China's DUV Mass Production, Overlaying AI Capital Expenditure Concerns, and Other Factors Trigger Semiconductor Sector Sell-off in the US and South Korea; South Korea's KOSPI Index Triggers Circuit Breaker

July 28th: The South Korean KOSPI index fell by 8% today, triggering a circuit breaker. SK Hynix dropped over 12%, Samsung Electronics dropped over 10%, and the US stock market's Philadelphia Semiconductor Index fell by over 5% on Monday. The steep decline in the US and South Korean semiconductor sectors was mainly driven by factors such as the progress of China's chip industry, concerns about AI capital expenditure, and investors taking profits at high levels.

China has made progress in the semiconductor manufacturing equipment field. Chinese companies have begun mass production of domestically developed DUV (Deep Ultraviolet) lithography manufacturing equipment, leading to a sell-off in semiconductor equipment stocks. ASML plummeted by 5.80%. However, Samsung Securities pointed out that the relevant equipment still needs to validate its production capacity, the short-term output is limited, and Chinese AI chips and server DRAMs are currently unable to enter the US data center ecosystem, limiting the actual impact on this AI semiconductor cycle. In addition, Citrini analyst Jukan stated that the news of China's progress in DUV lithography technology was not particularly surprising, as the market had already formed certain expectations. The Information's report only cited a speech by a professor from a Chinese university at an internal meeting in June and did not disclose more substantive information. The sell-off seen in ASML and other semiconductor equipment stocks was an overreaction.

JPMorgan Chase believes that although Chinese domestically produced immersion DUV lithography equipment has started small-scale production and plans to produce approximately 5 and 20 units in 2026 and 2027, respectively, its performance, reliability, and mass production capabilities still need further validation, and it is still far from truly replacing ASML equipment. The recent decline in semiconductor stocks such as ASML was more due to deteriorating market sentiment rather than damage to fundamentals, and ASML's performance trajectory is expected to remain unchanged.

Changxin Technology rose by 466% on its first day of listing, becoming the largest A-share listed company in China by market value. The market believes that China's progress towards self-sufficiency in the storage industry may accelerate. Analysts believe that after Changxin Technology completed the largest IPO in Asia this year, the company's capital will be more abundant, further enhancing its future production expansion, technological research and development capabilities, posing long-term competitive pressure on global storage chip leaders. In response, the storage sector fell across the board, with Sandisk (SNDK) down by 11.02%, SK Hynix (SKHY) down by 7.47%, and Western Digital (WDC) down by 4.21%.

Meanwhile, Nvidia's recent announcement of a $750 billion large-scale infrastructure partnership has reignited market concerns about the return on AI capital expenditure, revolving financing, and supplier financing risks. Investors are beginning to question whether the massive data center investment can translate into sufficient revenue, further suppressing chip stock valuations. Nvidia's credit default swap costs soared, causing a drop in tech stocks, with Nvidia (NVDA) falling by 4.99%. Hideyuki Ishiguro, Chief Strategist at Nomura Asset Management, stated that after reports of a significant investment transaction involving Nvidia, its credit risk has increased, which investors see as a bearish signal.

Furthermore, the semiconductor sector had previously experienced significant gains, and the market itself had entered a profit-taking phase. Old bearish narratives such as the peak of the semiconductor cycle, weakened profitability due to excessive capital expenditure, and the increase in China's semiconductor self-sufficiency were revisited, leading to a situation where stock prices declined and market sentiment deteriorated in a reinforcing loop. Samsung Securities believes that the current decline mainly reflects the fragile sentiment in the sector and is not sufficient evidence to prove that the AI data center investment cycle has peaked.