CITIC SEC: Consumer electronics national subsidy policy introduced, leading with Android chip design company + optical design.

CITIC SEC released a research report stating that on January 8, 2025, the National Development and Reform Commission and the Ministry of Finance issued a notice on the implementation of a large-scale equipment renewal and old-for-new policy for consumer goods in 2025. This policy is expected to boost downstream demand, shorten the replacement cycle for consumers, focus on the industry chain, and benefit the upstream > midstream > downstream. It is recommended to pay attention to domestic Android brand companies and Android chip design and optical companies with greater flexibility. CITIC SEC's main points are as follows: The consumer electronics subsidy policy was introduced, and the subsidy ratio and amount were in line with expectations, but there was no expectation for the subsidy limit of products with a single unit price of less than 6000 yuan. On January 8, 2025, the National Development and Reform Commission and the Ministry of Finance issued a notice on the implementation of a large-scale equipment renewal and old-for-new policy for three categories of digital products (phones, tablets, smartwatches, etc.) for individual consumers, with a selling price not exceeding 6000 yuan, providing a subsidy of 15% of the product's selling price, up to 500 yuan per product, and each consumer can receive a subsidy for one product in each category. The subsidy ratio (15%) and the subsidy limit (not exceeding 500 yuan) were already expected in the market, but there was no expectation for products with a selling price of less than 6000 yuan. According to the price limit, most Android phone models fall within the subsidy range, with only some high-memory models of flagship phones restricted, while Apple models eligible for subsidies are limited to entry-level, low-memory models/older models/SE models. According to the bank's calculations, there are approximately 220 million models that meet the subsidy conditions in 2023, accounting for about 80% of sales and 55-60% of revenue. According to GFK and IDC data, in 2023, Apple and Android shipments in the Chinese market were 0.47/2.24 million units, respectively. Assuming a total of approximately 280 million smartphones in China in 2024, segmented by price range, phones priced at 6001 yuan and above account for 20%, 4501-6000 yuan account for 13%, 3001-4500 yuan account for 14%, 1501-3000 yuan account for 35%, 0-1500 yuan account for 17%. Overall, it is estimated that models priced below 6000 yuan will account for about 80% of shipments in 2023, with approximately 220 million smartphones eligible for the subsidy policy; from a revenue perspective, the total market value of models below 6000 yuan is estimated to be about 570 billion yuan, accounting for 55-60% of the overall domestic smartphone market size (about 100 billion yuan). Assuming that all eligible consumers receive the subsidy and cover all models sold below 6000 yuan, the estimated scale of subsidy required is about 74 billion yuan. Based on the subsidy ratio of 15% and a maximum of 500 yuan per unit, assuming that all eligible consumers receive the subsidy and that all models sold below 6000 yuan are covered, the bank assumes an average price of 5000/3800/2000/800 yuan for phones in four price ranges, with corresponding subsidies of 500/500/300/128 yuan per unit. Using the estimated 2.8 million smartphones in China in 2024 as a benchmark, the overall subsidy required is estimated to be 74 billion yuan. However, not all buyers may participate in the subsidy program, so the actual scale may be smaller than the estimated amount. The impact of consumer electronics subsidies on the industry chain is reflected in both shortening the replacement cycle (quantity) and promoting product upgrades to higher-end models (price), favoring the demand for domestic Android models and increasing market share. In terms of quantity, the research firm Canalys previously estimated that the annual shipment of smartphones in Mainland China would exceed 290 million units by 2025. Considering that the subsidy is expected to drive demand growth and shorten the replacement cycle, the bank predicts that the domestic smartphone shipments will reach 310-320 million units in 2025. In terms of price, referring to the impact of subsidies on consumer electronics products, according to data from AVC Cloud, from the 35th to 46th week of 2024 (August 26 to November 17), the online retail volume, retail sales, and average price of seven major categories of consumer electronics products including TVs, air conditioners, refrigerators, washing machines, water heaters, range hoods, and gas stoves increased by 18.0%, 25.2%, and 6.0% respectively year-on-year. Offline retail volume, retail sales, and average price increased by 49.5%, 65.9%, and 9.5% respectively year-on-year, indicating that subsidies also have a significant impact on increasing product ASP. Based on the above analysis, the bank is optimistic about the impact of consumer electronics subsidies on demand for domestic Android models in China. Investment Strategy: The subsidy is expected to drive downstream demand growth and shorten the replacement cycle, with the bank predicting that domestic smartphone shipments will reach 310-320 million units in 2025. They are bullish on domestic Android brand companies and Android chip design and optical companies with greater flexibility. Risk factors: Demand falls below expectations, technological iteration falls short of expectations, market competition intensifies, global macroeconomic recovery falls below expectations, and the progress and effects of consumer electronics subsidy policies nationwide are below expectations.