Semiconductors

We aim to acquire high-quality assets at compelling valuations when industry sentiment is depressed and prosperity is low. We deliberately avoid pursuing momentum at cyclical peaks where bubbles often form. Instead, we seek to identify industry bottoms through objective, multi-dimensional indicators, enabling us to build positions ahead of the recovery and capture the primary phase of value re-rating. Cyclical positioning is determined by tracking supply-chain inventory levels (including turnover days from fabless designers through to distributors), and by monitoring global capital expenditure trends among major players—contraction in capex frequently serves as a leading signal of an impending cyclical trough. Concurrently, we compare company-specific valuation metrics (P/E and P/B) against their own historical ranges and global peer sets, placing particular emphasis on opportunities where multiples reside in the lower historical percentiles.

We target companies capable of converting incremental revenue into outsized profit expansion. The semiconductor manufacturing business model is characterized by high fixed costs; consequently, as demand recovers and capacity utilization rises, firms with elevated operating leverage experience gross margin and net profit expansion that significantly outpaces revenue growth, generating substantial profit elasticity. We conduct detailed examinations of cost structures, quantifying the proportion of fixed versus variable costs. We also model potential changes in gross and operating margins under varying revenue growth scenarios to assess profit sensitivity to sales. Special attention is given to companies that suffered severe margin compression during the prior downcycle yet preserved their market position and production capacity intact, as these firms typically exhibit the strongest earnings rebound momentum during recovery.

This criterion ensures that selected investments benefit not only from near-term cyclical recovery but also maintain leadership through successive waves of technological evolution. The aim is to exclude ephemeral cyclical names and instead focus on durable industry leaders capable of navigating multiple cycles through sustained innovation-driven growth. We place significant weight on the intensity and effectiveness of R&D spending, with particular scrutiny of accumulated expertise and breakthroughs in advanced nodes, specialty processes, chip architecture, advanced packaging, and core intellectual property. We further evaluate client concentration, product-line competitiveness, and strategic positioning within high-growth end markets. Priority is assigned to companies that have established defensible technological moats in specialized segments and are actively shaping industry roadmaps, thereby preserving strong competitive positioning well beyond the immediate cyclical upswing.