The pandemic has triggered a strong surge in demand for technology products as the global remote workforce expanded in a rush.
More people are also going online to communicate, transact and interact with one another.
These changes have resulted in an explosion in demand for semiconductors that are the main components of electronic devices.
However, the situation has also led to supply chain disruptions due to the temporary shutting down of factories and foundries.
Semiconductor industry veterans believe that restarting these plants and restoring supply chains to pre-pandemic levels could take as long as 18 months..
The situation has become so dire that top semiconductor manufacturing companies such as Taiwan Semiconductor Manufacturing Company (TSMC) (TPE: 2330), Intel (NASDAQ: INTC) and Nvidia (NASDAQ: NVDA) have warned that this crisis could last up till 2023.
In response, TSMC plans to spend US$30 billion to expand production this year, but these new plants will also take time to come online.
What’s certain is that this problem is unlikely to be resolved this year.
Investors may be worried as to whether electronic stocks may be impacted by this development.
Here are some observations and their implications.
Encouraging financial results
The sector has thus far reported an encouraging set of earnings for the first quarter of 2021 (1Q2021).
Micro-Mechanics (Holdings) (SGX: 5DD), or MMH, a company that designs, manufactures and markets tools, parts and assemblies for the semiconductor and aerospace industries, among others, reported a 9% year on year rise in revenue for its latest quarter (3Q2021).
Net profit after tax climbed by 7.9% year on year to S$4.2 million.
Meanwhile, UMS Holdings (SGX: 558), a company that provides equipment manufacturing cum engineering services to manufacturers of semiconductors, announced a 42% year on year surge in revenue to S$49.6 million.
Net profit attributable to shareholders soared by 44% year on year to S$15.4 million.
Elsewhere, blue-chip contract manufacturer Venture Corporation Limited (SGX: V03) has reported that revenue inched up 2% year on year, coupled with an 8.3% year on year increase in net profit.
These results show that the electronic players have not been as badly hit as expected and are still able to post growth on both top and bottom lines.
Momentum expected to continue
The outlook, as shared by these companies, remains sanguine.
According to MMH, the Semiconductor Industry Association (SIA) announced that chip sales have kicked off 2021 strongly and that semiconductor production is rapidly rising to meet surging demand.
Data from the World Semiconductor Trade Statistics (WSTS) pointed out that worldwide semiconductor sales for both January and February increased by 14% year on year to US$79.6 billion.
UMS’ CEO Mr Andy Luong has commented that the increased consumption of chips has opened up “significant” growth opportunities for the group as the major chip manufacturers ramp up production.
The global semiconductor manufacturing equipment market is poised to rise by 9.6% per annum from 2021 through 2026, supported by artificial intelligence, cloud computing and the Internet of Things.
Frencken Group (SGX: E28), which provides integrated technology solutions to a wide variety of industries such as life sciences and semiconductors, reported that its semiconductor segment is expected to show sequential revenue improvement in the first half of 2021 compared to the second half of 2020.
This expectation stems from strong global demand for both front-end and back-end semiconductor equipment.
Taken together, there is a consensus among these companies that the future is going to be bright, and that they are well-positioned to benefit from it.
Diversifying supply sources
Meanwhile, the problem of semiconductor shortage is being addressed by Venture Corporation.
The group has acknowledged the ongoing supply disruptions in impeding its ability to fulfil orders from customers.
Its solution is to set up working groups to source for parts from a wider base of suppliers and by working with its various stakeholders to secure the components it needs.
Although the other electronic companies did not flag these problems out, their optimism for the future implies that these kinks should work themselves out over time as chip manufacturers gradually ramp up production.
Get Smart: Short-term disruption
Investors need not fret too much over the current supply disruptions.
Though these disruptions may result in short-term pain and temporary hiccups, the industry’s growth momentum should resolve these issues over time.
Companies such as MMH have a clean balance sheet with zero debt, and this should stand it in good stead to weather any immediate challenges.
You should keep the faith and hold out for better days to come once these supply chain issues are fully resolved.
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Disclaimer: Royston Yang owns shares of Micro-Mechanics (Holdings) Limited.