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Chips are back, but not equally or for everyone

In the space of six months, the global semiconductor industry turned from being one of the hottest sectors to being among the most beaten up and bruised. An economic downturn, continued Covid lockdowns in China, heightened tensions across the Taiwan Strait, and harsher rules from Washington wiped close to $2 trillion off the value of listed chipmakers.

Now they’re back. An extraordinary turnaround over the past month has added $600 billion to the value of these companies. The rebound hasn’t been distributed equally, though, with some geographies and product sectors doing better than others.

An analysis by Bloomberg Opinion of more than 220 listed global chip companies with a market value of at least $1 billion found investors have brushed off concerns over the US government’s stricter rules on technology transfer to China. At the same time, semiconductor players in the world’s second-largest economy have fared worse, despite recent moves to ease Covid Zero and boost the local economy.

The Biden administration, early last month, announced it would halt access to machinery, software, and support that Chinese chipmakers use to manufacture components at 14-nanometers or better. The majority of capacity is currently at 28-nanometers or older, but the new rules are aimed at ensuring Beijing fails to catch up to the US and its allies. Shares of equipment and service providers such as Lam Research Corp. plunged amid fears that China would suddenly be out of bounds.

Chip designers such as Nvidia Corp. and Advanced Micro Devices Inc. also suffered on the belief that Chinese clients would no longer be allowed to procure their advanced components used to run artificial intelligence and high-performance computing systems. Equally, these moves were supposed to boost China’s local chip players as the industry benefits from government support aimed at shifting the balance away from foreign companies.

Investors now see it differently. In the past month, the weighted-average return of the global semiconductor sector jumped 21%. The sector is still down around 30% for the year with only two names among mid- and large-cap companies eking out growth (GlobalFoundries Inc. and On Semiconductor Corp.).

Nvidia and AMD, along with Dutch equipment maker ASML Holding NV, are leading the gains. In fact, it’s the bigger players — with market values above $100 billion — that have been the major beneficiaries of this turnaround, climbing an average 23.5%. This could be a sign that investors are ready to wade back in but would prefer to stick with blue-chip names: Taiwan Semiconductor Manufacturing Co. added almost $70 billion to its market value in the past month. Small-cap companies, which we define as those between $1 billion and $10 billion, are the laggards.

Note that we excluded Samsung Electronics Co. from our analysis because although it’s a major chipmaker, less than a third of its revenue comes from semiconductors.

Perhaps the biggest sign that investors are not concerned about the tougher regulations on selling to China is the fact that seven of the top 10 performers are providers of equipment or related services. These companies also have the potential to be among the biggest losers after major names, including TSMC, Intel Corp. and SK Hynix Inc., slashed their spending budgets for this year citing a supply glut and worsening economic outlook. But rather than cancelling orders, it’s looking increasingly likely that chipmakers will just push back their procurement to next year in anticipation of long-term growth.

Although much smaller than Taiwanese and American chipmakers on average, the sheer number of Chinese listed companies makes the nation a major player in global capital markets, even if that has yet to translate into supply-chain share.

This plethora of upstarts is due in large part to Chinese leader Xi Jinping’s plan to boost the local sector, complete with preferential treatment and government spending. That ought to be a positive for the industry. But investors don’t seem to believe it’ll benefit much, despite the US working ever harder to cut the world’s most-populous nation off from the rest of the planet. Apart from South Korea, which suffers from being highly reliant on the extremely moody memory-chip business, Chinese semiconductor companies lagged rebounds among US, Japanese and Taiwanese peers.

Chipmakers’ sharp drop through the middle of this year was a stark reminder for investors, and the industry, to not take the sector for granted. Yet as the dust settles, tensions cool, and world leaders gather again, the same reasons to fall in love with chips start to re-emerge. Until the next crisis.

The article has been authored by Tim Cuplan, columnist, Bloomberg

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