2021 sector strength to continue. We expect a positive outlook for 2021 with the sector momentum continuing, and our US analyst John Pitzer modeling +14% YoY semiconductor growth to US$500bn driven by (1) 5G units ramping from 257mn to 528mn, (2) hyperscale capex growing +16% YoY, (3) stay-at-home momentum sustaining through 1H21, (4) auto/industrial poised for pick-up with vaccine, (5) supply chain inventory drawing down through 2H20 and (6) IoT connectivity growth continuing. Key risk is faster slowdown of stayathome demand though we view 5G, data center and auto/industrial offsetting that.

Capacity tighter across the chain. The Asian semi chain is seeing full capacity and firm to rising pricing spanning TSMC’s advanced capacity through mature nodes across the other foundries. Pricing is rising 10-20% on 8”, 5-10% on mature 12” and firm on 40nm and below, with increases now on all other components save for seasonal over-supply in NAND. We would monitor for acceleration of back-end or tier 2 foundry capex, but at this stage new supply is manageable and US restrictions on advanced tools may slow SMIC.

High valuation, but earnings growth continues. The key risk to sector performance is the high base after a strong 2020 with Taiwan foundries up 74% and fabless up 91% the past year, although backend is a laggard only up 8%. Stocks are now at post-crisis highs trading averaging 24x 2021, though still a 10% discount to US semiconductors and recovering from the prior decade’s de-rating. While valuation is high, we model 16% earnings growth for foundry, 12% for fabless and 7% for back-end, supporting some further appreciation if companies continue to deliver good earnings.

Stocks with estimate and target upgrades. We roll over to 2022 valuation and reflect recent strength in estimates. We lifted TSMC TP last week and now lift TPs of UMC, Hua Hong, Vanguard, CHPT, ASE, Powertech, Mediatek, Realtek, and ASpeed. We downgrade ASpeed from Outperform to NEUTRAL with the stock over 50x 2022E EPS. We prefer TSMC (HPC and 5G leverage), UMC (tight capacity/rising pricing), ASE (Rising SiP and improving pricing), CHPT (share recovery), Mediatek (5G/non-mobile growth), Realtek (IoT and content gains), and Nanya (DRAM supply tight and pricing poised to rebound).