Semiconductor sector in turmoil: profit realization and financing outcomes will be key

1️⃣ Last week, the AI sector experienced a significant correction, reflecting the market’s growing demand for downstream commercialization to catch up with upstream capital expenditure, even as industry demand continues to grow. TSMC emphasized a massive supply-demand gap, while ASML stated that under current plans, output for 2027–2028 will still be insufficient to meet demand. Strong financial reports are no longer enough to dispel concerns about investment returns, as controversy around Anthropic’s revenue and valuation has further amplified worries. Quarterly revenue, annualized run rates, and profitability metrics for unlisted companies should be strictly distinguished, and no single company can represent the entire model industry. The market’s call for more evidence of commercialization is reasonable, but if all upstream profits are regarded as cyclical peaks, it may underestimate the demand potential unlocked by AI Agents.2️⃣ The widening of AI credit spreads is another catalyst, but pressure on financing costs does not equate to a complete cutoff of financing channels. Some CoreWeave bonds now yield over 15%, reflecting investors’ increased expectations for capital expenditure, repayment timelines, and debt-servicing ability. We will focus on the actual fundraising scale, cost, and terms for new cloud providers, as well as customer prepayments, project delivery, and cash collection. Pressure on individual highly leveraged companies can coexist with AI industry growth; if demand shifts toward well-capitalized cloud platforms, the industry is more likely to see financing subject differentiation rather than a collapse in overall demand.3️⃣ ChangXin Memory Technologies is accelerating memory capacity expansion with new technology, but this is not enough to overturn the view that AI is driving a shift in the demand center. Its new technology is initially aimed at DDR5, which in the short term is unlikely to ease the leading supply constraints for HBM; as Agents expand, competition for limited capacity between HBM and standard DRAM will persist. Global semiconductor sales have surged far beyond previous cycles, also reflecting how AI is opening new demand frontiers. Major memory players should not be valued purely based on traditional cycle peaks—technological barriers, long-term purchase commitments, and earnings visibility should be more fully priced in.4️⃣ Easing interest rate pressures does not mean financing pressure disappears, and high-valuation “defensive assets” are not necessarily safer. Last week, US September inflation beat expectations, but long-term Treasury yields fell and rate hike expectations for October cooled, with the decline in real rates being the main driver. The coexistence of lower risk-free rates and wider credit spreads suggests the market is still pricing in growth and financing risks. If AI-related financing pressures spread to investment and employment, traditional sectors will feel the strain as well; if industry expansion continues and downstream cash returns improve, upstream semiconductor companies and cash-rich cloud platforms may see room for valuation recovery. We maintain our industry outlook, with profit realization and financing outcomes the key factors to watch in the next phase.5️⃣ China-EU trade negotiations have opened a window for easing tensions, but the manufacturing trade game will persist. The interim arrangement for hybrid vehicles and the reduction in China's export tax rebate rate for new energy vehicles show that Chinese manufacturing’s internationalization faces a more complex trade policy environment. According to the “trade dependency–domestic competition pressure” framework, European mechanical, steel, and certain chemicals sectors—which have low dependence on China and high domestic competition—remain the most likely targets of trade defense. We are currently only in the first stage of this round of trade friction; relaxing negotiations does not mean that export constraints have ended. Increased uncertainty in external demand will also heighten the urgency for the implementation of policies to stimulate domestic demand in China.