Portfolio Managers’ View on Emerging Competition From China to ASML

Investment Insights
, 19 December 2025

Portfolio Managers’ View on Emerging Competition From China to ASML

Since the launch of our ETFs, we have been shareholders of ASML, reflecting our conviction in the company’s dominant competitive position, substantial barriers to entry, and strong long-term structural growth drivers. ASML is the leading manufacturer and supplier of lithography systems used in semiconductor chip production and occupies a uniquely strong position as the sole supplier of extreme ultraviolet (EUV) lithography machines. These systems are essential for the manufacture of the most advanced semiconductor chips, with demand supported by continued growth in artificial intelligence.

Recent Developments in Competitive Dynamics

This week, Reuters reported that China developed a prototype EUV lithography tool in early 2025 and has since entered a testing phase. The report indicates that this effort involves former ASML engineers and the reverse engineering of ASML’s EUV technology. According to Reuters, the prototype is operational and capable of generating extreme ultraviolet light; however, it has not yet been used to manufacture functional semiconductor chips. The article states that the Chinese government is targeting working chips by 2028.

Based on our discussions and preliminary research, we believe a more realistic timeline extends beyond 2030. While we acknowledge that this situation will continue to evolve, our assessment is grounded in currently available public information. In our initial assessment, China’s current prototype appears more comparable to ASML’s early development stage in 2001, when the company achieved its first internally developed working EUV prototype. For context, ASML required approximately five years to deliver its first external alpha demonstration tool in 2006, followed by a further four years to ship its first production-class system in 2010. Notably, the first EUV tool suitable for high-volume manufacturing was not delivered until 2017.

Reassessment of ASML Following the Recent News

While the Reuters article is likely to be headline-grabbing, we believe it risks overstating the near-term competitive threat and underestimating the broader context. As outlined above, the short- to medium-term risk to ASML’s market position appears manageable, given the historically long timelines required to progress from prototype development to a commercially viable, high-volume manufacturing tool, as demonstrated by ASML’s own experience. It is important to acknowledge that China’s development efforts could advance more rapidly due to reverse engineering. However, even under an accelerated scenario, we believe this would remain outside our investment time horizon, thereby continuing to support ASML’s dominant market position.

Over the longer term, increased competition is possible should Chinese firms successfully commercialize EUV technology. That said, the implications are not necessarily negative for ASML. Currently, ASML is unable to ship EUV systems to China due to export restrictions. There is a credible argument that successful domestic EUV development in China could eventually prompt the U.S. and EU to ease these restrictions, potentially allowing ASML to sell into the Chinese market and expand its total addressable market (TAM). Given the early stage of China’s EUV development, we assess near-term financial risk as limited, as ASML does not sell EUV systems into China due to existing Western export restrictions.

We will continue to closely monitor developments related to competitive dynamics. Overall, we remain comfortable with ASML’s positioning within the expected holding period of the funds. It is also worth noting that a production-grade EUV system requires not only the ability to generate EUV light, but also exceptional image fidelity, overlay accuracy, throughput, and tool availability. Achieving these performance characteristics to replicate an ASML-like high-volume manufacturing environment typically requires many years of refinement beyond the prototype stage.

Valuation and Investment Outlook

From a valuation perspective, the stock currently trades on a blended forward P/E multiple of 33.8x, compared with its historical 5-year average of 33.5x. Based on our assumptions, we believe the stock has the potential to deliver a 25+% cumulative return over the next three years.

We also see potential for additional upside supported by several factors, including a strengthening memory upcycle, potential incremental orders from Intel, a recovery in non-AI-related end markets, and the adoption of High NA lithography systems. The latter, in particular, is expected to drive both higher revenue growth and margin expansion over time.

Overall, we believe ASML’s unique and strategically critical position within the semiconductor value chain supports its status as a core holding within our semiconductor allocation. Alongside investments in TSMC and Cadence, this positioning ensures diversified exposure to key segments of the semiconductor ecosystem.

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