– News that AMAT facing criminal charges for violating China sanctions
– Sounds like Ion implant tools sent to SMIC in China via South Korea
– Criminal probe goes back to shipments starting in 2021 & 2022
– Overshadows an otherwise OK quarter and outlook
Reuters broke the news on the day of earnings results
It sounds from the Reuters article that the probe into AMAT has been going on for quite a while as it goes all the way back to shipments starting in 2021 after SMIC was put on the “bad list” in the end of 2020.
The probe is being handled out of Boston by the US attorney’s office and the National Security Unit, which points to Applied Ion Implant business in Gloucester Massachusetts.
The report seems to indicate that Applied circumvented the export restrictions by shipping the tools to their subsidiary in South Korea, then cross shipped to SMIC in China.
If proven true, this is a huge violation of the sanctions on China by the biggest US equipment maker.
As with any criminal investigation, Applied refused to comment on the ongoing matter and made no mention of it in prepared remarks on the quarter
Potential Huge penalties
Given that SMIC managed to essentially give a slap in the face to the US by manufacturing 7NM devices that they shouldn’t have been able to, we would imagine that anyone who violated the export sanctions will be harshly dealt with and made an example of.
We would imagine hundreds of millions in potential fines and/or restrictions on future sales to China and living under a microscope with any future export licenses likely subject to delays and more restrictions.
Its very, very bad when you take into consideration that China is Applied’s largest customer and Applied has a huge operation in China.
Likely to threaten Applied’s request for CHIPS act funding
As we had previously pointed out in prior reports we were very dubious of Applied Materials applying for CHIPS Act funding given that they are actively exporting jobs to Asia and specifically Singapore by building an even larger facility in Singapore than they plan for California.
If they are indicted, cut a deal or are found guilty we would imagine that the US government would/should not give them any funding out of the CHIPS Act budget. We can’t imagine the government funding a company that would circumvent the China sanctions.
We also pointed out in our most recent note that increased equipment sales to China was at the expense of other US semiconductor companies like Global Foundries and Micron. Applied sales to SMIC clearly would/will hurt Global Foundries directly.
Porosity of Sanctions continues to haunt the semiconductor industry
We have continued to point out in a number of our notes over the last year or more that the China sanctions were clearly both porous and ineffective, especially in light of SMIC and 7NM.
Equipment companies are well incentivized to circumvent sanctions especially since the industry is in a downturn and China is one of the few regions that continues to buy in an accelerating manner, while the rest of the industry is way down.
We can only imagine that US allies such as the Netherlands and Japan will look at this, if proven true, and wonder why they are going along with sanctions and hurting their own business.
Comes on the heels of a 741 page congressional China report
We put out our most recent note focusing on China semiconductors this past Monday.
Coincidentally on Tuesday (we did not have advance notice: The Coming China Chipocalypse – Trade Sanctions Backfire – Chips versus Equipment , Congress put out a 741 page report pointing out that China sanctions were ineffective.
Now on Thursday we hear about the criminal investigation of Applied Materials.
Link to Congressional report on China Sanctions
Doesn’t matter that AMAT had a good quarter
The criminal news story way overshadows any hint of positive quarterly results in our view.
Applied reported flat Y/Y revenues of $6.72B and non GAAP EPS of $2.12. Guidance was for $6.47B+-$400M and EPS of $1.72 to $2.08. Both results and guide were above expectations.
Applied talked about leading edge business improving while ICAPS (trailing edge) will likely be lower. NAND will be less than 10% of business but DRAM will be stronger.
Given that we are in a downcycle the results are good but not stellar and certainly does not nearly offset the bigger news.
A huge “Wet Blanket”
As the news of the criminal investigation was out along with earnings, the stock was down 7.5% in the after market.
We would imagine there is more downside potential as other investors may sell tomorrow as they don’t want to hang around and wait on the results of the investigation.
The potential negative impact on CHIPS Act money or future licenses and business with China throws a huge wet blanket over the companies outlook.
Unfortunately, there could also be collateral damage on other equipment stocks through guilt by association and exposure to China.
We can only imagine that investigators may want to look into Lam or KLAC given their exposure to China which we previously called out as a significant risk.
Even if this is a “witch hunt” by a government that is pissed about SMIC spitting in their face….witches still get burned or drowned….guilty or innocent…..
Semiconductors in general have been under pressure over China and this will add to uncertainty and concern and related discount in the stocks.
This could be the beginning of a long drip, drip, drip of an investigation and bad news.
With the risks in front of the stock we would be hard pressed to own it given the downside risk as well as the huge uncertainty associated with it.
We would be cognizant of the potential collateral fallout as well.
Not a Happy Thanksgiving……
About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.