GF SEC: Significant Recovery Trend in Electronic Industry, Growth Driven by AI+ Domestic Substitution.

GF SEC published a research report stating that in the first half of 2024, benefiting from the gradual recovery of the industry and the end of destocking, the electronic industry's prosperity entered an upward channel, with listed companies overall revenue recovering year-on-year, profitability significantly improving, and the cyclical recovery trend significant. The moment of AI fusion, the core power of calculation moves forward. In terms of computing power, GPUs are the core of computing power, with foreign excellent manufacturers in the lead and domestic GPU manufacturers accelerating their catch-up. Under the impact of overseas export control policies, there is a broad future growth space. In terms of connectivity, the value of AI server PCB continues to increase, with the proportion of HDI significantly increasing, domestic manufacturers having a significant advantage, and expected to grow along with the industry. In the future, there is still a broad space for domestic substitution, and domestic semiconductor companies are expected to continue to benefit from the ongoing deepening of domestic substitution processes. I. The electronic industry cycle is growing, with a significant recovery trend in 24H1 The electronic industry is showing cyclical growth, with a significant recovery trend in 24H1. Under the fluctuations in supply and demand, the electronic industry shows a trend of cyclical growth, which can be further broken down into three basic cycles: product cycle, capital expenditure/capacity cycle, and inventory cycle. In the second half of 2022, with weakening downstream demand and upstream capacity recovery, the industry as a whole entered a cyclical downturn phase, with global semiconductor sales entering a period of year-on-year decline. In the first half of 2024, benefiting from the gradual recovery of the industry, the rapid growth of AI training and inference demand driving strong demand for related chips, and the end of destocking, the electronic industry's prosperity entered an upward channel, with global semiconductor sales showing a trend of year-on-year recovery. The industry's prosperity continues to recover, and the performance of listed electronic companies has significantly improved. In the first half of 2024, the overall revenue of the electronic industry (using SW and CTI electronic industry indexes) increased by 11% year-on-year, and the net profit attributable to mothers increased by 31% year-on-year. Looking at a single quarter, in 24Q2, the overall revenue of the electronic industry increased by 11% year-on-year, an increase of 11% compared to the previous quarter; the overall net profit attributable to mothers increased by 18% year-on-year, an increase of 36% compared to the previous quarter. Consumer electronics sector: Prosperity drives revenue growth, profitability continues to rise. In terms of revenue, in 2024Q2, the consumer electronics sector's operating income increased by 11% year-on-year and 6% quarter-on-quarter. In 24H1, the revenue of the consumer electronics sector increased by 12% year-on-year. In terms of profits, in 2024Q2, the net profit attributable to mothers of the consumer electronics sector increased by 24% year-on-year and 5% quarter-on-quarter, while the net profit attributable to mothers of the consumer electronics sector increased by 49% year-on-year in 24H1. In the first half of the year, driven by the recovery of end-terminal demand, revenue and profit of the consumer electronics sector significantly rebounded. In the second half of the year, entering the traditional peak season, AI PCs, AI mobile phones, etc., are expected to start a replacement cycle, driving overall industry demand rebound. Semiconductor sector: Continues the trend of season-by-season growth, with clear signs of recovery. In 24H1, the revenue and profit of the semiconductor sector both maintained a growth trend. In terms of revenue, in 24H1, the overall revenue of the semiconductor industry increased by 12% year-on-year; in terms of profit, in 24H1, the overall net profit attributable to mothers of the semiconductor industry increased by 33% year-on-year. Looking at the situation by quarter, in 24Q2, the revenue of the semiconductor sector increased by 26.0% year-on-year, an increase of 17.0% quarter-on-quarter, achieving year-on-year growth for six consecutive quarters; the net profit attributable to mothers of the semiconductor sector increased by 20.2% year-on-year in 24Q2, an increase of 64.3% quarter-on-quarter. The recovery trend of the semiconductor sector in 24H1 continued, with strong downstream demand related to AI, continued warming of consumer electronics, gradual destocking in industry, automotive, and steady progress in domestic substitution, showing an overall positive trend. II. Growth momentum 1: The moment of AI fusion, the core power of calculation moves forward The moment of AI fusion, the industrial chain is changing rapidly. Since OpenAI released ChatGPT in 2022, from the iPhone moment of AI to the moment of AI fusion, the AI industrial chain is experiencing rapid and diversified growth. In terms of large models, GPT large models are rapidly updated and iterated, with the parameter volume reaching trillions; Google, Baidu, and other domestic and foreign cloud vendors have successively launched self-owned large models. On the computing side, GPUs are the core of computing power, with server ODMs, high-speed interconnects, storage, PCBs, and other core links of the computing industry chain leading the way, growing together with large customers and terminal demand. In terms of applications, ChatGPT functionality continues to enrich, Microsoft's Copilot AI PC application ecosystem continues to improve, and various vertical application products are being launched frequently. Calculation, connection, and storage are the core of AI computing hardware. AI computing hardware mainly includes calculation, connection, and storage. The calculation part mainly includes GPU, CPU, ASIC and other computing chips, which are the core of AI hardware, directly affecting the training speed and inference efficiency of AI models by executing various algorithms and data processing tasks; the storage part includes memory, high-speed cache and hard disk, used to store and quickly access a large amount of data and model parameters, and provide fast data read and write support during the calculation process, determining the scale of the model and the efficiency of training and inference; the connection part includes various buses, networks, and communication protocols, used to connect and transmit data, ensure efficient communication between various hardware components, and improve the overall performance and response speed of the system. Calculation: GPUs are the core of computing power, with domestic GPU manufacturers accelerating their catch-up. The data center GPU products of excellent foreign manufacturers have significant advantages in performance, efficiency, and ecology, leading the current AI large model computing power market. NVIDIA's cabinet-level solution GB200 NVL72 puts higher demands on ODM manufacturers, changes the ODM competitive landscape, and benefits ODM manufacturers that can provide complete AI server solutions. Under the influence of overseas policies, domestic AI chip manufacturers have rare development opportunities. With the continuous pull of local downstream AI demand, domestic AI chip manufacturers are accelerating their catch-up, with vast future growth space. Connection: The value of PCB in AI server continues to increase, with significant advantages for domestic manufacturers. The usage and specification of PCB in AI servers are increasing simultaneously, driving a significant increase in the value of the entire PCB. Due to its superior performance, HDI has an increasing proportion in AI server PCBs. Domestic manufacturers have been deeply cultivating the PCB industry for many years and are expected to grow along with the industry, leveraging their production capacity and management advantages.I am sorry, I do not understand the text you have provided. Can you please provide me with the text you would like me to English?Connection 2: The scale of clusters is growing exponentially, and the price of switches is rising. Large models have stronger demands for distributed parallel training, driving the exponential growth of GPU cluster scale, from tens of cards to hundreds of thousands of cards, and then to millions of cards clusters. Both domestic and foreign large factories are actively promoting the construction of large-scale GPU clusters. Large-scale GPU clusters require an increase in switch capacity and switch speed, which in turn increases the value of switch chips and switch PCB boards, ushering in a period of rising prices for switches. Storage: HBM specifications continue to upgrade, and domestic HBM urgently needs breakthroughs. The exponential growth of parameters in large models not only increases the computational power requirements of processors but also places higher demands on the memory system matched with processors. HBM is a new type of memory that offers higher bandwidth, higher storage density, lower power consumption, and smaller size. Its high bandwidth advantage is crucial for the efficiency improvement of training and inference in large models. In recent years, most high-end data center GPUs and ASICs use HBM as a memory solution, driving a significant increase in the HBM market size. The rapid development of computational chips also drives the rapid iteration and progress of HBM's capacity and bandwidth. Currently, the HBM industry chain is mainly dominated by overseas manufacturers, leaving vast space for domestic substitutes. Domestic manufacturers are expected to accelerate technological breakthroughs in various aspects of the industry chain and increase their share in the HBM market based on their existing industrial development foundation. Growth momentum 2: Domestic substitution is imperative, and local manufacturers continue to make breakthroughs The domestic semiconductor market has vast space, and domestic substitution is imperative. China is the world's largest electronic terminal consumer market and semiconductor sales market, attracting the migration of the global semiconductor industry to China. From the perspective of the industrial chain, in the upstream wafer manufacturing sector, China has the potential to become the world's largest wafer capacity base and has higher requirements for the construction of the local semiconductor equipment industry chain. Especially under the strategy of building a manufacturing powerhouse in China, the government strongly supports and promotes the industrialization and high-end development of local semiconductor manufacturing and supporting industries through industrial policies, tax incentives, and talent training. In recent years, the overseas trade frictions have highlighted the importance and urgency of supply chain security and independent controllability. As the cornerstone of the semiconductor industry, the semiconductor equipment industry and other related sectors will be imperative for domestic substitution. The domestic integrated circuit production has been steadily expanding, with exports showing a recovery growth trend. According to data released by the National Bureau of Statistics, in August 2024, China's integrated circuit production was 37.3 billion pieces, a year-on-year increase of 16%. With the steady expansion of domestic wafer capacity, China's integrated circuit production has increased about fourfold over the past decade. In the first half of 2024, as global semiconductor demand rebounded, China's integrated circuit exports also resumed year-on-year growth. In August 2024, China's integrated circuit export amount was 13.3 billion US dollars, an 18% year-on-year increase, achieving year-on-year growth for 10 consecutive months. The domestic semiconductor equipment market has vast space, and domestic substitution continues to advance. With the continuous expansion of domestic wafer capacity, the iterative upgrading of semiconductor manufacturing technology, and the acceleration of domestic substitution, the domestic semiconductor equipment market continues to expand. In 2023, the size of China's semiconductor equipment market was $35.697 billion, a year-on-year increase of 29.47%. In terms of semiconductor wafer manufacturing equipment, the progress of product iteration and updates of domestic semiconductor equipment companies is significant, speeding up the introduction of new products to customers, enriching business growth points, and expanding serviceable market space. The coverage of domestic equipment for mature processes is becoming more complete, and the breakthrough of advanced process technology is actively promoted. In the future, domestic semiconductor equipment is expected to continue to benefit from the expansion of the equipment market size and the deepening process of domestic substitution. In summary, GF SEC believes that the electronics industry's prosperity continues to recover, marking the moment of AI's fission, the beginning of new product cycles, and the advancement in computation, connection, and storage. Semiconductor domestic substitution continues to advance, with ample room for growth. Firstly, AI's fission moment spurs advancements in computation, connection, and storage. Regarding computation, GPUs are the core of computation with leading overseas manufacturers, while domestic GPU manufacturers are catching up, presenting vast growth opportunities in the face of export control policies abroad. In terms of connection, the value of AI server PCB continues to increase, with a significant increase in HDI ratio. Domestic manufacturers have advantages and are expected to grow alongside the industry. Furthermore, the exponential growth of cluster scale requires an increase in switch capacity and speed, heralding a period of rising prices for switches. Concerning storage, it is recommended to focus on domestic HBM-related manufacturers in urgent need of breakthroughs in the industrial chain. Secondly, semiconductor domestic substitution continues to advance with ample space for growth. The process of semiconductor domestic substitution is progressing steadily, from point to surface, from easy to difficult. Local manufacturers are increasing R&D investment, making continuous technological breakthroughs, expanding product categories, and exploring new growth boundaries. In the future, domestic substitution still has vast space, with domestic semiconductor companies expected to continue benefiting from the deepening process of domestic substitution. It is recommended to pay attention to key players in the domestic semiconductor design, manufacturing, equipment, and other related industries.