CMSC: The long-term trend of the semiconductor industry's demand for autonomy and controllability remains unchanged, with a focus on the core links of the industrial chain and core companies.

The enrollment securities released a research report stating that the current improvement trend in the semiconductor sector has slightly slowed down, and the penetration rate of innovative products such as AI terminals is expected to gradually increase. There may be possible changes in various policies and geopolitical situations under external influences. Recently, the market has been focused on TSMC's possible restrictions on supplying 7nm and below chips to domestic AI/GPU customers, as well as the US House of Representatives sending letters to several semiconductor equipment companies requesting details on sales in China. The focus on self-controllability has increased again, combined with the localization of the various links in the domestic semiconductor industry chain. It is recommended to pay attention to the relatively urgent demand for self-controllability combined with the increase in AI demand in the manufacturing/equipment/seal test/material links and advanced process chip companies, and core links such as EDA/IP. It is recommended to pay attention to various innovation indexes and core component stocks in the semiconductor index, grasp the companies with expected performance growth under the trend of economic recovery. Market Review: In October, the A-share semiconductor index outperformed the China Taiwan semiconductor index and the Philadelphia semiconductor index. In October, the semiconductor (SW) industry index rose by 19.36%, while the electronics (SW) industry index rose by 14.65%. The Philadelphia semiconductor index/China Taiwan semiconductor index showed a change of -1.56%/+4.93%. Year-to-date, the semiconductor (SW) industry index increased by 21.94%, while the electronics (SW) industry index rose by 18.95%. The Philadelphia semiconductor index/China Taiwan semiconductor index showed an increase of +18.47%/+51.67%. Key points of CMSC are as follows: Industry trend tracking: Consumer demand is gradually warming, while overall industrial demand recovery remains weak. 1. Demand side: Consumer electronics industry demand is weakly recovering, driven by innovations in AI/automobiles and other applications. Mobile phones: Global/domestic smartphone shipments in 3Q24 increased by 4.0%/3.2% year-on-year, with October entering a period of intense release of Android flagship phones. Pay attention to the performance of sales in the following months. PC: Global PC shipments in 3Q24 decreased by 2.4% year-on-year, multiple agencies, including IDC, predict that the PC market shipments are expected to recover moderately in 2024; the impact brought by AIPC is expected to be more significant in 2025-2027. Wearable devices: IDC predicts that global wearable device shipments in 2024 will increase by 6.1% year-on-year. XR: It is expected that the VR industry will still be in a slow sales period in the next year, and attention should be paid to the integration of AR and AI innovations. Servers: In October, the revenue of Inspur increased by 112% year-on-year and decreased by 3% month-on-month. Global CSPs such as Google and Amazon are expected to further increase Capex in 2025. Automobiles: In October, domestic passenger car sales increased month-on-month, while new energy vehicles maintained rapid year-on-year growth. 2. Inventory side: Chip manufacturers in the mobile phone industry saw a slight increase in inventory in Q3, while industrial customers are still in the process of inventory digestion. Global mobile chip giants saw a slight increase in inventory in 3Q24, while Wei, Maxscend Microelectronics, GalaxyCore Inc., and Huatian saw an increase in inventory in Q3 compared to the previous quarter. PC terminal manufacturers saw an increase in inventory, with Inte1 and AMD seeing an increase in inventory in Q3, and AMD mentioned that customers Microsoft and Sony in its gaming business reduced channel inventory. International analog and power chip manufacturers saw an overall increase in inventory in 3Q24, with TI mentioning that inventory digestion in the industrial field is ongoing, and the company's inventory is expected to increase by several billion dollars in Q4, while ONN stated that inventory in the automotive and industrial sectors continued to be consumed, and distribution channel inventory increased with the demand from distributors. 3. Supply side: Logic utilization rate is slowly recovering, with storage manufacturers increasing production of advanced products such as HBM and DDR5. 1) Utilization rate: TSMC stated that demand for 3nm/5nm in 3Q33 remains strong; UMC's capacity utilization rate in 3Q24 was 71%, an increase of 3 pcts month-on-month, and it is expected to decline by 2-5 pcts to 66%-69% in Q4 as a result of the new capacity ramp-up in 22/28nm; SMIC's capacity utilization rate in 3Q24 was 90.4%, an increase of 13.3pcts year-on-year and 5.2pcts month-on-month, and the company mentioned that the fourth quarter is traditionally a slow season, with an expected release of 30,000 wafers/month of capacity, leading to a decrease in overall utilization rate; Huahong's utilization rate in 3Q24 was 105.3%, an increase of 18.5pcts year-on-year and 7.4pcts month-on-month, with the company expecting a recovery in capacity utilization of the 48-inch line in Q4 and strong demand for the 12-inch platform; GlobalFoundries' utilization rate in 3Q24 increased by a high single-digit percentage month-on-month to 70%, with an estimated decrease to around 65% in Q4; 2) Capital expenditure: Storage: Micron and SK Hynix will focus on expanding production of advanced products such as HBM and DDR5 in 2024, with Micron expected to revise its capital expenditure upward from $80 billion to $81 billion in 2024, with a significant increase expected in 2025; Logic side: In 2024, global mature process expansion will focus on demanding processes, with continued capacity expansion in advanced processes. TSMC expects its capital expenditure for 2024 to slightly exceed $30 billion, mainly for N2, N3, and other advanced processes; UMC's expected capital expenditure is flat year-on-year at $3 billion in 2024, mainly for the expansion of 22/28nm; Semiconductor Manufacturing International Corporation's guidance for 2024 is to remain flat year-on-year at approximately $7.5 billion; Huahong expects an average capital expenditure of $2 billion from 2024 to 2026, mainly for the expansion of a new line in Wuxi; Nexchip Semiconductor Corporation expects a full-year expansion of 30,000-50,000 wafers/month, mainly for high-end CIS. 4. Price side: Overall storage prices were under pressure in October, while MCU prices remained stable. 1) Storage: As of November 8th, the DXI index was 39,331 points, a decrease of 272 points from October 1st; in October, there was weak demand for consumer DRAM chips, NAND wafers, and storage modules, causing pressure on prices.Prices of mainstream NAND flash models are dropping; demand for AI remains strong, with manufacturers increasing production of high-end storage such as HBM and QLC SSDs, as well as high-end DDR5 products, which are seeing continued price increases. However, with supply gradually increasing, the price growth of high-end products is also starting to stabilize.2) MCU: Prices continue to bottom out, but the rebound time is still being observed. 3) Analog chips: The overall prices of domestic analog chip products are relatively stable, and the delivery cycle of international major factories has been further shortened. 4) Power devices: The prices of medium and low voltage MOS products are expected to gradually recover, while IGBT products still face certain price pressure. 5) Sales end: Global semiconductor monthly sales revenue has increased for the fifth consecutive month. SIA stated that the global semiconductor sales revenue for 24M8 was $53.1 billion, a year-on-year growth of +20.6% (24M7 year-on-year growth of +18.7%), showing year-on-year growth for ten consecutive months and a month-on-month growth of +3.5% (24M7 month-on-month growth of +2.7%), showing month-on-month growth for five consecutive months. Industry chain tracking: Some marginal improvements are evident in certain parts of the industry chain, focusing on the recovery of the economy and the sustainability of the AI chain. 1) Design/IDM: Growth driven by the recovery of demand in consumer areas, with a focus on the sustainability of the recovery and AI demand. 1) Processors: Focus on the progress of high-end GPU products in China, with domestic SoC companies showing year-on-year performance improvement in Q3. AMD downstream data center and client processors continue to grow, while the gaming and embedded sectors show a year-on-year decline in Q3, with an upward revision of annual data center GPU revenue guidance to over $5 billion. Intel expects Q4 revenue growth, gross margin to return to normal, and positive EPS. Domestic GPU/CPU companies like Rockchip Electronics, Bestechnic (Shanghai) Co., Ltd., Allwinner Technology, and Amlogic benefit from the recovery of IoT downstream and low base factors, showing impressive year-on-year growth in Q3, focusing on industry recovery trends and progress in specific segments. 2) MCU: Demand in consumer/appliance/IoT sectors is recovering, while demand in industrial/automotive sectors continues to be under pressure. 1) Consumer: There has been a relatively significant warming trend in personal consumption of mobile phones and mobile peripherals in 24H1, but demand has been relatively flat in 24Q3, and 24Q4 is the traditional off-season, with demand expected to weakly recover. 2) Appliances: Zhongying stated that industry demand in 24Q3 was relatively stable, but with the appliance industry entering the peak season and national regulatory and consumer promotion policies fermenting, income is expected to increase in 24Q4. 3) Industrial: STMicroelectronics expects continuing inventory adjustments in 25Q1, especially in Asian markets where the Chinese New Year holiday led to further inventory reductions, with a continued decrease in 25Q2 and normalization expected in 25H2. 4) Automotive: STMicroelectronics stated that the backlog orders and new orders in 24Q3 have further deteriorated; Weichip indicated that overall orders are below expectations, with a slight acceleration in new orders but very low visibility, with Capex expected to remain low in 2025-2026. 5) IoT: Espressif Systems stated that both domestic and international markets are showing growth trends, with new application scenarios continuously expanding, and some old markets such as payment devices and new energy devices are also experiencing growth. 3) Storage: Profits of overseas manufacturers have significantly improved quarter by quarter, with a cautious yet optimistic outlook for niche storage in the second half of the year. 1) DRAM and NAND: The profit capabilities of the three major storage manufacturers have continued to improve significantly each quarter, with increasing demand and prices for DRAM and NAND products, especially for high-end products such as HBM, eSSD, while demand for consumer products still remains under pressure. Overall demand is expected to moderately recover, with subsequent capital expenditures of the three major manufacturers focusing on high-end products such as HBM and eSSD. 2) Niche storage: Niche storage demand in 24Q3 did not show significant recovery compared to the first half of the year, with prices remaining stable on a month-on-month basis. Domestic niche storage chip manufacturers mainly targeting consumer and industrial markets showed high year-on-year revenue growth in 24Q3, but due to the lack of significant recovery in downstream market demand, revenue remained relatively stable month-on-month, with gross margin stability or slight increase. In terms of profits, domestic manufacturers achieved high year-on-year growth, with month-on-month performance varying mainly due to differences in expenses. 3) Storage modules: Domestic storage module companies achieved substantial year-on-year growth in revenue and profit in 24Q3, but profits were under pressure month-on-month due to product structure mainly focused on consumer markets, with adjustments in consumer prices since 24Q3 bringing some cost pressure from inventory, impacting gross margin adjustment. Looking at inventory, the pace of destocking among domestic manufacturers varied, with Shenzhen Longsys Electronics reducing inventory by $1 billion in 24Q3, while inventories of other manufacturers remained relatively stable. 4) Analog: Demand in automotive electronics and consumer sectors is relatively strong, with a focus on domestic companies' mergers and acquisitions. TI/MPS expect revenue declines of -7.3%/-1.6% in Q4 2024, with TI stating that some downstream sectors recovered in Q3, such as automotive/personal electronics/communications/enterprise seeing an increase in revenue, while the industrial sector remains weak. Among Chinese analog chip companies, most consumer-oriented analog chip companies such as Sanbao/Aiwei/Nansin showed stable or slight increases in revenue in Q3 2024, with growth in the consumer sector mainly driven by phones slightly slowing down, and sectors like industrial, automotive, new energy, and communication showing initial signs of recovery with companies like Suzhou Novosense Microelectronics/3peak Incorporated/JoulWatt Technology showing some improvement, and Jadard Technology Inc. showing a significant increase of 29% in revenue in Q3 due to display driver chips. Regarding mergers and acquisitions, Shanghai Bright Power Semiconductor Co., Ltd. plans to acquire EChamp Technology, which specializes in wireless charging chips.0% equity, Halo Microelectronics is planning to purchase 100% stake in Chengxin Micro.1) RF: The domestic market competition pressure is still high, paying attention to the progress of domestic leading LPAMiD new products. Stable Revenue in 24Q3 increased by +4.4% year-on-year / -12.4% quarter-on-quarter, slightly lower than previous guidance. Qorvo's revenue in 24Q3 decreased by -5.2% year-on-year / +18.0% quarter-on-quarter, and the revenue forecast for Q4 is -16% year-on-year / -14% quarter-on-quarter, which is lower than expected, mainly due to the shift in demand from mid-range Android 5G smartphones towards entry-level smartphones. The company further expects that the company's mobile business revenue in the FY25 fiscal year (24Q2-25Q1) will experience a low single-digit year-on-year decline. Domestic companies Maxscend Microelectronics and Stable Revenue in 24Q2 saw a decrease in revenue and net profit attributable to shareholders on a quarterly basis, mainly due to intense industry competition and significant price pressure. It is recommended to pay attention to high-end categories such as filters and L-PAMiD for domestic alternatives. 6) CIS: Domestic manufacturers are entering the high-end product line, and the growth of the Android camp in 24Q3 continues. In 24M10, mainland optical company Sunny Optical's shipments of mobile phone lenses decreased by -1.9% year-on-year / -2.6% quarter-on-quarter, and overall revenue for optical manufacturers in China and Taiwan decreased by -4% year-on-year / -7% quarter-on-quarter. Domestic manufacturers Will Semiconductor and SITRI saw continued growth in performance in 24Q3, mainly driven by continuous breakthroughs in new products and accelerated domestic substitution; Will Semiconductor's revenue in 24Q3 increased by +10% year-on-year / +6% quarter-on-quarter, achieving a historical high in quarterly revenue, while profitability improved quarter by quarter; SITRI's revenue in 24Q3 increased by +150% year-on-year / +8% quarter-on-quarter, mainly due to an increase in market share and improved performance driven by the release of new machines from large clients in Q3. Attention should be paid to future increases in market share and progress in introducing new customers. 7) Power Semiconductors: Relatively strong demand for automotive electronics, paying attention to the recovery pace of demand in the energy storage field and the pull of high-end products in the AI field. International powerhouses ST/Anson Mei/Wolfspeed are expected to have a Q4 revenue increase of +2.2%/-0.11%/-8.6% quarter-on-quarter, with Anson Mei stating that automotive growth in Q3 is low to mid-single digits, while industrial growth is relatively flat or slightly down. Domestic power companies with a high proportion of low-voltage devices or consumer class such as Hangzhou Silan Microelectronics/China Resources Microelectronics/Yang Jie saw mostly flat or slight increases in revenue in 24Q3. It is expected that the impact of IGBT price pressure or pricing pressure will continue, and some low-voltage products will see stable prices but competition may continue. It is recommended to continue monitoring the sustainability of automotive demand in Q4, the recovery of demand in the energy storage field, and the impact of industry price changes. 2) Contract Manufacturing: Continued recovery in 24Q3 utilization rates, price increases for advanced processes and some 12-inch mature processes. 1Utilization rate: UMC's utilization rate in 24Q3 was 71%, an increase of 3pcts compared to the previous quarter, and it is expected that the utilization rate in 24Q4 will decrease by 2-5pcts to 66%-69%, mainly due to the new 22/28nm capacity ramp-up; SMIC's utilization rate in 24Q3 was 90.4%, an increase of +13.3pcts year-on-year / +5.2pcts quarter-on-quarter, the company said the fourth quarter is a traditional slow season, the utilization of 30,000 wafers/month is expected to be released, and the new capacity verification led to a decrease in overall utilization rate; Huahong's utilization rate in 24Q3 was 105.3%, an increase of +18.5pcts year-on-year / +7.4pcts quarter-on-quarter, the company expects the utilization rate of the 48-inch production line to recover slightly in 24Q4, and the demand for the 12-inch platform remains strong; TSMC's utilization rate in 24Q3 increased by a high single-digit percentage point to 70% quarter-on-quarter, and is estimated to decrease to around 65% in 24Q4; 2) Wafer prices: TSMC's wafer ASP in 24Q3 increased by +6% quarter-on-quarter; UMC's wafer ASP in 24Q3 slightly decreased by 1% year-on-year due to changes in product mix; GCS's wafer ASP in 24Q3 remained flat quarter-on-quarter; SMIC's ASP in 24Q3 increased by +15.5% quarter-on-quarter, mainly due to strong demand for 12-inch products, bringing about product mix optimization, and the company expects ASP to steadily increase in 24Q4; Huahong's ASP in 24Q3 decreased by -4% quarter-on-quarter, the company said 24Q4 prices for 48-inch wafers are expected to remain under pressure, with strong demand for 12-inch products, and ASP is expected to see a slight recovery quarter-on-quarter; Nexchip Semiconductor Corporation has stated that it has adjusted the prices of some outsourced products according to market conditions. 3) Testing & Packaging: Overall industry Q3 utilization rate increased quarter-on-quarter, and there is still marginal room for improvement in the overall industry outlook for Q4. Jingyuetan expects a slight increase in revenue quarter-on-quarter for Q4 testing and packaging / gross profit margin remains flat; Ankao expects a median revenue decrease of -11% quarter-on-quarter, due to lower-than-expected production plans for high-end smartphones in H2, and expects a 24% quarter-on-quarter revenue growth in H2. The overall revenue of domestic testing and packaging companies in 24Q3 increased on a quarterly basis, with different performances among downstream companies. Long Electric stated that the recovery in non-telecommunications demand in Q3 was relatively slow, while companies like Tongfu expect continued improvement in demand for high-end compute chips in 24Q4. Hui Cheng and others stated that products related to large-size display drivers may see a warming up in Q4, with overall expectations for continued revenue growth on a quarterly basis for domestic testing and packaging companies in 24Q4. 4) Equipment & Materials & Components: Marginal improvement in industry sentiment, the intensification of US export controls may accelerate domestic substitution process. On November 5th, according to the Wall Street Journal, American chip equipment manufacturers AMAT and LAM have begun requiring their suppliers not to use Chinese components, and even suppliers with Chinese funding or shareholders are deemed unacceptable; According to reports, on November 7th, the China Special Committee of the US House of Representatives sent letters to companies that produce semiconductor manufacturing equipment such as AMAT, LAM, and KLA, expressing concern about selling technology to China and requesting detailed information on sales volume and major customers. 1) Equipment end: Domestic manufacturers' orders are marginally improving, accelerating domestic substitution. Leading domestic equipment manufacturers such as NAURA Technology Group and Advanced Micro-FactoriesFab Equipment Inc. China, Piotech Inc., Hwatsing Technology, and Acm Research (Shanghai), Inc. all experienced stable and robust growth in Q3 revenue compared to the previous quarter; however, Kingsemi Co., Ltd., Shanghai Wanye Enterprises, and JHT Design Co., Ltd. saw a decline in revenue in Q3 compared to the same period last year, mainly due to factors such as product structure. Skyverse Technology, Wuhan Jingce Electronic Group, Hangzhou Changchuan Technology, Beijing Huafeng Test & Control Technology, Shenzhen SEICHI Technologies all experienced a high year-on-year growth in revenue, mainly attributed to the rapid increase in new product volume and faster order confirmation. With the acceleration of domestic Fab equipment procurement in 2024, the expansion of advanced manufacturing capacity, and the acceleration of domestic substitution, domestic equipment manufacturers are seeing an increased trend in signed contracts and shipments, indicating a positive outlook for revenue growth in 2025.Components: The domestic and international business environment continues to be favorable, leading to an improvement in revenue and profit margins for some manufacturers. With the recovery of overseas equipment and accelerated domestic equipment procurement in 2024, combined with the deepening trend of domestic parts substitution, overseas business revenue is expected to recover and domestic business is expected to enter a period of accelerated order growth. Overall, the revenue growth of domestic components companies since 2024 has significantly improved, and it is anticipated that profit growth will accelerate after the realization of economies of scale. Materials: The downstream wafer factory utilization rate continues to recover, with new product development and domestic substitution accelerating. The semiconductor materials industry has seen fluctuations in demand along with downstream Fab utilization rates. Since 2024, the domestic Fab utilization rates have continued to recover, with Semiconductor Manufacturing International Corporation and Hua Hong 24Q3 achieving utilization rates of 95.4% and 105.3% respectively, leading to an improvement in revenue performance for some domestic materials manufacturers. Additionally, some manufacturers have benefited from rapid volume increase of new products, such as Hubei Dinglong, Anji Microelectronics Technology, Konfoong Materials International, Jiangsu Yoke Technology, with their revenue and profit growth in 24Q3 surpassing the average level of semiconductor materials manufacturers. EDA/IP: One of the bottlenecks in the upstream semiconductor industry in China, focusing on segments and products related to high-end manufacturing. In Q3, semiconductor IP licensing fees and chip design business of Xinyuan saw a month-on-month revenue increase of 17% each, while Empyrean Technology experienced a 30% revenue increase due to landing large orders from major clients. Primarius Technologies' design-class EDA revenue from Q1 to Q3 showed a year-on-year increase of 75%, driven mainly by DRIVE. Investment recommendation: Focusing on three main themes based on certainty, business environment, and valuation: 1) Focus on companies involved in GPU, foundry, equipment, testing, materials, and upstream EDA/IP, as the demand for computing power increases and domestic logic strengthens. 2) Seize opportunities in the industry chain brought by new products like AI terminals and smart vehicles. 3) Focus on design companies with good performance visibility: - Computing power industry chain: Focus on domestic companies producing large semiconductor chips and storage industry targets benefiting from recovery margins and increased demand for AI servers. - Equipment & Materials & Components: Focus on domestic advanced semiconductor equipment manufacturers benefiting from domestic substitution, as well as those with low domestic manufacturing rates. - Manufacturing and testing: Focus on advanced Semiconductor Manufacturing International Corporation in the domestic process layout, and companies in advanced testing areas like TongFu Microelectronics and JCET Group Co., Ltd.OGY, as well as Union Semiconductor, Hefei Chipmore Technology, China Wafer Level CSP, China Chippacking Technology Co., Ltd., Foshan Blue Rocket Electronics, and Guangdong Leadyo Ic Testing Co., Ltd., which are expected to benefit from the overall recovery of the industry.4) EDA/IP: Focus on domestic EDA software companies with independent and controllable technology such as Empyrean Technology, Primarius Technologies, Semitronix Corporation, and Verisilicon Microelectronics (Shanghai) Co., Ltd. that are expected to benefit from the Chiplet trend. 5) Consumer IC: For SoC products, it is recommended to pay attention to Bestechnic (Shanghai) Co., Ltd., Amlogic, Rockchip Electronics, Espressif Systems, Actions Technology, etc. It is suggested to focus on the recovery of the smartphone market and the domestic substitution in high-end categories, which could benefit Maxscend Microelectronics, Will Semiconductor, Vanchip, GalaxyCore Inc., Sitway, Huizhiwei, etc., while also paying attention to the impact of new AI smart terminal products. 6) Analog Chips: It is recommended to focus on companies such as SG Micro Corp, Shanghai Awinic Technology that benefit from the recovery of consumer demand. Also, companies with good performance growth and new product breakthroughs like Jadard Technology Inc., Lontium Semiconductor Corporation, as well as those actively involved in mergers and acquisitions like 3peak Incorporated and Suzhou Novosense Microelectronics. 7) Power Semiconductors: Considering the significant drop in prices of mid-to low-end products, it is suggested to pay attention to companies like Wuxi Nce Power, Yangzhou Yangjie Electronic Technology that are affected by price changes and demand recovery. Also, consider companies impacted by changes in industry competition dynamics like Zhuzhou CRRC Times Electric, StarPower Semiconductor, Macmic Science & Technology, Suzhou Oriental Semiconductor, Hangzhou Silan Microelectronics, etc. 8) MCU: Focus on companies like GigaDevice Semiconductor Inc., Chipsea Technologies(Shenzhen)Corp.,Ltd, Fortior Technology(Shenzhen)Co., Hi-Trend Technology, Shenzhen China Micro Semicon, C*Core Technology that are expected to benefit from future demand recovery. 9) Storage Chips, Modules, and Controllers: Prices of some consumer storage products have been adjusted, while prices of high-end DDR5, HBM, etc. continue to rise. Companies such as GigaDevice Semiconductor Inc., Puya Semiconductor (Shanghai) Co., Ltd., Giantec Semiconductor Corporation, Dosilicon Co., Ltd., Zbit Semiconductor, Inc. that benefit from improving shipment volumes, as well as storage module and controller manufacturers Shenzhen Longsys Electronics, Biwin Storage Technology, Netac Technology, Shenzhen Techwinsemi Technology should be focused on. 10) Specialty IC: The industry is gradually bottoming out, with companies continuously releasing breakthrough products. It is recommended to pay attention to Unigroup Guoxin Microelectronics, Shanghai Fudan Microelectronics Group, Guizhou Zhenhua Fengguang Semiconductor, Chengdu, Great Microwave Technology, Anhui XDLK Microsystem Corporation, etc. Risk Alert: Below-expected end-user demand; slow inventory turnover; slower-than-expected development of domestic semiconductor substitution; increased industry competition, etc.