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utilization rate of Chinese mainland fabs/packaging and testing fabs is generally better than that of overseas, thanks to the further evolution of the "local for local" localization trend. The semiconductor materials sector has many segments, and the overall benefit is from the recovery of downstream utilization rate to bring about the growth of usage, but some low-end categories will still have price pressure in 2025. We are optimistic about the leading companies in the segment with excellent competitive landscape, especially those that can achieve "0-1" breakthroughs in key links such as advanced storage and advanced packaging, and are expected to continue to benefit from the trend of "independent and controllable" in the upstream of semiconductors in 2025 and achieve a double improvement in performance and valuation.

Comments The

global wafer foundry sector presents the characteristics of "two differentiations", and domestic manufacturers have performed better due to the trend of localized production. 1) Demand differentiation between advanced and mature processes: Taking TSMC as an example, the capacity utilization rate of its 5nm/3nm node has reached 100% since 24Q3 and continues to operate at full load; The 2nm process N2 is also progressing smoothly, and mass production is expected to start in mid-2025. Due to the weak demand for industrial control and automobiles in the mature process, and the continuous release of the production capacity of mature node wafers in the industry during the same period, the utilization rate and price of the overall mature wafer fab are still under pressure. We expect global mature 8-inch production capacity to exceed demand by about 20% in 2025 and 15% in 2026, while 12-inch is relatively good, and the proportion of oversupply is expected to be in the high single digits. 2) Demand differentiation of mature processes between different regions or countries: In the context of geopolitical uncertainty, the trend of "local for local" has led to the differentiation of demand for mature processes between different regions. Taiwan's mature wafer fabs such as UMC, VIS and PSMC will only have less than 7% of the 8-inch capacity utilization rate in 2024, and it is expected to recover to 75-80% in 2025. On the other hand, in China, the utilization rate of wafer fabs represented by Huahong and Jinghe Integration is better than that of overseas peers (especially 12-inch), and we believe that this divergence will continue until at least 2025. Taking Huahong as an example, the company's current utilization rate of the 8-inch production line has dropped slightly to 90%, while the 12-inch production line is still maintained at more than 100% overload; Benefiting from the release of 12-inch production capacity in Wuxi and the increase in MPS's overseas orders, the overall ASP in 25 years will continue to recover in the second half of 2024, driving the revenue in 25 years to increase by about 15-20% year-on-year.

Downstream demand is recovering moderately, and semiconductor material companies that pay attention to "excellent competition pattern + new products to achieve 0+1 breakthrough". From the perspective of volume and price, we expect that the sales volume of semiconductor materials will increase in 2025 with the recovery of the utilization rate of downstream wafer factories, but due to the continuous expansion of upstream material manufacturers in the past two years and the competition of domestic semiconductor materials is mostly concentrated in the low-end category, some subdivided consumables such as wet electronic chemicals and electronic special gases still have some price reduction pressure. On the other hand, we are optimistic about the leading companies in the segment with excellent competitive landscape, especially those that can achieve "0-1" breakthroughs in key links such as advanced storage and advanced packaging, and are expected to continue to benefit from the "independent and controllable" trend of semiconductor upstream in 2025 and achieve a double improvement in performance and valuation. It is recommended to pay attention to: 1) Electronic bulk gas (Guanggang gas 688548. CH, Changxin and Changcun suppliers); 2) CMP polishing slurry (Anji Technology 688019. CH）； 3) Advanced packaging electroplating solution and photoresist (Aisen Co., Ltd. 688720. CH）； 4) PCB electronic chemicals and electroplating solutions (Tiancheng Technology 688603. CH）； 5) Silicon carbide substrate (Tianyue Advanced 688234. CH, the main business of silicon carbide substrates continues to expand and superimpose SiC wafers in the application of optical waveguides.

Risk Warning:

1) The expansion progress is slowing down and less than expected; 2) the increase in the share of localization has slowed down; 3) Deterioration of market competition