The semiconductor industry has long been recognized as a cornerstone of modern technology, underpinning everything from smartphones to sophisticated AI systemsAs we look back at the performance of 42 semiconductor firms over the first three quarters of this year, the numbers reveal a remarkable 100% growth in their net profits, excluding extraordinary itemsThis growth positions the sector favorably within the Wind secondary industry index, ranking it as the tenth highest in terms of performanceAs we approach 2024, a gradual recovery is anticipated globally in the semiconductor sector, which is expected to favorably impact companies listed on the A-shares market in China.

However, it is worth noting that the demand experienced by different segments of the semiconductor market has exhibited marked variability this yearFor instance, the consumer electronics sector, after experiencing over eighteen months of inventory digestion, has begun to see a modest pickup in end-user demand

The spike in AI-related products has emerged as the prime area of interest and speculation within the market, while industrial control products continue to face challenges as they work through their own inventory corrections.

Industry experts assert that the current semiconductor cycle has yet to reach its apexThe revenue growth rate for semiconductor companies listed on A-shares is significantly outpacing that of their profitability growth, indicating that there remains further room for profit enhancementBack in 2025, the focus of the semiconductor industry will undoubtedly be the flourishing applications of AI, particularly which products will see their market penetration rates escalate, subsequently driving performance in related firmsAdditionally, as semiconductor cycle recovery trends gradually emerge, China's pursuit of self-sufficiency in its semiconductor industry will serve as another major investment highlight for 2025.

Despite these positive trends, it’s essential to acknowledge that profit growth within semiconductor companies still requires further upward adjustment

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In 2024, the rhythm of recovery in China's semiconductor market is expected to align with global trendsWhile demand for high-end chips like AI processors may remain subdued, there is clear evidence of overall market growthNotably, the demand for imported chips in China is increasing swiftly, with significant imports in processor and storage categoriesRecent customs data indicates that as of October, China’s integrated circuit imports surged to $34.319 billion, reflecting a year-on-year increase of 10.28%. Specifically, the import growth rates for microprocessors and storage devices were reported at 9.69% and 20.61%, respectively.

Allies within the semiconductor supply chain are also reaping the rewards of this recovering landscape, as many companies continue to report impressive monthly revenuesAccording to financial reports, the net profit growth for the surveyed 42 firms reached 100% or more in the first three quarters of the year, with standout stocks such as Huiding Technology (603160.SH) and Weir Shares (603501.SH) presenting astonishing growth rates of 20.41 times and 16.65 times, respectively

This performance marks a notable recovery compared to the previous years.

Overall, the semiconductor sector recorded a median revenue growth rate of 18.62% year-on-year for the first three quarters, while net profit growth figures displayed a less vigorous median rate of 6.6%, resulting in a notable gap of 12 percentage pointsThis data illustrates that while many semiconductor companies have experienced significant revenue rebounds, their profitability remains constrained by the cyclical climate and ongoing destocking phases of some productsIt’s also notable that for most of the first nine months of the year, the semiconductor index displayed lackluster performanceHowever, by the end of September, the sector broke free from its previous two-year downturn, reaching its strongest performance in recent memory, as market funds circled around core stocks linked to AI and self-sufficiency

By December 19, the Wind semiconductor index registered a closing figure of 3709.29 points, equating to an annual growth rate of 18.19%, placing it tenth within the Wind secondary industry indicesMeanwhile, the Philadelphia Semiconductor Index on the U.Sstock market recorded a slightly higher annual growth rate of 19.05%.

The total market capitalization of the 197 publicly-listed semiconductor stocks stands at a staggering 4.83 trillion yuan, marking a year-to-date growth of 1.08 trillion yuanRemarkably, 70 semiconductor stocks have witnessed price increases of over 20%, outperforming major indices such as the Shanghai Composite Index and the CSI 300. Notably, 45 of these semiconductor stocks experienced annual price hikes exceeding 30%, with 8 of them managing to double their market pricesThe standout performers in this sector include Cambrian (688256.SH), Runxin Technology (300493.SZ), and Shanghai Beiling (600171.SH), with increases of 371.27%, 249.65%, and 179.9%, respectively

Moreover, leading giant SMIC (688981.SH) reached its all-time high of 109.5 yuan earlier in November.

The various sub-sectors in semiconductors, such as logic chips, materials, equipment, wafer manufacturing, and packaging/testing, have shown commendable performances—except for the analog chip segment, which has suffered due to a lack of investment interestAs of December 19, the Shenwan Analog Chip Design Index has seen a cumulative decline of 5.06% for the year, the weakest among all semiconductor sub-sectors, with leading stock Zhaoshengwei (300782.SZ) experiencing a drop of 30.94% over the same period.

A responsible executive from a listed semiconductor company noted, “The rapid increase in the number of Chinese analog chip companies over the past two years has intensified competition, leading to significant price wars in numerous categoriesParticularly in the consumer electronics segment, the homogeneity of analog chips has prompted major firms like Texas Instruments to reduce their chip prices in the Chinese market to combat mounting competition—a move that has, unfortunately, hurt many companies' profitability

However, as the industry gradually recovers and with policy-level support for mergers and restructuring, larger listed companies are likely to incorporate smaller players to streamline the industry.”

Looking ahead to 2025, the narrative of "dancing with AI" will likely remain a focal point of the semiconductor phenomenonSignificant figures along the supply chain have yielded impressive results, such as Cambrian’s staggering 371.27% annual increase placing it at the top of the sectorJust as the calendar flipped to December 19, Cambrian's stock price reached a new record of 636.02 yuan, giving it an impressive total market value of 265.5 billion yuanAdditionally, stocks from firms like Zhongke Shuguang (603019.SH) have also seen increases exceeding 50%. Nevertheless, some investors express concern concerning the elevated valuations; Cambrian, for example, boasts a market value of 2600 billion yuan off just 710 million yuan in revenues for 2023, raising questions about the sustainability of such a price increase.

According to forecasts from third-party analysts, major cloud service providers in the U.S.—like Microsoft, Google, and Amazon, alongside Meta—are expected to increase their capital spending by an astounding 42% in 2024, followed by a further increase of 18%, bringing their total to $250 billion by 2025. Furthermore, Apple’s recently launched iPhone 16 introduced nascent AI functions, while expectations for an iPhone 17 release in 2025 suggest substantial advancements in local AI processing capabilities, adaptive learning functionalities, and intelligent scene recognition may usher in a wave of AI-integrated smartphones

This prospect is likely to ignite a growth cycle within the semiconductor sector when combined with the significant investments being made in research and development by these foremost players.

In its outlook for the semiconductor industry in 2025, Zhao Yin International maintains a bullish long-term forecast on the growth driven by AI, emphasizing the importance of seizing opportunities during multiple investment cyclesThe report highlights that core beneficiaries within the supply chain still present ample investment opportunities—including the evolution of AI GPUs, the explosion of AI applications, and the realization of monetization strategies.

Moreover, Zhao Yin International asserts confidence in the rising share of domestic firms in China's semiconductor supply chains, driven by self-sufficiency trendsWith increasing geopolitical tensions shifting the focus of various economic powers from optimizing production efficiency to ensuring supply chain security, self-containment within the semiconductor industry can be viewed as another critical investment theme for 2025.