Asian Equities: Value Emerges Among Japanese Chip Equipment Makers

While Japanese equities are fairly valued, trading at just around a 5% discount to our fair value, value is emerging amid the ongoing selloff in technology shares. We see attractive values among semiconductor equipment manufacturers and relatively better-contained risk.

For investors seeking to keep or add exposure to the artificial intelligence story, Japanese semiconductor equipment manufacturers are our preferred proxy in Asia. Outside the AI trade, we see value in internet, media, and entertainment companies that were sold down in January on AI disruption worries.

The Morningstar Japan Target Market Exposure Index is up around 18% this year through September. Like other markets, the stellar jump in the tech shares in the second quarter was the main driver. But a smaller portion of the Japanese market is tech than the Korean or Taiwanese markets. Japan’s strengths lie further upstream in the semiconductor supply chain, such as in equipment, components, and materials, where the leading players have smaller market caps than the large chip manufacturers.

As a result, the broad Japanese market has been much less volatile, and we expect it to be relatively resilient amid AI volatility. Further, these upstream players include some of the most competitive companies in the AI buildout, and we think shares of the leading equipment makers are attractive.

Demand and Adoption Likely to Persist for AI Buildout, Despite Growth Risks

We expect the AI buildout to continue to grow at a strong pace. Although this growth could be dented by access to capital, policies, and/or energy constraints, it doesn’t change the outlook that demand and adoption are likely to remain strong. Any delay should just prolong the buildout.

We expect global AI investment to grow at a compounded annual growth rate of 20% to $3.2 trillion in 2030. The expansions by chip foundry Taiwan Semiconductor TSM, conglomerate Samsung Electronics 005930/SSNLF, and semiconductor companies SK Hynix SKHY and Micron MU are estimated to total $1.4 trillion over these five years.

Key beneficiaries of this buildout include Japanese chip equipment companies such as Advantest ATEYY, Lasertec LSRCY, and Disco 6146/DSCSY. The three companies respectively enjoy global market shares of over 60%, 45%, and 80% in their core products, and their contracted sales visibility has extended through 2028. Both Advantest and Lasertec are involved in testing and inspection equipment for semiconductors, while Disco produces polishing equipment. With upside to semiconductor expansion plans, as supported recently by TSM’s guidance for higher capital spending should it build its Texas plant, we think the visibility in contracted sales for Advantest, Lasertec, and Disco should extend into 2029.

While the ongoing tech sector correction could lead to value emerging for other tech companies in Asia, we maintain a preference for Disco, which trades at around a 37% discount to our fair value estimate.

Outside of TSM, which continues to lead chip technology, the rest of the industry—notably memory chips made by SK Hynix, Samsung, and China’s CXMT 688825—tend to be commodities with highly cyclical and competitive pricing. We expect the pricing cycle to peak over the next 12-18 months for some products as capacity expansion reduces supply bottlenecks. While sales volume will remain strong, we expect revenue growth to slow from lofty levels. This slowdown is being digested in market expectations.

As the market diversifies away from the risks in AI growth, investors have turned to the internet and software solution shares that were sold down in the first quarter on AI disruption risks. These names were among the better performers in the third quarter.

We’re seeing this rebound continue in October, with Japanese gaming and media companies such as Konami 9766/KONMY and Nintendo 7974/NTDOF seeing rising share prices amid the market turmoil. While upside potential to our valuations has narrowed, we still like Nintendo, which trades at a 39% discount to our fair value estimate.