Ride the technology capex up-cycle
- These government-led initiatives will lead a fresh round of long-term earnings growth and capex expa
Ride the technology capex up-cycle
The Covid-19 situation has changed the contour of economic backdrop and also fast tracked the acceptance of technology development – industrial automation, remote connectivity, cloud, online commerce, digital payments, and the omnipresent Internet infrastructure.
The extensive development in devices, data processing, IC chipsets, high performance computing, and wireless connectivity are driven by constant innovation in technology architecture, which was achieved by uncompromising commitment on capital expenditure (capex). In fact, the magnitude of capex among regions have expanded since the Global Financial Crisis, in which both the North America and Asia ex Japan remained the biggest spenders and have expanded their shares.
Enters the multi-year capex cycle. Meanwhile, signs are emerging that the world’s largest economic powers are upping the ante in boosting their technology development foundations.
In 2020, China spent USD33b of subsidies on technology development in an effort to support the advancement of its semiconductor industry and to move up the value chain. This amount was 14% higher than the year before and an enormous twelve times larger than 10 years ago. Going forward, China will continue the abiding journey and commit large portions of national expenditure in research and development (R&D) innovation to strengthen the migration toward higher value add and self-sufficiency in technology. Presently, IC Insights expects China’s semiconductor self-sufficiency ratio to reach 19.4% by 2024, still poles apart from meaningful levels.
In parallel, across the Pacific Ocean, the recent passing of US Innovation and Competition Act will see USD250b being allocated to match China's technology march. At the core is USD52b in funding specifically for semiconductor research, design, and manufacturing, in order for the US to maintain its technology leadership. The recent chain of events has realistically opened the prologue for fresh round of multi-year capex race.
Against this greater backdrop, the fraternity of integrated device manufacturers (IDM), logic foundries, and memory foundries are projected to spend a total USD110-120b of annual capex in 2021 and 2022, with upside room in the coming years (Figure 1).
Figure 1: Secular capex trend
The new capex cycle has just begun. Government-led initiatives will lead a fresh round of long-term earnings growth and capex expansions among the world's leading semiconductor players, including the equipment makers (Figure 2). We are convinced that the new capex cycle is still at preliminary phase, as many of the industry players have just started to rollout new commitments to revolutionise the technology of tomorrow.
The combination of these factors has resulted in glaring stock price performance among semiconductors and semiconductor equipment makers over the decade (Figure 2). The strong revenue and capex trend will continue to support the sector’s earnings outlook, driven by rising demand for advanced node architecture (Figure 3).
Figure 2: Annual capex of leading semiconductor equipment makers (2009 -2022F)
Figure 3: Sustainable uptrend in semiconductor and equipment sectors
This government-led global race for technology advancement will without doubt bolster the size of the total addressable market (TAM), benefitting a wide range of companies in IC design, wafer foundry, semiconductor equipment, communication networks, artificial intelligence (AI), cloud services, high performance computing, power management, industrial automation, and data security.
Foreseeing the long haul benefits of rolling out more advanced IC chips with more complicated and integrated functions, upstream technology firms have turned proactive in expanding their technology capability, patent portfolio, pipeline development, and more importantly, market share access.
This has triggered waves of ongoing merger and acquisition (M&A) activities where acquiring firms enhance their market positioning, technology standing and product pipelines in the years to come. We see a continuation of large scale M&A deals which will certainly bolster shares of such companies. (Figure 4).
Figure 4: Surge in M&A deals
AI: The next driver of technology advancement. After the huge success of logic and memory ICs and the wonders they are delivering, we foresee that the next multi-decade trend will besiege chipsets with AI capabilities.
The new capex requirement to develop this totally new architecture is expected to skyrocket, led by creations of complicated IC chipsets with AI and quantum analytics capability. Fortune Business Insights predicted the value of global AI market will grow at CAGR of 33% between 2019 and 2027 and reach an annual value of USD267b (Figure 5). Growing need for and adoption of AI across different verticals like automation, machine learning, health care, smart manufacturing, autonomous vehicles, and information security should further augment the demand for AI-enabled chips. At the going rate, AI will be infused into countless of devices and programs, and the success of AI implementation is as good as the capability of the chipsets that run it.
Figure 5: Global AI market
Investment positioning. The Barbell Strategy is well positioned to capture the secular capex trend and ride on the long-term technology migration over the coming years, as the future of broad technology will remain highly compelling.
With rising levels of capex being deployed, the availability of abundant liquidity, and the need for growth-boosting inventions of tomorrow, the wide penetration of digitalisation and secular trends of technology innovation are irreversible. There is a long runway ahead.
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