China WFE: Still growing, but expected to recover after the semiconductor trade deficit widened

China (PRC) | Technology China WFE: Still -ve Growth, but Set toRecover as Semi Trade Deficit Expands China's Apr SPE imports fell 4% as 6% fall in WFE was offset by 21%/42%growth in testing/pkg tools. WFE's 6% drop was driven by 36%/20% growthin dep/ion implant offset by 60%/28% fall in litho/etch. YTD WFE importsfell 12%. But weakness is likely bottoming, as 1) Trump's visit has broughtno change to US restrictions, and 2) AI-driven demand and upcoming IPOsshould prompt faster capacity expansion, esp in memory. China's semi China's Apr WFE imports fell 6%, which is still a moderation relative to DD declines in Nov-Feb, but imports of packaging tools rose sharply.Apr SPE imports fell 4% YY, same as in Mar,a big moderation of double-digit declines in the prior three months. Interestingly, imports oftesting/packaging tools jumped 21%/42% YoY. Although one month's data do not representa trend yet, this coincided with Huawei's announcement last week of its "Tau" scaling law,which requires chip-to-chip hybrid bonding and TSV equipment to implement its "Logic Folding" YTD (4M26), SPE imports down 13%, driven by 12% fall in WFE offset by 6% growth inpackaging tools.Singapore is the fastest-growing source of both SPE and WFE imports intoChina YTD, at 19% and 43% YoY, respectively. YTD, Singapore accounted for 24% of China'stotal WFE imports, ranked as dual No. 1 with Japan, and trumping the Netherlands (19%).Singapore's import share was only 16% in 2025. Another country that has a rapidly rising shareof China's WFE imports is Malaysia, which has 12% share YTD vs 10% in 2025. Imports from Source: China Customs, Jefferies China's semiconductor (semi) imports grew 58% in Apr, a new high since Jan 2018, as thewidening of its semi trade deficit has accelerated.Sharply higher memory prices and priceincreases in other chips such as CPU, GPU, power and optics driven by AI are likely the keydrivers. We estimate China's semi trade deficit expanded by 17% in 4M26 (Chart 4), reversingthe trend of declining/flattish deficits since 2021. Since the beginning of this year, China's semiimports have been sharply higher YoY, and the growth has been accelerating. We believe 1)a widening semi trade deficit, 2) strong domestic AI demand, and 3) upcoming large memory Edison Lee, CFA * | Equity Analyst852 3743 8009 | edison.lee@jefferies.com Nick Cheng * | Equity Analyst+852 3743 8750 | nick.cheng@jefferies.com Jacky He * | Equity Analyst+852 3743 8084 | jacky.he@jefferies.com Matt Ma * | Equity Analyst852 3767 1109 | matt.ma@jefferies.com Annie Ping, CFA, FRM * | Equity Associate+852 3767 1273 | annie.ping@jefferies.com Company Valuation/Risks Our PT of Rmb415.00 is based on 80x/58x 2026E/27E P/E. Key risks include 1) further sanction from US Department of Commerce, 2) slower-than-expected customer capacity expansion, 3) slower-than-expected new customer acquisition outside China, and 4) slower-than-expected new Analyst Certification: I, Edison Lee, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or I, Nick Cheng, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I, Jacky He, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I, Matt Ma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I, Annie Ping, CFA, FRM, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies)and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations Registration of non-US analysts:Nick Cheng is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualifiedas a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject Registration of non-US analysts:Jacky He is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/quali