CITIC SEC: Electronics 24Q4 demand is normal, AI + automotive related industry chain is highly prosperous.

CITIC SEC released a research report saying that it is expected that the overall performance of the electronic industry in Q4 2024 will be relatively flat. Consumer electronics demand is normal, automotive demand is gradually recovering, and AI-related materials remain highly prosperous. Looking at the downstream, it is expected that Apple's demand in Q4 will grow slightly, while Android's demand will be relatively flat. Automotive and industrial demand will remain stable. In the midstream, the pace is similar to the downstream. Upstream CIS domestic substitute demand continues to be strong. Overall, the outstanding sub-sectors include the leading companies in the fruit chain, IoT, CIS, AI-related PCB, equipment, advanced testing and packaging, among others, with some segments seeing early stockpiling demand due to the impact of tariff increases. The main viewpoints of CITIC SEC are as follows: Consumer electronics sector: Stable demand for Apple, relatively flat for Android, and continued differentiation in IoT performance. 1) Downstream: The bank expects Apple's iPhone shipments to increase by 5% year-on-year to 81 million units in Q4 2024, while it expects Android phone shipments to decrease by 8% year-on-year to 224 million units, showing relatively flat demand for Android. In terms of IoT, the bank expects Edifier Technology OWS headphone shipments to further increase their market share, maintaining steady growth in performance. 2) Midstream: Fruit chain orders in Q4 are normal, with the depreciation of the Renminbi having a marginal positive contribution to the supply chain's performance. The bank expects most of the supply chain performance for Android in Q4 to be relatively stable compared to Q3, with some companies performing better. 3) Upstream: In Q4 2024, the SoC companies in the IoT segment continue the trend of differentiation from Q3, with most revenues remaining stable compared to the previous quarter. Demand for CIS in the mobile segment remains strong, while other segments show relatively flat performance. Semiconductor sector: Overall, there is a mild recovery, with domestic replacement demand being maintained, but there is some differentiation in short-term profitability. 1) Manufacturing/Testing: Q4 is the normal peak season, with demand relatively stable. The bank expects Fab factory revenues to slightly increase compared to the previous quarter, with 12-inch wafer utilization rates remaining at full capacity and 8-inch utilization rates increasing slightly. Overall, wafer ASPs in Q4 2024 are expected to see a slight increase, but there is a risk of price reductions in mature processes in 2025. The bank expects testing and packaging utilization rates to remain stable in Q4 2024, with companies that have domestic replacement logic or overseas incremental customers performing better. 2) Semiconductor Equipment/Components: The bank expects the overall industry performance in Q4 to meet expectations, as orders from Q3 gradually turn into revenue. However, research and development expenses may result in differentiation in profitability. At the order level, due to the pace of expansion by large customers, there may be fluctuations in the full-year orders for companies within the sector, with demand in 2025 awaiting the landing of pre-orders from large customers around the end of the year. 3) Memory Chips: The bank expects prices of mainstream memory chips in Q4 to continue to fall, but the rate of decline is slowing. Module manufacturers could see a slight improvement in shipments compared to the previous quarter, with revenue expected to remain stable, and profitability stabilizing at the bottom. Domestic niche memory chip shipments may decrease slightly due to seasonal factors. 4) Analog Chips: Due to seasonal factors, the bank expects some companies to see a mild increase in revenue compared to the previous quarter, performing better. 5) Power Devices: The bank expects that the revenue of most companies in Q4 will remain stable compared to the previous quarter. Electronic Assembly Sector: AI+ automotive demand continues to be prosperous, with home appliance subsidies driving panel demand beyond expectations. 1) PCB: AI+ automotive demand remains prosperous, with the sector expected to see overall revenue growth in Q4. The bank expects stable demand for copper-clad laminate in Q4. 2) Panels/LED: Domestic panel demand exceeds expectations due to home appliance subsidies, with the bank expecting LCD panel utilization rates to exceed 80% in November and December. The bank expects large-size panel prices to increase by $1 in December, with the performance of leading companies in the panel sector in Q4 slightly decreasing, but profitability remains significant, exceeding expectations. In terms of LED, the bank expects manufacturer revenue to increase slightly in Q4, with some companies still facing impairment risks at the end of the year. 3) Security: The bank expects demand to remain under pressure, with leading companies expected to maintain steady performance. Investment Strategy: The bank expects the overall performance of the industry in Q4 to be relatively flat, with normal demand for consumer electronics, gradual recovery in automotive demand, and continued strong demand for AI-related materials. Sub-sectors with relatively outstanding performance include leading companies in the fruit chain, IoT, CIS, AI-related PCB, equipment, and advanced testing and packaging. In 2025, the electronic sector will focus on AI innovation, domestic demand recovery, and self-sufficiency in domestic production. In terms of main trends, AI innovation, as the sector with the lowest valuation and the most clear EPS growth, remains the recommended direction, with both the fruit chain and AIoT being main trends. Additionally, from the perspective of domestic demand recovery expectations, the bank continues to recommend the Android chain, security, and pro-cyclical components, with a focus on the expected government subsidy for mobile phones. From the perspective of semiconductor self-sufficiency, equipment, signal creation, and AI computing are the most advantageous directions benefiting from policies and funding, which the bank continues to favor. Finally, the bank advises to pay attention to the arrival of the era of industrial mergers and acquisitions. Risk factors: Risks of global macroeconomic downturn; risks of changes in international political environment and escalating trade tensions; lower-than-expected downstream demand; lower-than-expected AI innovation; slower-than-expected progress in AI commercialization; slower-than-expected innovation in the Android industry chain; slower-than-expected progress in domestic substitution; slower-than-expected expansion of domestic wafer factories; slower-than-expected development of advanced process technology; increased competition among downstream manufacturers; risks of raw material price increases due to inflation; risks of increased sanctions; risks of significant exchange rate fluctuations, etc.