The China Syndrome- The Meltdown Starts- Trump Trounces Taiwan- Chips Clipped

• The chip industry got a double tap of both China & Taiwan concerns
• Bloomberg reported the potential for draconian China chip restrictions
• Trump threw Taiwan under the bus demanding “protection money”
• Over-inflated chip stocks had a “rapid unscheduled disassembly”

US looking to further restrict ASML & Tokyo Electron

It has been reported by Bloomberg that the US is going to crack down further on chip equipment sales.

Unfortunately the main targets appear to be non US semiconductor equipment companies such as ASML & Tokyo Electron rather than US equipment companies which sell a similar percentage of their wares to China.

Link to article on China restrictions

The US government is obviously punishing foreign firms more than US firms, Such as AMAT, LRCX & KLAC that are doing the same thing. Perhaps not wanting to hurt US companies…..or perhaps the government is finally realizing their efforts haven’t worked and will finally crack down on US based sales to China.

We mentioned in our note last week about the tens of millions of dollars being spent lobbying the government on behalf of US equipment companies…..maybe its not enough or the government is finally realizing they need to do more

Foreign Direct Product rule

….says that the US can restrict foreign companies, like ASML & Tokyo Electron from selling and servicing equipment that contains US technology.

Foreign Direct Product rule link

ASML famously bought Cymer, a US company in San Diego for their DUV & EUV sources.

Most investors don’t know that Cymer had a lot of “star wars” defense industry technology involving high power lasers and that ASML had to get permission from US defense related officials in order to acquire Cymer. Any agreements ASML made in order to achieve permission were never publicly released, but we would imagine the US government retained some sort of influence

The government is likely as concerned about chip technology as well as high power laser technology

Tokyo Electron does a lot of R&D in the US (as does ASML), so we are sure their products contain US technology in many places….its impossible to avoid

That giant “sucking sound”

We had mentioned in our note last week that US equipment companies would be “sucking major wind” if they lost the 40% plus of their sales which go to China.

But its much worse than it appears on the surface. US chip equipment companies charge Chinese companies a whole lot more than TSMC or Samsung, so the margins are much higher on that 40% plus than of the 50%+ non China sales.

We would not be surprised if closer to 60% or more of profitability comes from China sales. Thus losing China sales has an oversized impact on the bottom line.

US semiconductor equipment companies could actually lose money for the first time in many years if China sales were curtailed enough…..it could get very ugly very fast….

The Mafia “Don” wants “protection money” from Taiwan

Having been born and raised in New York we were very familiar with local establishments paying “protection money” to organized crime types to prevent something bad from happening…….

You can imagine the phone call from the US to Taiwan….” nice little island you got there, you wouldn’t want anything bad to happen to it, would you?”, “cut us in for 20 percent of the action on those chip things you make….”

This scenario is not as far fetched as it would sound as Donald Trump today suggested that the US might not defend Taiwan if they didn’t pay the US for that “protection”….so much for helping out friends and allies….obviously Ukraine will get a similar message.

This statement threw gasoline on an already raging China restriction issue that had the chip stocks in turmoil already.

If the US restricts China sales and China blockades Taiwan at Trumps invitation, equipment sales at the number one and number two markets are at risk……a very bad day…..

The Stocks

…were obviously crushed today on this double whammy of news.

Its not like the stocks were at low valuations to begin with. We have pointed out time and again that the stocks were overheated and over extended. We certainly think AI is the greatest thing in technology ever, but a lot of unrelated chip and chip equipment names got run up in the tsunami.

We will likely see a near term valuation reset across many names in the semi space.

Final valuations and impacts will not truly be known until the US actually publicly states what’s going on and how bad the damage will be. Until then it will be a guessing game but just guessing how bad the impact will be as its all negative.

Initially it will be ASML & TEL but we think this time US companies will likely finally feel some pain as well…..we just don’t know how much it will hurt……

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.

Also Read:

SEMICON West- Jubilant huge crowds- HBM & AI everywhere – CHIPS Act & IMEC

KLAC- Past bottom of cycle- up from here- early positive signs-packaging upside

LRCX- Mediocre, flattish, long, U shaped bottom- No recovery in sight yet-2025?

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