US-China Trade Truce Creates a Window for Semiconductor Value Plays

The temporary thaw in US-China trade tensions, marked by the lifting of export restrictions on semiconductor design tools and rare earths, has created a rare opportunity for investors to identify undervalued chipmakers poised to rebound. While the truce—set to expire in August—remains fragile, the policy shift has already unlocked critical access to markets and supply chains, offering a strategic entry point for those willing to bet on a prolonged detente.

The Regulatory Truce: A Temporary Détente

The June London agreement saw the US lift export curbs on Electronic Design Automation (EDA) software—vital for chip design—after China agreed to expedite rare earth exports. This reversal benefits US EDA giants Synopsys (SNPS) and Cadence (CDNS), which control 70% of China's EDA market. Both stocks plummeted in May as restrictions were imposed, but have since stabilized.

The truce also saw ethane and jet engine exports resume, easing supply chain bottlenecks. However, tariffs remain a hurdle: US tariffs on Chinese goods average 55%, and China's retaliatory measures persist at 10%. The expiration of the deal in August looms large, but investors betting on a negotiated extension could profit from current undervaluations.

The Hidden Opportunity: Undervalued Chipmakers

The regulatory shift has created a valuation gap between US and Chinese chipmakers. While SMIC (OTC: SMICY) and Huawei's HiSilicon face ongoing US restrictions on advanced nodes, US firms such as ASML (ASML) and Applied Materials (AMAT)—critical to global chip production—are trading at discounts despite their monopoly on key technologies.

• EDA Leaders: Synopsys and Cadence trade at 25x and 22x forward P/E, respectively, below their five-year averages. Their recovery hinges on sustained access to China's $100B+ chip market.
• Foundry Dominance: TSMC (TSM), benefiting from US subsidies and Taiwan's geopolitical neutrality, trades at 18x P/E—cheap given its 54% share of advanced node production.
• Equipment Firms: ASML, which controls 100% of EUV lithography, trades at 28x P/E, but its order backlog exceeds $25B, suggesting strong demand.

Chinese firms, meanwhile, face structural challenges. While ChangXin Memory (CXMT) and YMTC are advancing in memory chips, they remain reliant on US/EU equipment for mature nodes.

Risks and Considerations

• Truce Expiration: A failure to extend the August deal could reignite tariffs and export controls, reversing recent gains.
• Technological Gaps: China's inability to master EUV lithography or 3nm nodes limits its long-term competitiveness.
• Overcapacity Risks: Global foundry expansions (e.g., TSMC's $100B US plant) could lead to oversupply by 2026.

Investment Thesis: Play the Truce Extension

Investors should prioritize US firms with exposure to the truce's benefits and long-term subsidies:

1. Synopsys (SNPS): Buy the dip at $450/share (50% recovery potential if China's chip demand rebounds).
2. ASML (ASML): A core holding due to its EUV monopoly and $25B backlog.
3. TSMC (TSM): A defensive play with geopolitical insulation and CHIPS Act subsidies.

Avoid Chinese chip stocks (e.g., SMICY) until US sanctions ease meaningfully.

Conclusion

The US-China trade truce has created a narrow window to invest in undervalued semiconductor leaders. While risks remain, the policy shift has reduced immediate supply chain disruptions, and the August deadline could force a permanent resolution. For investors with a 6-12-month horizon, now is the time to position in EDA, equipment, and foundry stocks—provided they are prepared to exit if the truce collapses.

The semiconductor sector's role as the epicenter of the tech arms race ensures that regulatory clarity will eventually reward those who bet on resilience.