ASML shares fall 10% as China risks cloud solid Q2 earnings

By Toby Sterling and Nathan Vifflin

AMSTERDAM (Reuters) -Shares in ASML, the biggest supplier of computer chip- making equipment, fell sharply on Wednesday on the prospect pressure from the U.S. government could lead to tighter restrictions on its exports to China.

The investor concerns overshadowed second-quarter earnings at Europe's largest technology company that beat forecasts and showed a rise in AI-linked bookings, as well as continued strong sales in China.

Shares fell by more than 10% after Bloomberg reported on Tuesday that the U.S. is telling allies, including the Netherlands, it may take unilateral action to restrict exports of chip equipment to China if they fail to do so themselves.

"We don't comment on the rumours," said Christophe Fouquet in his first analyst call as CEO following the earnings.

ASML is already restricted from selling most of its advanced product lines in China, and Fouquet added that the company also already faces restrictions on servicing existing equipment in some Chinese plants as a result of US and European rules.

The Dutch foreign ministry said it could not comment on the report but was in close contact with allies on export controls, which it said were a matter of national security.

Fouquet said ASML continued to view 2024 as a "transition year" with broadly flat performance as it prepares for a strong 2025.

"We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments," Fouquet said.

Net income of 1.6 billion euros ($1.74 billion) for the quarter ended June 30 was down 19% from a year earlier but beat the 1.41 billion expected by analysts, LSEG data showed.

Revenue fell 9.5% to 6.2 billion euros but topped an analysts estimate of 6.04 billion.

ASML dominates the market for lithography systems, complex tools that use lasers to help create the tiny circuitry of computer chips.

OLDER GENERATION

Chinese chipmakers, facing escalating U.S.-led restrictions on ASML's top-end gear, have increased purchases of equipment used to make older generations of chips widely used in cars and industrial applications.

China, usually ASML's third market after Taiwan and South Korea, accounted for more than 2 billion euros in lithography system sales in the second quarter, around 49% of the total.

CFO Roger Dassen said about 20% of the company's current order backlog is for sales to China, and those tools would likely be sold elsewhere if not in China, given the world's growing demand for older chips.

Analysts linked the fall in share price to the Bloomberg report and remarks Bloomberg published from a June interview with U.S. presidential candidate Donald Trump in which he said Taiwan had taken "100% of our chip business".

ASML's top customer is Taiwan's TSMC, which makes chips for Nvidia and Apple.

"The geopolitical angle....is more likely to be in focus today than the results," Citi analysts wrote in a note.

"The arguments being referenced [in the Bloomberg report] are not new, but pressure is building" for further restrictions they said.

Shares in Europe's second-largest listed company behind pharmaceuticals maker Novo Nordisk fell 7.9% to 900.00 euros at 1236 GMT, pulling other European chip stocks lower.

ASML's shares were up 28% in the year to date following Wednesday's decline.

In the earnings report, new bookings increased to 5.6 billion euros from 3.6 billion euros in the first quarter, with about half of that coming from the its most advanced EUV product lines - vital to manufacturing AI and smartphone chips.

Analysts had expected ASML's order book to increase to about 5 billion euros, according to estimates compiled by Visible Alpha.

"EUV orders increased substantially" in the quarter, Mihuzo Securities analyst Kevin Wang told Reuters. "We attribute this to strong orders from TSMC and Intel."

TSMC, Intel and Samsung are engaged in construction projects that will be outfitted with equipment in 2025-2027.

($1 = 0.9172 euros)

(Reporting by Toby Sterling; editing by Janane Venkatraman, Varun H K, Jason Neely and Barbara Lewis)