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Global AI boom surges, but local semiconductor players face delayed recovery

Douglas Toh
Douglas Toh • 8 min read
Global AI boom surges, but local semiconductor players face delayed recovery
Souring US-China relations could prove to be a real hurdle for the recovery of the semiconductor industry in 2025. Photo: Bloomberg
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The semiconductor industry has experienced a mixed year. On the one hand, Semiconductor Equipment and Materials International (SEMI) reported that electronic sales rebounded in the third quarter, growing 8% q-o-q after declining in the first half. Likewise, semiconductor capex turned the corner in the period, with memory-related capex surging 34% q-o-q and 67% y-o-y. 

Memory capacity, in particular, increased by 0.6% in the third quarter due to the surging demand for high bandwidth memory (HBM) chips, which are essential to the complex computing demands for AI processes.

Industry headliner Nvidia has continued to see its share price rise to astronomical heights, with a 184.5% jump year-to-date to US$137.06 ($184.50) as of Dec 12. In its 3QFY2025 ended Oct 27 results, the chip giant reported a net income of US$19.3 billion, up 16% q-o-q and 109% higher y-o-y from 3QFY2024’s US$9.24 billion. “The age of AI is in full steam, propelling a shift to Nvidia computing,” says Jensen Huang, the company’s founder and CEO.

Huang is playing the role of the pied piper well. A global semiconductor industry outlook survey conducted at the end of 2023 by international audit firm KPMG revealed that AI ranked as the second-most important revenue driver for companies while implementing generative AI was identified as one of the top three strategic priorities for the next three years.

While over 80% of respondents projected revenue growth in 2024, 30% reported an excess of semiconductor inventory, and a further 12% expected a surplus to emerge by the year’s end. The growth is also uneven. Maybank Securities analyst Jarick Seet says semiconductor companies in Singapore are still waiting for a recovery, as the expected rise in volume orders has yet to materialise.

“It’s now delayed to the second half of 2025. While AI did help with some demand, the mass market demand from the automotive, PC sectors, et cetera is still lacklustre. There is still hope for a ramp-up next year, but the current additional US sanctions looks to be a dampener,” adds Seet.

See also: Grand Venture Technology rides semicon recovery by investing ‘ahead of the curve'

Weathering storms

Mainboard-listed UMS Integration, one of the key semiconductor players here, has reported muted results over the past year and more, with its latest set of results no different. Still, for the original equipment manufacturer (OEM) formerly known as UMS Holdings , there are some indications of a turnaround. For its 3QFY2024 ended Sept 30, earnings came in 32% lower y-o-y at $10.4 million, while revenue fell 9% y-o-y to $64.9 million. Despite this, both figures showed an improvement q-o-q, at 11.5% and 16.1% respectively. 

The stalling of the semiconductor industry’s recovery and excess inventory from UMS’ key customer, capital equipment maker Applied Materials (AMAT), has continued to hurt the group. Revenue in UMS’ semiconductor integrated system segment fell 19% from $33.3 million in 3QFY2023 to $27.1 million in 3QFY2024, while component sales dipped 6% y-o-y to $28 million. 

See also: Chipmaker Kioxia faces tough debut in Tokyo’s busy IPO arena

To relieve some reliance on AMAT, UMS has secured a new customer, which is expected to boost earnings in the year ahead. With this, Seet upgraded his call on the stock from “sell” to “hold” at a raised target price of $1.03 from 85 cents previously, noting that although the group’s outlook seems cloudy, earnings had bottomed out.

He writes in his report on Nov 12: “UMS is still facing labour shortages, causing the ramp-up of orders to be slower than expected. However, it is expecting $50 million of orders in FY2025 from its new customer, but execution will be a key hurdle.”

RHB Bank Singapore’s Alfie Yeo is more optimistic, believing UMS could benefit from the industry’s recovery, driven by a surge in orders from a new customer from 2HFY2024 onwards. “There are also plans for another assembly plant, post its recent equity fundraising exercise, to increase production capacity. This, in turn, should facilitate customers scaling up their orders in the future. We believe it will target more complex, medium- and large-format components to boost customer stickiness,” writes Yeo in an unrated Nov 4 report.

Mixed reactions

Like its peers, AEM Holdings has faced a challenging 2024. Once a high-flying stock, the chip tester saw the resignation of both its CFO and CEO, as it turned from making big bucks into flowing red ink.

With the appointment of Amy Leong as the new CEO on July 1, however, AEM has embarked on a strategy of riding the incoming AI wave due to Leong’s expertise in the field. Leong’s most recent stint was at the California-based FormFactor, where she was involved with advanced packaging and AI-driven test requirements.

For its 3QFY2024 results, the chip tester reported a loss of $917,000, an improvement from $1.52 million a year ago in the same period despite a 6.5% y-o-y decline in revenue to $74.2 million. The improvement stems from a better-margin product mix, reinforcing AEM non-executive chairman Loke Wai San’s comments in a June interview with The Edge Singapore, where he mentioned “four new vectors in the pipeline”.

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Analysts have mixed reactions to its most recent earnings. While the majority remain cautious on this counter, DBS Group Research’s Amanda Tan and Ling Lee Keng have put out what they admit is a contrarian “buy” call.

“Earnings appear to be a miss versus our FY2024 estimate of $10 million. 3QFY2024 revenue of $74 million was largely in-line, with 9MFY2024 revenue of $248 meeting 69% of our full-year estimate,” writes UOB Kay Hian’s John Cheong in his Nov 14 report.

While he understands that AEM aims to reach its mid-term targets with continued growth and expansion into new test markets, he awaits positive surprises in future revenue guidance and the company’s winning of more new customers. With this, Cheong raised his target price to $1.10 from $1.04, although he kept his “sell” call. 

Meanwhile, DBS’s Tan and Ling believe that the company is near an inflexion point, and they foresee AEM’s customer diversification strategy to yield more significant returns from 1QFY2025 onwards. To reflect their optimism, they have raised their target price to  $1.72 from $1.67. 

“The $20 million order which was initially due for recognition in 4QFY2024 will now be booked in FY2025, while there has been a pull forward of around $30 million in revenue from Intel into 4QFY2024 from FY2025,” write Tan and Ling. “Barring further exceptionals, we believe that we are past the earnings trough as Intel’s contributions remain supported by the non-cancellable purchase orders while new customer contributions gain momentum,” they add.

Delayed recovery?

Frencken Group, with its more diversified overall customer base, was able to improve its earnings in the most recent quarter even as its peers struggled. In its 3QFY2024 ended Sept, it reported revenues of $9.2 million, up 29.3% y-o-y. 

In-line with this was a 7.7% increase in revenue to $198.6 million due to greater contribution from its mechatronics business division, where its semiconductor segment lies. Revenue in the segment increased by 23% y-o-y to $91.7 million on the back of steady sales to its key customer in Europe, ASML, the leading manufacturer of chip-making equipment, as well as continued recovery in sales from its Asia operations.

Despite the growth, Frencken noted on Nov 19 that the uneven recovery across different markets in the global semiconductor industry has caused delays in demand for some sector segments.

While Maybank’s Seet has retained Frencken as his top pick in the Singapore tech sector, he has lowered his target price to $1.47 from $1.77 on slower AI-driven growth. “We believe the much-anticipated ramp up in orders will now likely only come in 2QFY2025 to 3QFY2025 as we do not see any signs of incoming ramp up yet from our channel checks.”

DBS’s Ling has also kept her “buy” call while lowering her target price to $1.47 from $1.77 previously, noting that Frencken’s 3QFY2024 results were below expectations while expecting the pick-up in orders to arrive in 2HFY2025.

While the semiconductor industry appears poised for a delayed recovery, risks remain. The primary concern is the impact of worsening US-China relations. China has already launched an antitrust investigation into US-based Nvidia, believing its acquisition of Israeli networking company Mellanox could violate the country’s anti-monopoly laws.

Then, there is US president-elect Donald Trump. During his campaign, he criticised the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act introduced by outgoing president Joe Biden, whose administration aimed to fund the domestic production of semiconductor chips, which are largely manufactured overseas.

Trump has openly labelled the act “a bad deal” and argued that his proposed tariff-heavy strategy would achieve the same goal of bringing chipmakers back to the US. Until his swearing-in on Jan 20, 2025, the semiconductor industry and players in Singapore can only adopt a wait-and-see stance amid this increasingly complex geopolitical climate.

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