Demand expectations broadly revised upward, with stronger equipment and materials pricing

Overview

JPMorgan summarizes key takeaways from overseas semiconductor supply-chain earnings for April–June, covering fab capital expenditure, the semiconductor production equipment market and pricing, InP substrate capacity, and long-term memory chip supply agreements. The report concludes that demand across multiple segments is stronger than three months ago, and equipment and materials suppliers are gradually raising prices, providing positive support for the earnings outlook of Japanese semiconductor and technology materials companies.

Core views

Fabs are expanding capital expenditure in response to strong demand, with investment focused primarily on front-end equipment while back-end equipment demand is also growing steadily. WFE market expectations continue to be revised upward, and equipment manufacturers are driving gross-margin expansion through value-based pricing and product-mix improvement. InP substrates are a major bottleneck in the optical communications supply chain, and capacity expansions and long-term agreements will strengthen supply security. Memory manufacturers are improving demand and pricing visibility through multi-year, prepaid long-term agreements, potentially driving a sector valuation re-rating.

Analysis framework

Based on April–June earnings disclosures and management guidance from overseas companies, the analysis compares fab capital expenditure, WFE forecasts and gross margins of equipment manufacturers, capacity expansion plans of materials suppliers, and the number, duration, and pricing arrangements of long-term supply agreements among memory manufacturers.

Methodology notes

• Industry cycle trackingCapital expenditure and WFE demand validation

  Assess supply-chain demand strength through fab capital expenditure and equipment-market forecasts.

  Higher capital expenditure, increased investment in front-end and back-end equipment, and upward revisions to WFE market forecasts are used as core evidence of improving demand for semiconductor equipment and materials.

• Profitability analysisValue-based pricing and gross-margin tracking

  Assess whether price increases can translate into gross-margin improvement.

  The report focuses on equipment companies' product pricing, pass-through of cost increases, and gross-margin targets to assess the earnings impact of tight supply-demand conditions.

• Supply-demand analysisCapacity expansion and long-term supply agreements

  Measure supply constraints and revenue visibility through materials capacity expansion and long-term agreements.

  InP substrate expansion progress and multi-year long-term memory chip agreements are key indicators for assessing bottleneck easing, demand lock-in, and reduced price volatility.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• JX Advanced Metals (5016)

  InP substrate supplier

  Strengths

  Plans to expand InP substrate capacity by 7-10x by 2030, benefiting from optical communications and data center demand.

  Weaknesses

  Capacity expansion requires product-size upgrades and technology ramp-up.

  Comparison

  Compared with downstream device manufacturers, the company benefits more directly from tight substrate supply and capacity expansion.

  Risks

  Uncertainty around expansion execution, customer qualification, and demand sustainability.

• Tokyo Electron (8035)

  Semiconductor production equipment supplier

  Strengths

  Upward-revised WFE market forecasts and the ability to raise prices and improve gross margins.

  Weaknesses

  Earnings are highly sensitive to fab capital expenditure cycles.

  Comparison

  Benefits from growth in front-end equipment investment and is directly linked to global WFE market conditions.

  Risks

  Delayed capital expenditure, intensifying competition, and changing customer demand could affect orders.

• SCREEN Holdings (7735)

  Semiconductor production equipment supplier

  Strengths

  Raised its WFE market outlook and is particularly positive on memory chip-related demand.

  Weaknesses

  Sensitive to the memory investment cycle and equipment procurement timing.

  Comparison

  Among the equipment companies covered in the report, it is a relatively prominent beneficiary of the recovery in memory demand.

  Risks

  Memory price volatility and adjustments to customer capital expenditure could suppress demand.

• KIOXIA Holdings (285A)

  Memory chip manufacturer

  Strengths

  Long-term supply agreements in the memory industry and improved shareholder returns could support valuation re-rating.

  Weaknesses

  Its share price has declined significantly from its June high.

  Comparison

  Compared with equipment and materials companies, its investment case relies more heavily on the credibility of long-term agreements and memory price stability.

  Risks

  Progress in executing long-term agreements, price volatility, and changes in end demand.

Key data

• TSMC 2026 capital expenditure$60-64 billionApproximately 15% above the prior $52-56 billion plan; up 52% year over year based on the midpoint.
• SK hynix 2026 capital expenditureKRW40 trillionUp 45% year over year.
• Tokyo Electron WFE market forecastAt least $150 billion in 2026; at least $190 billion in 2027Management believes there remains further upside to the forecast.
• SCREEN Holdings WFE market forecastAt least $140 billion in 2026Expected to grow by more than 20% year over year, with a similar growth rate expected in 2027.
• Lam Research WFE demand intensity$9-10 billion of WFE demand per $100 billion of AI investmentThe prior estimate was approximately $8 billion.
• JX Advanced Metals InP substrate capacityExpand 7-10x by 2030First expand 3-inch capacity, followed by 4-inch and 6-inch products.
• AXTI quarterly sales capacity target$60 million by end-2026; more than $130 million by end-2027These respectively correspond to targeted capacity increases of approximately 3x year over year and more than 2x year over year.
• Samsung Electronics long-term supply agreements5 completed, with another 5 close to agreementCustomers primarily request rolling five-year contracts, with substantial prepayments expected.
• SK hynix long-term supply agreements10 signedContracts appear to primarily be five-year agreements with prepayments, aimed at reducing price volatility.
• SanDisk long-term supply agreements8 signedAverage term of four years, with a maximum of five years; covers approximately 50% of bit demand in fiscal 2027 and about two-thirds in fiscal 2028.

Impact & implications

Upward revisions to demand expectations and improving pricing trends are expected to raise revenue and profit-margin expectations across the semiconductor equipment, materials, and memory supply chains. For Japanese semiconductor and technology materials companies, expanding fab capital expenditure, WFE market growth, and tight materials supply together constitute positive catalysts; for memory companies, the credibility of long-term supply agreements and shareholder returns will be key to valuation re-rating.

Risks

• A weaker global macro environment or end demand could cause fabs to cut or defer capital expenditure.
• Price increases by semiconductor equipment and materials companies may fall short of expectations, or rising costs may erode gross margins.
• InP substrate expansion progress, yields, and customer qualification may fall short of expectations.
• Execution, pricing mechanisms, or prepayment arrangements for long-term memory supply agreements may not meet expectations.
• China market demand and geopolitical restrictions could affect the equipment and materials supply chain.
• Potential conflicts of interest exist through market making, investment banking services, shareholdings, or client relationships between companies covered and J.P. Morgan.

What to watch

• Whether fabs continue raising 2026-2027 capital expenditure and changes in the investment mix between front-end and back-end equipment.
• WFE market-size forecasts and order and gross-margin guidance from equipment companies including Tokyo Electron, Lam Research, and KLA.
• Actual progress of price increases by equipment and materials companies, cost pass-through effectiveness, and gross-margin changes.
• InP substrate capacity expansion, 6-inch product development, and customer qualification progress at JX Advanced Metals and AXTI.
• New long-term supply agreements, prepayments, coverage ratios, and pricing terms at Samsung Electronics, SK hynix, and SanDisk.
• Memory chip price trends, shareholder return policies, and valuation recovery at KIOXIA Holdings.