China Great Wall: Optimistic about the continuous recovery of demand in the electronic industry, AI promotes the development of advanced semiconductor processes.

China Great Wall released a research report stating that inventory adjustments in the electronics industry are gradually falling into place, and overall demand is gradually recovering. Boosted by AI hardware innovation, consumer electronics demand is expected to recover first, Huawei's return is driving overall gradual recovery in smartphone demand, and the performance of the consumer electronics peak season in the fourth quarter is worth looking forward to. Automotive electronics demand is expected to recover, cost reduction momentum continues to strengthen, semiconductor industry sentiment warms up, wafer foundry utilization rate continues to improve, benefiting from advanced packaging expansion and AI demand drive, and glass substrate manufacturers are expected to seize good opportunities in the industry. Key points from China Great Wall's report: The recovery trend in the electronics industry is evident, with strong growth in revenue and profitability in 24Q3. In 24Q3, revenue of the Shenwan Electronics sector was 915.18 billion yuan, a year-on-year increase of 19.10% and a quarter-on-quarter increase of 14.28%; net profit attributable to the parent company was 40.228 billion yuan, a year-on-year increase of 20.90% and a quarter-on-quarter increase of 12.62%. The top 3 sectors in terms of sequential revenue growth in Q3 were consumer electronics components and assembly (QoQ + 23.92%), printed circuit boards (QoQ + 11.65%), and discrete devices (QoQ + 8.97%); the top 3 sectors in terms of sequential net profit growth in Q3 were consumer electronics components and assembly (QoQ + 39.07%), discrete devices (QoQ + 34.01%), and printed circuit boards (QoQ + 8.80%). ODM/OEM: Strong rebound in demand continues in the peak season, driving significant improvement in revenue along the manufacturing chain. Benefiting from the increase in demand for consumer electronics in the peak season and new product releases, overall revenue performance of ODM manufacturers improved significantly quarter-on-quarter. In the first three quarters of 2024, Luxshare Precision Industry achieved steady revenue growth, mainly driven by the increase in demand for consumer electronics in the peak season, traditional products such as computer peripherals maintained steady growth, new products from customer A brought clear momentum, and the acquisition of Qorvo and Cosmo related entities by the company also led to additional revenue. Q3 revenue of Huaqin Technology increased significantly quarter-on-quarter, mainly due to resonance from multiple business lines, especially in servers, high-speed network switches, AIoT, and other business segments with high growth rates. In addition, categories such as smartphones and wearable devices also maintained strong growth. Wingtech Technology turned quarterly net profit from loss to profit in 24Q3, mainly benefitting from a substantial decrease in quarterly net losses in the product integration business. Shanghai Longcheer Technology achieved nearly doubling revenue growth year-on-year in 24Q3, mainly due to continuous growth in various business segments. Goertek Inc. achieved stable revenue growth in 24Q3, mainly driven by the release of new products in the third quarter by large customers in AR/VR and headsets and new products by customer A, which led to an increase in revenue driven by stockpiling of new products by the company. PCB: Industry demand continues to recover, with overall revenue growth driven by the peak season effect. The revival of the PCB industry cycle is being driven by AI technology innovation and recovering market demand, with AI servers and automotive electronics being the main engines driving demand for high-end PCB products. Benefiting from the recovery in industry demand and the dual drive of AI technology revolution, the PCB industry maintained a recovery trend in the first three quarters of 2024. As we enter the second half of the year, the traditional peak season, many PCB companies achieved high-speed revenue and net profit growth, with companies heavily involved in AI-related products performing exceptionally well in terms of profitability. Some companies saw a decrease in profit performance due to rising costs in product and production line adjustments, as well as fluctuations in raw material prices and exchange rates. Storage: The storage market is trending towards stability, with strong demand for high capacity in the second half of the year. This year, global technology companies have embarked on an AI construction wave, resulting in a surge in demand for high-capacity, high-performance storage products. In the second half of the year, capital expenditures of North American internet companies continued to rise, with strong demand for high-capacity QLCSSD, DDR5, and HBM products. In China, although traditional server demand, including from operators, has been average, the wave of AI competition has driven positive demand for AI server-related products from domestic internet companies. As of September 30, 2024, the DRAM index was 554.78, and the NAND index was 694.15. While demand in the AI and server markets remains hot, other sectors including mobile phones, personal computers, and consumer electronics products are lackluster. It is expected that the market conditions in the fourth quarter will be similar to those in the third quarter as the seasonal off-peak period approaches. IC Design: Digital chip growth remains year-on-year, while analog chip profitability is under pressure year-on-year. In 24Q3, the digital chip design sector improved year-on-year, while the analog chip design sector is under pressure year-on-year. The digital chip design sector, driven by the recovery in downstream terminal demand such as smartphones, will show a steady growth trend in the global CIS industry market size. Given that Sony and Samsung are gradually reducing their market share in the Chinese CIS market, domestic manufacturers launching high-end CIS products may have the opportunity to gain more market growth. The analog chip design sector, the industry is currently adjusting inventory continuously, and China's electric vehicle development momentum is strong. Panel: The LCD terminal market is showing signs of recovery, with overall profitability of panel manufacturers improving year-on-year. According to consulting firm data, the prices of LCD TV panels have been on the rise since February 2024, with a decline in July and stabilization in October. Meanwhile, the price fluctuations of LCD IT panels have been smaller than that of TV panels, with overall stability in prices in the third quarter. BOE, a major panel manufacturer, saw signs of recovery in the LCD terminal market in the first three quarters of 2024, with TV products benefiting from the "trade-in" policy, boosting market demand, and the trend towards larger screens continuing; IT product sales grew year-over-year driven by e-sports demand and the "trade-in" policy; the smartphone terminal market is gradually recovering. BOE has benefited from the recovery in LCD terminal market demand and product structure optimization, with a significant year-on-year improvement in profitability in the first three quarters. TCL Huaxing also stated that under the seasonal fluctuations in downstream stocking demand, TV panel prices rose moderately in the first half of the year, with a slight decline in the third quarter, currently showing a stable trend; benefiting from hardware product innovation and replacement demand.Driven by demand, the prices of mid-to-small-sized panel products have continued to fluctuate narrowly after experiencing structural increases. Benefiting from the price increase of main products compared to the same period last year, TCL Huaxing's operating performance has significantly improved year-on-year.In addition, Xiaomi Tianma stated that in the first three quarters of 2024, with the continuous improvement of product specifications, the continuous optimization of product structure, and the continuous advancement of extreme cost reduction work, the overall gross margin of the company maintained an increase compared to the previous quarter. Among them, the profit improvement of the flexible AMOLED smartphone display business, which has a significant impact on profit, was good, and the TM17 flexible AMOLED smartphone display business achieved a positive single-quarter gross profit in Q3. Furthermore, the scale development and value enhancement of the company's automotive business also led to a further expansion of the profit scale of the automotive display business. On this basis, the company achieved a net profit attributable to shareholders of the listed company in the single quarter of Q3, reversing losses. Looking forward to 2025, the recovery of consumer demand is expected to drive the stabilization of panel prices, and the gradual increase in OLED penetration rate is expected to improve the performance of domestic panel manufacturers. Semiconductor foundry: AI drives strong demand for advanced processes, and the consumer electronics sector leads the industry to stabilize and recover. In the third quarter of 2024, the global silicon wafer shipments continued the upward trend that started in the second quarter of this year. Although inventory levels in the entire supply chain have decreased somewhat, they still remain relatively high. Specifically, the demand for advanced silicon wafers for artificial intelligence applications continues to be strong. In contrast, demand for silicon wafers in the automotive electronics and industrial applications sectors remains weak, while the demand for silicon wafers for smartphones and other consumer electronics products shows signs of recovery to some extent. TSMC recently stated at the investor conference that the demand for its 3nm and 5nm technology for smartphones and AI-related applications remains strong. In the fourth quarter of 2024, the semiconductor market showed signs of stabilization and recovery driven by the demand in fields such as consumer electronics. Mainland Chinese manufacturers, Semiconductor Manufacturing International Corporation, Hua Hong Semiconductor, Nexchip Semiconductor Corporation, and Xinlian Integrated Circuit Co., Ltd., all saw their performance improve to varying degrees. In the fourth quarter of 2024, Semiconductor Manufacturing International Corporation further optimized its product structure, and its ASP, overall capacity utilization rate, and gross margin all increased. Hua Hong Semiconductor's revenue and gross margin were better than expected, and its capacity utilization rate reached full capacity in all aspects. Nexchip Semiconductor Corporation has been operating at full capacity since March this year, resulting in price increases for some product foundry services and a steady increase in revenue and product gross margin. Xinlian Integrated Circuit Co., Ltd. benefited from the recovery in the new energy vehicle and consumer markets, with its new products such as SiC and 12-inch silicon wafers quickly adopted and produced by top customers, promoting the company's steady growth. Semiconductor packaging and testing: Differentiated demand in terminal application markets leads to performance growth in advanced packaging. In the first three quarters of 2024, the explosion of AI demand drove rapid rebound in logic and high-end memory demand, and market demand in the communications and consumer electronics sectors showed clear signs of recovery. Demand in the automotive and industrial sectors was weak in the first half of 2024, but showed signs of recovery in the third quarter. Demand for packaging and testing is mainly driven by advanced packaging. In the first three quarters of 2024, mainland Chinese packaging and testing giants, JCET Group Co., Ltd., TongFu Microelectronics, and Tianshui Huatian Technology, all had bright spots in their performance. Additionally, there is still a shortage of advanced packaging capacity, with TSMC stating at a recent investor conference that CoWoS advanced packaging capacity remains tight. Mainland packaging companies like TongFu Microelectronics, Tianshui Huatian Technology, Forehope Electronic, are investing resources and expanding capacity in advanced packaging-related technologies, targeting AI applications in high-performance storage and computing fields. The demand for advanced packaging technology products is expected to maintain a high-speed growth trend in the next few years, and packaging and testing companies are expected to benefit from the shortage of advanced packaging capacity, leading to long-term performance growth. Power semiconductors: Revenue steadily growing benefiting from downstream demand recovery. Against the backdrop of economic recovery and rising industry sentiment downstream, the demand for power semiconductors is continuously growing, with the capacity of major wafer foundries approaching full load, leading to price increases for some power semiconductor products, ongoing inventory optimization, and steady revenue growth with varying profitability. In the third quarter of 2024, the four leading companies in the power semiconductor segment, Hangzhou Silan Microelectronics, Wuxi Nce Power, Yangzhou Yangjie Electronic Technology, and Jiangsu Jiejie Microelectronics, all showed different degrees of year-on-year growth in performance. Benefiting from the gradual recovery of downstream markets and significant increase in demand in emerging application fields, inventory acceleration, Wuxi Nce Power's sales continued to improve, thereby driving steady revenue growth. Due to the gradual improvement in semiconductor market demand, and the gradual recovery in consumer electronics and industrial markets, as well as the rapid growth of automotive electronics business, Yangzhou Yangjie Electronic Technology achieved stable growth in performance in the first three quarters of 2024. In the first three quarters of 2024, influenced by industry cyclical adjustments and increased R&D investment, China Resources Microelectronics saw a slight decline in net profit year-on-year. Market review: Valuation.In the high range.From the beginning of the year to November 8, 2024, the Shanghai Composite Index rose 16.05%, the Shenzhen Component Index rose 17.19%, the CSI 300 Index rose 19.61%, and the Shenwan Electronics sector rose 24.29%. The PE-TTM index of the Electronics sector (excluding negative values) is 47.92, indicating that valuations are in a continuous recovery range. From the beginning of the year to November 8, 2024, the top five industries in terms of growth are semiconductor equipment (46.94%), printed circuit boards (38.43%), optical components (36.72%), integrated circuit testing (33.25%), and digital chip design (32.23%). The top two industries in terms of decline are branded consumer electronics (-4.94%) and analog chip design (-0.99%). Investment recommendation: Recommend Huaqin Technology (603296.SH), Suzhou Gyz Electronic Technology (688260.SH), Southchip Semiconductor Technology (Shanghai) (688484.SH), Forehope Electronic (688362.SH), DBG Technology (300735.SZ), Smartsens Technology (688213.SH), GalaxyCore Inc. (688728.SH), Ningbo Sunrise Elc Technology (002937.SZ), Zhejiang MTCN Technology (003026.SZ), Nexchip Semiconductor Corporation (688249.SH), Hua Hong Semiconductor (688347.SH), Shanghai Bright Power Semiconductor Co., Ltd. (688368.SH), WG Tech (JiangXi) Group (603773.SH). Risk warning: Market volatility risk, intensified market competition, AI progress falling short of expectations, escalation of US-China tensions.