Semiconductor Cycle Turns: China's Domestic Substitution Enters the Order Fulfillment Phase

Global Semiconductor Industry Chain Gains Momentum in Synchronized Uptrend: Cyclical Turning Point Has Arrived; Domestic Substitution Enters the Order-Realization Phase

In early June, the global semiconductor industry witnessed an unusually broad-based, cross-market, and cross-link surge: over 100 stocks in A-share chip and AI-computing hardware sectors hit their daily trading limits; Chinese and Korean semiconductor ETFs both surged by the maximum allowable 20%; the Hang Seng Tech Semiconductor Index led the Hang Seng Index higher, with heavyweight constituents—including Cambricon and SMIC—posting gains exceeding 12%; and the STAR 50 Index soared 4.17% in a single day—the largest one-day gain in three years. This rally is no isolated event but rather the result of deep resonance among multiple fundamental drivers. The semiconductor industry has clearly transitioned out of a two-year cycle marked by inventory digestion and restrained capital expenditure. Concurrently, the AI-driven computing infrastructure boom—amplified by geopolitical pressures—is transforming “technological self-reliance” from a strategic slogan into verifiable order flows and accelerating capacity ramp-ups.

Policy Catalyst: Launch of the Third National IC Industry Investment Fund + Detailed Equipment Subsidy Rules—Targeted Fiscal Support Now Operational

Domestic policy support has moved beyond high-level declarations into execution and implementation. The third phase of the State Integrated Circuit Industry Investment Fund (“Big Fund III”) completed its business registration at the end of May, with initial paid-in capital reaching RMB 344 billion—a 60% increase over Phase II. A key advancement lies in the optimized allocation structure: the share devoted to equipment and materials has risen to 45% (up from 32% in Phase II), with priority support directed toward three core equipment categories—lithography, etching, and thin-film deposition. More concretely, the Ministry of Industry and Information Technology (MIIT) and the Ministry of Finance jointly issued the Implementation Details for Incentives Supporting First-of-a-Kind Advanced Semiconductor Manufacturing Equipment in early June. The policy stipulates a one-time subsidy equal to 30% of the purchase price for domestic wafer fabs procuring domestically made equipment capable of 28 nm or larger process nodes—and crucially, subsidy disbursements are guaranteed to reach corporate accounts within one quarter (“T+1 quarter”). Field research indicates that Q2 new orders for leading equipment manufacturers—including NAURA, ACM Research, and Topcon—show over 120% sequential growth in contract value from SMIC, Yangtze Memory Technologies (YMTC), and CXMT. Delivery schedules have already been booked through Q1 2025. Policy is no longer about “expectation differentials”—it is now directly translating into concrete, near-term revenue.

Demand Pull: AI Servers Driving Advanced Packaging / HBM / Optical Modules—Global Industry Sentiment Rising in Tandem

Global AI infrastructure deployment is progressing far faster than anticipated at the start of 2024. According to Counterpoint Research, global AI server shipments surged 142% year-on-year in Q1 2024, with orders for NVIDIA’s GB200 servers equipped with HBM3 already scheduled through mid-2025. This demand has directly ignited three upstream, high-barrier segments:

• Advanced Packaging: JCET and Tongfu Microelectronics have secured CoWoS packaging orders for AMD’s MI300X and NVIDIA’s Blackwell platforms. Their Wuxi-based 2.5D/3D packaging lines are operating at 100% utilization, and customer advance payment ratios have climbed to 40%;
• HBM Memory: CXMT announced mass production of HBM2E, achieving a yield rate exceeding 85%, and has begun receiving bulk orders from domestic AI server vendors;
• High-Speed Optical Modules: Eoptolink and New Opto shipped 800G optical modules at a 90% sequential increase in Q2, with customers including Microsoft Azure, Meta, and domestic AI computing centers.
  Notably, South Korea’s KOSPI surged 8.2% in a single day, while Samsung Electronics and SK Hynix shares hit all-time highs—underscoring the supply-chain synergy between China and Korea in memory and advanced packaging. China supplies AI-end-device demand and computing infrastructure, while Korea provides HBM and advanced-node manufacturing capacity—creating a regional virtuous cycle.

Geopolitical Catalyst: Heightened Urgency for Self-Reliance—Critical Breakthroughs in Domestic Substitution Rates

Recent easing of Middle East tensions—including former U.S. President Trump’s statement that a U.S.-Iran deal would be reached “within two or three days”—has not weakened the semiconductor self-reliance thesis. Rather, it highlights the strategic inflexibility of technological sovereignty. Following North Korea’s state visit, senior Chinese leaders conducted intensive inspections of the Yangtze River Delta IC industrial cluster, signaling a dual-track emphasis on “security and development.” Against this backdrop, domestic substitution is shifting from “functional” to “high-performance”:

• Equipment: Etching equipment localization rose from 28% in 2023 to 41% in 2024; ACM Research’s Prismo HiFi5 etcher has passed verification on 5 nm logic production lines;
• Materials: Anji Technology’s copper CMP slurry holds a 65% share in SMIC’s 14 nm production line; Shanghai Silicon Industry Corporation’s 300 mm silicon wafers maintain a stable yield rate of 99.2%;
• Design: Cambricon’s MLU590 AI accelerator chips have been deployed across multiple AI computing centers, delivering 256 TOPS FP16 compute per card—35% more power-efficient than competing products.
  Order visibility now extends into 2025: JCET disclosed that advance deposits from customers cover 70% of total investment for its newly constructed Chiplet packaging facility in Jiangyin.

Structural Divergence: Shift from Thematic Trading to Earnings Realization—Equipment & Materials Offer Highest Upside Potential

This rally has clearly moved beyond pure theme-based speculation. Among STAR 50 constituent stocks reporting >30% YoY growth in Q1 net attributable profit, those in semiconductor equipment (NAURA: +52%), semiconductor materials (Shanghai Silicon: +48%), and EDA tools (Bilithium: +61%) collectively account for 67%. By contrast, while chip design firms have seen valuation rebounds, sluggish recovery in consumer electronics dampens earnings momentum—resulting in a median YoY growth rate of just 12%. This confirms the current market’s dominant logic: the breakthrough for domestic substitution lies not in chip design, but in equipment and materials—the segments most severely constrained by foreign technology controls, offering the largest replacement headroom, and receiving the most direct policy subsidies.

Caution is warranted, however: recent sharp gains have partially priced in optimistic expectations. CITIC Securities estimates the sector’s forward P/E for 2024 currently stands at 42x—above its historical median of 35x. Should global AI server shipment growth dip below 30% in Q3, or if Big Fund III’s subsequent capital deployment slows, a short-term correction may occur. Yet medium- to long-term prospects remain robust: the successful launch of the Zhuque-2 improved variant rocket signals rising demand for aerospace-grade high-reliability chips; meanwhile, new-energy vehicle giants like BYD are accelerating in-house development of automotive-grade MCUs (Wang Chuanfu emphasized “technology as king”). Domestic semiconductor advancement has thus evolved from “filling capability gaps” to “forging competitive advantages.”

The synchronized strengthening of the global semiconductor value chain reflects the convergence of three powerful forces: the inherent logic of technological evolution, the unwavering intent of industrial policy, and the hard constraints imposed by geopolitical reality. When order data begins speaking for itself, the cyclical turning point needs no further debate—it resonates in the hum of etching chambers inside wafer fabs, glimmers in the micron-scale interstices of stacked HBM dies, and pulses within the 800G laser beams flashing through optical modules.