Semiconductor inventory still mixed post 2Q17. Based on our sample of 20leadingfoundry customers, we estimate days of inventory (DOI) levels at the end of 2Q17purged by four days (excluding Intel). The overall level of inventory is still far from “lean”and remains relatively high. Further, overall trends are not consistent by end market,with major players seeing both builds and purges in the same segments. Some of thebiggest inventory decreases came from Qualcomm (QCOM US, NR), NVidia (NVDA US,NR), AMD (AMD US, NR), Xilinx (XLNX US, NR), and Cypress (CY US, NR) which allsaw 9-plus days of inventory purged in 2Q17. Decreases at GPU suppliers AMD andNVidia were one notable trend based on strong demand from gaming, AI/deep learning,and in particular cryptocurrency mining applications. Others, such as Microchip (MCHPUS, NR) stated “inventory days were at 7-year lows” and “despite capacity increases, weare hardly keeping pace with demand”. STMicro (STM US, NR) stated “inventory washealthy” with product in distribution “really low”. On the negative side, companies suchas Intel (INTC US, NR), MediaTek (2454TT, TWD280, Buy), Qorvo (QRVO US, NR),Cirrus Logic (CRUS US, NR), NXP (NXPI US, NR), and Texas Instruments (TXN US,NR) all saw increases in DOI q-o-q. We note management at Intel, which saw an 8dayq-o-q increase in DOI, stated on its earnings call that “channel inventories are higherthan the last couple of quarters”. Those companies that built inventory pointed to: a)seasonality ahead of major product ramp-ups (Novatek (3034TT, NR) and Qorvo); b)longer cycle times for advanced chip manufacturing (MediaTek); and c) strong sell-in intodistribution channels outpacing sell-through (NXP).    Delayed start may lead to better-than-seasonal 4Q17. TSMC (2330TT, TWD214,Hold) management stated that the “inventory correction will continue through 3Q17, alittle longer than we earlier expected”, but fabless inventory “should return to seasonallevels by the end of 3Q17”. From our perspective, the seasonal semiconductor supplychain ramp is underway, and while it may not be starting from an extremely leaninventory level, we believe delayed China smartphone launches will also kick-in soontoo and compete with Apple’s (AAPL US, NR) ongoing build. This will likely translatetightening capacity and stretching lead times – ultimately leading to a better-thanseasonal4Q17. From a stock perspective, our preferred non-memory chip namesinclude MediaTek, ASE (2311TT, TWD37.85, Buy), Silergy (6415TT, TWD597.00,Buy) and KYEC (2449TT, TWD29.80, Buy). We are less constructive on the majorpure play foundries in Asia mostly due to their full valuations on already lofty end-ofyearexpectations and 2018forecasts.

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