Zhongjin: Iteration of the supply chain drives demand for low dielectric electronic cloth, 7628 products slightly raise prices with downstream inventory replenishment.

CICC released a research report stating that the market has recently been paying attention to Low-Dk electronic grade glass fiber cloth, with AI driving the upgrading of PCB and related industry chains, which may boost the growth of low-dielectric electronic fabric. Current domestic low-dielectric mainstream suppliers include Taishan Fiberglass, Linzhou Guangyuan, Grace Fabric Technology (603256.SH), among others, and the process of domestic substitution is underway. Among them, Sinoma Science & Technology announced in October 2024 that it plans to invest 1.3 billion yuan to build a special glass fiber cloth project with an annual capacity of 26 million meters. Targets recommended include Sinoma Science & Technology (002080.SZ) and China Jushi Co., Ltd (600176.SH). The main points of CICC are as follows: AI drives the upgrading of PCB and related industry chains, driving the growth of low-dielectric electronic fabric. CICC believes that AI servers have higher requirements for PCB performance. In high-speed switches (such as 800G switches), as the transmission rate of the switch increases, the signal frequency and transmission rate increase significantly. Low-dielectric constant (Low-Dk) materials can effectively reduce the delay and loss in signal transmission, thereby improving signal integrity. The first-generation low-dielectric formula has been publicly disclosed, and domestic enterprises are expected to boost their supply share. According to Sublime China Information and company announcements, domestic suppliers of first-generation low-dielectric products include Taishan Fiberglass, Linzhou Guangyuan, Grace Fabric Technology, Chongqing Polycomp International Corporation, among others; overseas suppliers include Nittobo, among others. With the expansion of downstream demand, enterprises are expanding production capacity. Combining the progress of domestic enterprises' expansion, assuming that overseas enterprises do not expand production for the time being, and some Taiwanese-funded enterprises have slow progress in reaching full capacity, we believe that even considering the release of production capacity, there is still pressure on the supply of first-generation low-dielectric products, and product prices may be supported. Traditional 7628 electronic fabric: With the release of downstream restocking intentions, product prices may rise slightly. Currently, low-dielectric product companies in the industry, such as Taishan Fiberglass, Grace Fabric Technology, Chongqing Polycomp International Corporation, etc., have 7628 production capacity, but the scale ratio is limited. Leading company China Jushi Co., Ltd focuses on 7628 electronic fabric products, and by the end of 2024, it will have a capacity of 1 billion meters of electronic fabric, with a market share of 20%-30% in the industry. Calculated by the company's cost advantage of at least 20% compared to its counterparts due to its production scale advantage. Currently, the price of 7628 electronic fabric products is 4-4.1 yuan/meter including tax, and most companies are in a loss-making state. With limited capacity for mainstream product expansion and due to the release of downstream restocking intentions, it is predicted that product prices may rise slightly. Valuation and recommendation Recommend Sinoma Science & Technology (002080.SZ) and China Jushi Co., Ltd (600176.SH), maintaining coverage of target profit forecasts and China Jushi Co., Ltd's target price. Taking into account the boost in valuation for Sinoma Science & Technology due to high-end Low-Dk electronic fabric, the target price of Sinoma Science & Technology has been raised by 16% to 16.7 yuan, corresponding to 25/26e21x/17x P/E, implying a 14% upside potential. Risk factors Demand recovery is slower than expected, new production line deployment progresses faster than expected, and high-end product prices are not stable as expected.