Prepare for ASML in the United States

文 | BT财经数据通，作者 | Rickzhang

In the wave of the technology industry, lithography machine giant ASML (ASML) has always been the leader, but the recently released financial report has poured cold water on the industry leader.

On April 17, 2024, ASML disclosed its first-quarter earnings report, but the story behind the numbers is deeply chilling.

The decline in revenue and profit is like a cold wind in the cold winter, which makes people shiver. In the first quarter of 2024, ASML achieved net sales of 5.290 billion euros, a large figure that, despite the substantial, fell by a full 21% year-on-year, and only reached the midpoint of the company's previous forecast revenue range. Despite a gross margin of 51 percent, slightly above expectations of 48 to 49 percent, net profit was only 1.224 billion euros, down 38 percent year-on-year.

All of this points to a fact that cannot be ignored: ASML is facing serious challenges. Behind the challenges is the reduction of orders from customers in Chinese mainland, as well as the reduction in the volume of goods pulled by TSMC and South Korean customers. The value of new orders was only 3.6 billion euros, of which EUV orders accounted for 656 million euros, which is a dismal figure compared to the same period last year.

Looking back on 2023, ASML has enjoyed great prosperity under the strong demand of the Chinese market, with annual sales of 27.6 billion euros, gross profit margin and net profit of 7.8 billion euros, respectively. However, the good times are short-lived, and in 2024, the situation has taken a sharp turn for the worse. The company's revenue forecast for this year was in line with 2023, but the actual results in the first quarter were well below the previous guidance of 5 billion to 5.5 billion euros.

What's even more shocking is that ASML shipped 449 lithography machines in 2023, but in the first quarter of this year, shipments plummeted to only 70 units, a decrease of 54 units from the previous quarter, almost halved. Such a sharp decline in performance has undoubtedly put tremendous pressure on ASML.

The dismal performance is directly reflected in the capital market. Investors were pessimistic about the future of ASML, and the stock price fell in response. According to the data, ASML's stock price dived after the earnings release, falling 6% at one point.

Behind this series of figures, the importance of the Chinese market to ASML is highlighted. As the president of ASML said, decoupling from the Chinese market is impractical, especially in the field of chip semiconductors. ASML's CFO expects that ASML's sales in the Chinese market may fall by 10% to 15% in 2024 with the implementation of export restrictions.

This became the most unbearable pain for ASML.

The truth of what the earnings report shows

In the global semiconductor industry chain, ASML has always been a leader in the field of lithography machines. However, the recent earnings report shows that the industry leader is facing unprecedented challenges. What's the story behind the numbers?

In the first quarter, ASML achieved net sales of 5.290 billion euros, but a closer look reveals that 1.3 billion euros came from the installation management business, while net system sales were 3.966 billion euros. Notably, EUV systems accounted for 46% of net system sales, up 6 percentage points from the previous quarter. This may seem like a positive sign, but the truth behind it is not so simple.

From an application perspective, logic process manufacturers account for 63% of sales, while memory manufacturers account for only 37% of revenue. This data reveals that memory chip manufacturers are becoming more and more conservative in equipment spending. In the shadow of overcapacity, they had to tread cautiously.

Let's look at the number of lithography systems sold. In the first quarter, 11 EUV systems were sold, while ArFi and KrF systems were down 30% and 50%, respectively. More worryingly, new orders amounted to only 3.6 billion euros, well below the 9.2 billion euros recorded in the same period last year. This change in numbers undoubtedly casts a shadow over the future of ASML.

Faced with such a dilemma, ASML's top management tried to give an optimistic explanation. They point out that if you add up new orders in the fourth quarter of 2023 and the first quarter of 2024, there is almost 13 billion euros, which is a considerable figure. However, such an explanation obviously cannot hide the fact that ASML is facing a serious problem of overcapacity.

Overcapacity means a decline in demand for lithography machines. ASML can't deny this. They predict that the demand for lithography machines will not grow until after 2025. Prior to this, ASML's shipments were likely to decline overall compared to 2023. And the surge in shipments in 2023 is more due to the large number of deliveries in the Chinese market before the license expires.

The decline in the performance of wafer foundries such as TSMC, Samsung, and SMIC has cast a shadow on ASML's prospects. These major manufacturers have slowed down the pace of procurement, because overcapacity of advanced processes has become an indisputable fact. Even with the rise of AI chips, TSMC's 5nm process has been able to operate at full capacity, but this cannot change the overall overcapacity situation.

Against this backdrop, the future of ASML is uncertain. Will they be able to survive this winter of overcapacity, and will they be able to usher in an increase in demand for lithography machines in 2025?

In this regard, Peter Wennink, President and CEO of ASML, said: "ASML expects net sales of between €5.7 billion and €6.2 billion in the second quarter of 2024, with gross margins in the range of 50% and 51%. R&D costs are expected to be around EUR 1.07 billion, and sales and administrative expenses will be around EUR 295 million. As the semiconductor industry continues to recover from the downturn, our outlook for the full year 2024 remains unchanged and we expect the second half of the year to be stronger than the first. We see 2024 as a year of adjustment, and we will continue to invest in capacity enhancement and technological advancement to prepare for the inflection point of the industry's cycle. ”

However, at present, the problem is unresolved. But one thing is for sure, ASML is facing unprecedented challenges and pressures. They must find new breakthroughs and growth points to get out of the current predicament.

In fact, the answer has already been given in the financial report.

China remains the largest customer

Judging from the latest financial report, ASML's sales performance in the first quarter can almost be said to be a concentrated embodiment of "China dependence".

Chinese mainland accounted for 49% of sales, up 10 percentage points from the previous quarter. At the same time, once major markets such as Taiwan and South Korea, have languished, falling to just 6% and 19% respectively. This change, like a weather vane, clearly points out the shift in ASML's focus in the global market layout.

Behind all this is the demand of customers in Chinese mainland to continuously expand production capacity. They continue to purchase ArFi and other products, which have become an important support for ASML's performance. However, this high dependence on a single market also makes ASML's future uncertain.

In fact, ASML's close ties to the Chinese market did not happen overnight. As early as after the signing of the tripartite agreement, ASML insisted on shipping to China, and even after the expiration of the agreement, it still worked hard to obtain a four-month license period to continue to supply 2000i and other models of lithography machines to China. This insistence not only reflects ASML's importance to the Chinese market, but also highlights its helplessness and compromise in the layout of the global industrial chain.

However, the expiration of the license is a wake-up call to the delicate relationship between ASML and the Chinese market. With the end of the license, ASML's revenue, profit and lithography machine shipments all declined in the first quarter.

This undoubtedly confirms ASML President Wennink's previous prediction: leaving the Chinese market, ASML will face huge challenges.

The huge demand for lithography machines in the Chinese market is in stark contrast to ASML's shipments. Although ASML has accelerated its shipments to China in the past year, and has even delivered almost all prepaid lithography machine orders, this still only meets half of the domestic market demand, according to the tripartite survey data.

This supply-demand imbalance has put ASML in a dilemma: on the one hand, it is eager to meet the huge demand in the Chinese market, and on the other hand, it is restricted by various export controls and cannot ship freely.

This situation has also made people start to look at the development of China's local lithography machine industry. CITIC Securities and other authoritative institutions believe that with the continuous increase of domestic investment and support for the lithography machine industry chain, the development of domestic high-end lithography machines, especially 14-28 nm DUV lithography machines, is expected to quickly achieve new breakthroughs.

This forecast undoubtedly puts great pressure on ASML, because once the local lithography machine industry in China makes a breakthrough, ASML's position in the Chinese market will face serious challenges.

In such a complex market environment, the future of ASML is full of uncertainties.

They predict that as much as 15 percent of Chinese mainland sales this year will be hampered by export control measures. However, even in the face of such a difficult situation, ASML CFO Roger Dassen remains optimistic about the demand in the Chinese market. He believes that despite the difficult economic environment, demand from Chinese mainland will remain "strong" for the rest of the year.

As an industry that fully enjoys the dividends of globalization, the last thing the chip industry needs is trade protectionism, but the U.S. strategy has been very clear: from equipment to technology itself, the United States wants to encircle China in all aspects involving the chip industry and block China's ability to obtain advanced chip manufacturing technology from the globalized industrial chain. Even at the cost of economic losses.

ASML, who couldn't stand it, had already begun to "resist".

Asmir who began to rebel

Out of its own considerations, the United States has recently started a new round of plans to suppress Chinese companies in the field of chips.

According to Bloomberg, the U.S. government is pressuring allies such as the Netherlands, Germany, South Korea and Japan to further restrict China's access to semiconductor technology. But the U.S. move has met with resistance in some countries, notably the Netherlands and Japan, which have reacted lukewarmly and apparently do not want to take new measures that could harm manufacturers.

In this turmoil, ASML's attitude is particularly striking. The company's leadership has made it clear on several occasions that the so-called pressure policy in the United States has adversely affected the company's business. CEO Peter Wennink stressed the absolute need for ASML to continue to gain market access to China.

In the face of US pressure, ASML did not choose to give in. Instead, they resisted with a tenacity.

Nils Smedgard, chairman of the supervisory board, was blunt in saying that the company faced "devastating" and "unfortunate" restrictions on exporting chip-making equipment to China. He warned that these restrictions could hurt ASML's R&D budget in the long run.

The dispute even sparked rumors that ASML might move away from the Netherlands. However, the Dutch government acted quickly and announced that it would invest 2.5 billion euros (about 19.5 billion yuan) to improve infrastructure and reduce corporate taxes, aiming to retain ASML. This initiative demonstrates the importance and support that the Dutch government attaches to ASML.

Although the outcome of ASML's negotiations with the Dutch government is unclear, several experts believe that it is more likely that ASML will eventually remain in the Netherlands. Even if negotiations break down or a new right-wing government comes to power, ASML's chosen location for its new headquarters could still be in an EU country.

The recent visit of Dutch Prime Minister Mark Rutte to China was seen as a move to strengthen Dutch-Chinese relations.

ASML's hardline stance has brought some new opportunities to the relationship between the Netherlands and China. The Dutch government may develop workarounds to deal with U.S. pressure in order to protect the commercial interests of its own businesses. For example, measures such as allowing the export of certain types of products or extending the grace period before the ban comes into force to mitigate the adverse impact on ASML.

However, the United States has not given up further pressure, and the US Department of Commerce's Under Secretary of Industry and Security Alan Estevez has proposed to push for a ban on ASML from providing after-sales services for lithography equipment already sold to Chinese mainland, especially when it comes to key components, which is undoubtedly another major challenge for ASML.

But ASML was undeterred, and President and CEO Peter Wennink made it clear: "I don't think there's anything that can stop us from servicing the existing installed systems in China based on the conclusions we already have." These words demonstrate ASML's firm stance and determination.

In fact, the premise of having the ability to "go through the cycle" is that ASML will continue to maintain its technological leadership in the field of lithography machines. After all, latecomers are likely to overtake giants at key points in certain technological iterations, as ASML itself has done, and Wennink said that the step-by-step pressure is likely to make China "eventually learn to make semiconductor production equipment that cannot be imported."

In order to stay ahead, ASML must continue to increase its R&D expenses exponentially, which requires ASML to have stable and predictable revenues.

This is the courage of ASML to dare to "endure it any longer".

Because if we don't resist again, ASML will not only lose a market, but may lose an era.