parent company of 251 million yuan, a year-on-year increase of 188%. Espressif's products are applied in the pan-IoT field, and the company stated that downstream customer projects are gradually entering the mass production stage, driving performance growth during the reporting period.

Chip design stocks that have seen double growth in revenue and net profit also include CIS leader Will Semiconductor, Rockchip Micro, and Telink Micro (688591.SH). Will Semiconductor estimates that the net profit attributable to the parent company for the first three quarters will be between 2.267 billion and 2.467 billion yuan, a year-on-year increase of 515.35% to 569.64%. The sequential growth has slowed down. According to the mid-year profit of 1.367 billion yuan, the minimum profit for the third quarter is 900 million yuan, a sequential growth rate of 11.25% for the third quarter, while the sequential growth rate for the second quarter was 45.08%.

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Xinlian Integration (688469.SH), which released its performance forecast on the same day, has been in a loss for four years since its listing, with a net profit attributable to the parent company of only 13.29 million yuan after deducting non-recurring gains and losses. The company estimates that this year's third-quarter revenue and net profit attributable to the parent company will be 718 million yuan and -111 million yuan, respectively, with revenue growing by 23.6% year-on-year, marking the first positive year-on-year growth since the first quarter of 2023. The net profit loss narrowed by about 45 million yuan, with five consecutive quarters of losses.

Xinlian Integration is still in the stage of wafer capacity ramp-up. The revenue for this year's third quarter increased both sequentially and year-on-year, but profit realization still requires time. The company estimates that the revenue for the first three quarters will be about 4.547 billion yuan, a year-on-year increase of about 18.68%, and the net profit attributable to the parent company will be a loss of 684 million yuan, a reduction of 677 million yuan compared to the same period last year. It also stated that the gross margin for the third quarter has achieved a positive quarter-on-quarter change, at about 6%.

Jinghe Integration (688249.SH), which is also engaged in wafer foundry, estimates that the net profit attributable to the parent company for the first three quarters will increase by 744.01% to 837.79% year-on-year, reaching 270 million to 300 million yuan. The company stated that as the industry's prosperity gradually recovers, the capacity has been fully loaded since March this year, and the foundry prices for some products have been adjusted since June, which has helped the steady increase in revenue and product gross profit levels.Valuation premiums depend on individual stocks

Semiconductors once led the current market trend, and even when the Shanghai Composite Index (Shanghai Index) corrected sharply on October 9th, the semiconductor sector still rose against the trend. The China Semiconductor Chip Index broke through the 9,000-point mark, and as of now, it is reported at 7,367.53 points. The rise and fall of individual stocks have made investors "dizzy."

The wafer foundry leader, SMIC (688981.SH), soared by 86.94% within 5 trading days, with the highest price during the trading day setting a new high for over four years. The E Fund Shanghai Science and Technology Innovation Board 50 ETF held up SMIC, holding 108 million shares as of the announcement date, accounting for 5.47% of SMIC's total A-share capital; the power device company, Jie Jie Microelectronics (300623.SZ), pulled out three consecutive boards, and its stock price doubled within 5 trading days; Cambricon (688256.SH), which has both AI and chip concepts, set a historical high of 415 yuan per share during the trading day on October 9th, and its stock price doubled in a week.

From September 24th to the latest closing date (October 12th), the average increase and decrease of 158 semiconductor stocks (CITIC component plate) was 37.8%, with 54 stocks increasing by more than 40%, led by Jie Jie Microelectronics and National Technology (300623.SZ). At the same time, 86 semiconductor stocks experienced a retracement of more than 20%.

Looking at the ETF side again, equity ETFs are one of the main channels for market investors to layout in recent times. Among various industry ETFs, TMT's performance is unparalleled. Data shows that most A-share sectors fell in the past week (October 8th to 11th), with only TMT funds with a scale of more than 100 million yuan on average rising by 2.37% (funds with a scale of more than 100 million yuan refer to ETF funds that meet the conditions of being listed for trading for more than 2 weeks, the sample update date's management scale exceeds 100 million yuan, and the average daily transaction volume in the last two weeks is not less than 10 million yuan). Cyclical, consumer, small and medium-sized, and biopharmaceutical sectors all closed lower. Looking further at fund flows, the inflow of funds related to science and innovation/entrepreneurship indexes is the highest, the broad market index ranks second, and TMT ranks third.

"The recent significant market fluctuations are partly due to the warming of investor sentiment, which has amplified short-term fluctuations. After the sentiment cools down, valuation corrections are inevitable. At the same time, a large influx of funds has raised the overall industry valuation. Whether it can match the performance for the third quarter and the whole year still needs to be verified by the disclosure of financial reports." A private fund manager in Shanghai told reporters, "The technology stock market will inevitably be accompanied by bubbles, corresponding to the abundance of funds and a significant increase in market risk preference. At present, the dual attributes of semiconductors (cyclical and growth) are in an upward recovery cycle, which is beneficial for valuation repair, especially when the industry's market value is still undervalued in recent years. Demand is still mainly structural, so the premium given by the market may only occur in stocks with better-than-expected performance or continuous profit repair."