CITIC SEC: AI-related prosperity in the high season with the return of normal electronic demand.

CITIC SEC released a research report stating that the 24Q3 electronic industry is returning to a normal demand-driven peak season, with consumer electronics returning to normal, the automotive industry experiencing a mild recovery, and AI-related sectors seeing high prosperity. Looking downstream, Apple Inc. (AAPL.US) demand in Q3 remains stable, with some Android demand moving to Q4, overseas and IoT-related performances showing differentiation; automotive and industrial margins continue to improve, servers continue with DDR5 upgrades; midstream demand and downstream pace are similar; in terms of domestic substitution, downstream storage and logic expansion continues, with companies maintaining their annual performance and order expectations unchanged, but profits showing differentiation. Overall, subsectors with relatively bright performances include fruit chain leaders, IoT chip leaders, CIS, equipment leaders, passive leaders, and AI-related PCBs. CITIC SEC's main points are as follows: Consumer-end: Apple Inc. demand remains stable, Android demand delays, overseas and IoT-related performances differ. 1) Apple Inc. smartphones: We expect terminal sales to remain stable in 24Q3, with shipments flat year-on-year at 52 million units; we expect new machine stocking in the second half of the year to be around 89-90 million units, with a low single-digit increase year-on-year. In the supply chain end, stocking pace is slightly ahead year-on-year, revenue is increasing, but exchange rate fluctuations may negatively impact profits, causing profit growth to be weaker than revenue growth. We expect companies with new SKUs and increased demand to perform relatively well. 2) Android smartphones: We expect pressure on terminal sales in 24Q3, with shipments down 6% year-on-year/flat quarter-on-quarter at 243 million units, mainly due to a high base in 23Q3 (Huawei releasing new products and Android phone manufacturers stocking pace ahead) + overall delay in flagship Android stocking pace in 24Q3 (such as Huawei's delayed product launch), as well as changes in inventory structure (24Q2 inventory on the high side); we expect Android phone sales in Q4 to be better than Q3, with overall moderate growth in the second half of the year. In the supply chain end, we expect Q3 revenue to fluctuate near flat, with stronger momentum in Q4, relatively dull overall, with companies with new SKUs and increased demand performing relatively well, some segments (such as storage) may experience stocking adjustments due to price hike expectations, and some company Q3 quarter-on-quarter may decline. 3) Overseas and IoT-related: We expect strengthening demand in 24Q3, but with slowing growth, differences in pace are beginning to appear, with some companies showing better demand performance. 4) Other demands: We expect a decline in demand for e-cigarettes, and weak momentum in TV sales. Non-consumer-end: Automotive and industrial margins continue to improve, servers continue with DDR5 upgrades. 1) Automotive: We expect recovery in some subsegments, while others are in the final stages of destocking, but overall pricing remains weak due to competition. 2) Industrial: We expect overall destocking to be in its final stages, with expectations of moderate improvement in demand for some subsegments in the second half of the year. 3) Photovoltaics: The impact of destocking up till 24Q2 is gradually fading, with sectors such as household storage showing relatively strong demand, and we expect overall improvement in the photovoltaic sector in the second half of the year. 4) Servers: DDR5 upgrades continue, and we expect performance of related companies to improve sequentially. Semiconductor sector: Overall, a moderate recovery is maintained, domestic substitution remains strong, with some differentiation in short-term profit margins. 1) Manufacturing and testing: Normal moderate recovery during the peak season in Q3, with 12-inch production rates close to full capacity, 8-inch production rates slightly increasing quarter-on-quarter, with weakening DDIC demand and strengthening CIS demand. Overall wafer ASP in Q3 is expected to increase quarter-on-quarter, but sustainability needs to be observed; Testing rates are normal for an increase, with companies with domestic substitution logic or high proportion of domestic customers performing better. 2) Semiconductor equipment/components: Performance overall meets expectations, with continuous expansion in downstream storage and logic production, with all companies maintaining their annual performance and order expectations unchanged. Orders for 2023 are gradually converting into revenue, maintaining steady growth, but due to different customer structures and research and development paces, profits are differentiating. Overall, Q3 orders are stable, expected to see continued expansion in advanced storage and logic in the second half of the year, with confidence in continued growth in orders next year. 3) Mainstream storage: At the wafer end, we expect prices of mainstream storage DRAM and NAND in Q3 to continue to decouple in the contract and spot markets, with contract prices in Q4 potentially narrowing further or experiencing a slight decline, and AI-driven high-end HBM prices expected to continue rising; At the module end, overall revenue shows weakening margins, with AI server and data center high prosperity continuing, and prices of related high-end DDR5 and SSD modules expected to continue rising. 4) Niche storage: We expect SLC NAND Flash prices to remain stable or slightly increase, while NOR Flash prices and niche DRAM (DDR3, DDR4) are expected to remain stable. 5) Power: Prices of low-voltage power components are expected to benefit from increases, with revenue increasing quarter-on-quarter; High-voltage power components are waiting for inventory digestion to be completed. 6) Analog: Performance of consumer-focused companies is expected to continue recovery but with some slowdown, while industrial automotive-related companies are entering a phase of moderate recovery. Electronic component sector: AI-related sectors see high prosperity, passive components show differentiation, with fluctuations in other sectors. 1) We expect PCB production rates to be maintained, with relatively strong demand from AI and automotive sectors; 2) We expect differentiation within passive components, with continued strong demand for consumer-grade resistors and capacitors, and film and aluminum electrolytic capacitors gradually emerging from the bottom of the cycle since 24Q2; 3) We expect continued expansion in Mini LED production, with improvements in LED display applications quarter-on-quarter and a decline in prosperity in the lighting sector; 4) We expect panel prices and production rates to decline ahead of schedule, resulting in performance fluctuations; 5) We expect continued pressure on demand for security components, with leading manufacturers experiencing a slight single-digit recovery in performance. Risk Factors: Global economic downturn risks; risks of changes in international political environment and escalating trade frictions; downstream demand falling short of expectations; AI innovation falling short of expectations; AI commercialization progressing slower than expected; lack of innovation in the Android industry chain; MR sales falling short of expectations; domestic substitution process falling short of expectations; domestic wafer fab expansion falling short of expectations; advanced process technology development falling short of expectations; downstream manufacturers facing increasing competition.Intensifying competition; risk of rising raw material prices caused by inflation; risk of escalating sanctions; large fluctuations in exchange rates, etc.Investment Strategy: The overall performance of the electronic industry in the first half of 24H1 benefited from the recovery in demand and high growth in the past two quarters due to a low base in the same period last year. However, we believe that the direction of moderate recovery is clear, and the momentum of AI innovation is strong, especially at the midpoint of this year, the turning point of end-side AI explosion has been established. Against the backdrop of established recovery trends and the arrival of innovation turning points, we are very confident in the continued high prosperity of the industry in the next 2-3 years, and optimistic about the sector's fundamental improvements in the short term recovery, medium to long-term end-side AI volume, and continuous domestic substitution. However, we also advise paying attention to the external disturbances that may arise from political changes at GEO Group Inc and exchange rate fluctuations in the fourth quarter.