In recent years, the semiconductor equipment industry in mainland China has experienced remarkable growth alongside the expansion of wafer fabrication facilitiesAs manufacturers roll out new products, they have garnered positive recognition from clients, which has resulted in a significant increase in orders and a reinforced market presence, creating a virtuous cycle of production and revenue.

The recent wave of investments by wafer foundries presents substantial opportunities for the semiconductor equipment sectorMultiple companies have successfully tapped into new customer bases and explored emerging markets, enhancing overall revenue levelsAs of the third quarter of 2024, contract liabilities in the semiconductor equipment segment reached approximately 20.182 billion yuan, reflecting a year-on-year growth of 13.99%. Some of these orders have already been converted into revenue, and many related companies reported record highs in their quarterly revenue or profits

However, for certain companies, there has been a slight decline in gross marginsVariations in product and customer structures from quarter to quarter can lead to fluctuating profit marginsTo combat this, equipment manufacturers must increase their research and development investments, launch new features and modules, and maintain production scale to dilute the depreciation costs that can impact profitability.

In recent years, the capital markets have offered substantial funding to semiconductor equipment companies, with equity refinancing volumes exceeding 20 billion yuanAs of now, the returns on equity for related companies have significantly increasedThe end-market demand for automotive, industrial, and consumer electronics sectors continues to recover, while the growing complexity of devices will support accelerated orders in the upstream equipment segments.

We're witnessing the onset of a peak investment period in wafer fabrication facilities

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Following the lows reaches in the fourth quarter of 2023, when wafer production capacity utilization fell below 70%, foundries have once again initiated an expansion cycleThe International Semiconductor Industry Association has projected that capital expenditures on wafer fabrication equipment will rise continuously from 2025 to 2027, with year-on-year growth rates of 21%, 12%, and 4% respectivelyNotably, equipment spending is expected to hit a record high of 145 billion dollars by 2027. In 2024 alone, it’s projected that 60 new wafer fabs will begin construction globally, with six of them located in mainland ChinaFurthermore, there are currently 19 operational fabs in China, and by 2027, the country is anticipated to account for 29.71% of the world’s total of 239 300mm fabs.

The expansion plans of wafer foundries are creating significant growth opportunities for the semiconductor equipment sector

Statistics indicate that by the third quarter of 2024, contract liabilities in this sector have risen to 20.182 billion yuan, marking a 13.99% increase year on year, with an inventory balance of 57.612 billion yuan—a 42.81% increase compared to the previous year.

In the first three quarters of 2024, the equipment manufacturer Zhongwei Company recorded new orders of 7.64 billion yuan, marking a year-on-year increase of approximately 52.0%. Notably, the company reported new orders of 6.25 billion yuan for etching equipment, which represented a growth of around 54.7% from the previous yearThe company foresees new orders could reach a total of 11-13 billion yuan in 2024. Zhongwei further expanded its production output of dedicated equipment by about 310%, which corresponds to a value of approximately 9.419 billion yuan, setting a solid groundwork for future delivery and revenue recognition.

Many companies are beginning to see the conversion of orders into tangible revenue

During the first three quarters, Huahai Qingke generated operational revenue of 2.452 billion yuan, reflecting a 33.22% increase over the same period last yearThe company's net profit attributable to the parent company also rose by 33.85% to reach 615 million yuanSpecifically, in the third quarter of 2024, Huahai reported a quarterly revenue of 955 million yuan, up 57.63%, and a net profit of 246 million yuan, growing by 62.36%, achieving a historical peak.

Zhengfan Technology also saw a record high in its third-quarter performance, posting a revenue increase of 54.63% to 1.649 billion yuanThe company’s net profit attributable to the parent company reached 195 million yuan, a 55.63% rise, further demonstrating the rebound of the semiconductor equipment market.

During the third quarter, companies like Shengmei Shanghai and Northern Huachuang recorded historical highs with revenues of 1.573 billion yuan and 8.018 billion yuan respectively, marking increases of 37.96% and 30.12%. Shengmei’s newly established equipment research and manufacturing center, which includes two buildings and an auxiliary facility, reportedly saw its first measuring devices being installed in a cleanroom, dramatically enhancing the company’s measurement capabilities.

Finance and investment trends stability remain positive

In the first three quarters of 2024, Northern Huachuang's research and development expenses reached 2.192 billion yuan, nearly doubling compared to two years priorConsequently, its return on equity has seen a sharp increase, with its gross sales profit margin sitting at 44.22%. Most notably, the company's asset turnover ratio spiked to a historical high of 0.35 times, demonstrating an effective utilization of its resources.

Zhongwei Company also reported significant growth in operational revenue for the first three quarters 5.507 billion yuan, which constitutes a 36.27% increase compared to the previous yearTheir plasma etching equipment has gained widespread recognition among both domestic and international clients, with revenues for etching equipment reaching 4.413 billion yuan—an approximate 53.77% year-on-year increaseNew products like LPCVD equipment generated an initial revenue of 28 million yuan, and the EPI equipment has successfully passed verification phases with numerous advanced logic devices and MTM device clients.

Though gross margins for Zhengfan Technology fell slightly to 27.47%, primarily due to pricing pressures in their process medium system business, as well as higher depreciation costs from newly established gas production capacities, overall companies continue to innovate through extensive R&D investments.

As for Huahai Qingke, their gross margins recorded 47.42%, 46.46%, and 45.82% throughout 2022-2024. The company is striding to augment its R&D funding in order to sustain steady profitability rates.

The semiconductor equipment industry is gearing up for monumental sales as well

The International Semiconductor Association predicts that sales figures will hit an unprecedented 128 billion dollars by 2025, with backend markets accelerating significantly as testing and packaging equipment trends upwards at growth rates of 30.3% and 34.9% respectively.

Zhengfan Technology experienced a robust improvement in performance during the first three quarters of 2024, with a significant number of orders in hand, mostly stemming from IC sectors, which represent about 50% of their marketAs such, the company is in a position to meet rapidly growing procurement and upgrade demands from clients as it expands its offerings in non-system businesses, which now constitute over 38% of new contracts—increasing by a commendable 83%. This remains a primary driver for revenue growth.

Northern Huachuang continues to expand its product categories, primarily focusing on semiconductor, vacuum, and lithium battery equipment as well as precision electronic components

By maintaining platform-based layouts in semiconductor equipment manufacturing, the company has witnessed remarkable growth in high-end equipment categories, including etching, PVD, CVD, ALD, and cleaning machines among othersAs of the mid-2024, they have seen impressive progress in the investment pace of their various projects, reflecting an optimistic future for order growth, particularly with ramifications stemming from China's memory production line expansions.

Furthermore, Huahai Qingke's CMP products, integral to IC front-end manufacturing processes, have secured increased market share through broader client engagementThe establishment of new polishing system architectures has facilitated their entry into the market with small batch shipments, encountering successive sales orders from major clientsThey have validated several machines for thinning as well as cleaning methodologies, steadily enriching their operational capabilities.

Zhongwei Company is also attuning its sights on advanced packaging market opportunities, having developed TSV machinery applicable to this niche, while concurrently exploring additional equipment products for advanced packaging based on client demand.

Overall, the financial landscape indicates a favorable outlook for semiconductor equipment companies, given the considerable influx of capital being funneled into this sector, showcasing a healthy synergy with the overall industry growth trajectories