CITIC SEC: The underlying growth logic of the PCB industry has not changed. In the long term, it may compete for differentiated competitive advantages.

CITIC SEC released a research report stating that since late September, the PCB sector has seen a slight correction. Apart from a cooling off in market trading sentiment, the bank believes that market concerns are mainly focused on disruptions to the short-term performance of leading companies, changes in industry competitive landscape, and delays in the implementation of new applications. However, the bank emphasizes that the underlying growth logic of the AI PCB industry remains unchanged, holding a relatively optimistic view on market concerns and seeing potential catalysts in the future for the sector. From a performance and valuation perspective, the bank believes that the performance expectations of leading manufacturers are gradually being met and there is further room for valuation upgrades. At this point in time, the bank remains optimistic about the upward momentum of the PCB sector. Key points from CITIC SEC: Core market concerns: disruptions to the short-term performance of leading companies, changes in industry competitive landscape, delays in the implementation of new applications Since late September, the PCB sector has continued to weaken, with the PCB (CITIC) index retracting by about 16% from its peak in late September. Apart from a decrease in trading activity, the bank identifies market concerns as follows: 1) Short-term performance disruptions: this year, with the gradual increase in demand for NVIDIA GB200/300 chips, high-end PCB production capacity is becoming increasingly tight. As the industry capacity gradually expands, there is a mismatch between the performance of leading PCB companies and market high expectations, leading to concerns about the future growth rate of the industry. 2) Changes in industry competitive landscape: many top PCB manufacturers are entering the AI PCB market at an accelerated pace, with several companies announcing plans to commence production since mid-year, potentially leading to an overcrowded industry supply landscape. 3) Delays in the implementation of new applications: currently, the orthogonal backplane solution is still in the sampling process, and various aspects such as PCB processes and CCL materials need further optimization, resulting in uncertainty in the implementation schedule. The bank's perspective: underlying industry growth logic remains unchanged, with strong mid-term certainty of high growth in performance, competing for long-term differentiated competitiveness In response to the market concerns mentioned above, the bank believes: 1) Regarding industry supply and demand, the underlying logic of AI PCB remains unchanged (increasing shipments of computing chips, PCB upgrading, and an expected increase in the proportion of PCB costs in overall AI servers). The bank has systematically analyzed the future demand and production capacity of the industry, with strong certainty of maintaining the balance of supply and demand in the industry up to 2027 (the bank estimates that the demand and advanced production capacity of the AI PCB market will both be in the range of 1200-1300 billion yuan). High profit margins in the industry are expected to be sustained. Therefore, for leading companies, given that PCB is an industrial product with high-end customization attributes and a cyclical nature of capacity expansion, fluctuations in short-term performance are considered a normal phenomenon, while the high certainty of demand trends does not affect the visible profit space in the medium to long term. 2) Regarding the current stage of PCB development, the bank summarizes that the AI dividend is currently in a phase of spreading from a few leading companies to other top companies with relatively matched technologies, production capacities, etc. However, the window of high-end production capacity shortage is not expected to last long. If the gap between mid to lower-tier manufacturers and leading companies cannot be significantly reduced, from the perspective of downstream customers' supply chain economics, the industry's supply matrix will not continue to expand, and the supply landscape is expected to stabilize after 2026. 3) Implementation of new applications: Looking at the upgrade pace of PCB applications, taking the example of NVIDIA GB200 HDI mainboard, its solution was only confirmed and matured just before mass production began. The mass production of orthogonal backplanes still has a long way to go, and current signal disruptions are considered normal in the development of new products. The bank believes that PCB as a solution with high integration, strong interconnection capabilities, and the most suitable for short-distance interconnection in computing facilities, has inevitability and certainty in its application expansion. In summary, the bank believes that in the medium to short term, leading companies in the industry still have strong certainty of high growth in performance. In the medium to long term, as the shortage of production capacity gradually eases, manufacturers with differentiated competitiveness (customer relationships, overseas production capacities, etc.) are expected to achieve excess performance growth. Upcoming focus areas: computing power prosperity, progress of orthogonal backplanes, updates on Rubin PCB solutions, etc. The bank believes that with the approach of the third-quarter reports of tech giants, more forward-looking information on demand for 2026 is expected to strengthen the prosperity of computing power demand. Recent catalysts include NVIDIA GTC Washington Conference, production and order updates for 2026 AI chips, overseas tech giant financial reports and guidance, etc. In terms of focusing on the PCB sector, the current orthogonal backplane solution is in the iteration/validation process and is expected to receive further feedback results within 1-2 months, while NVIDIA's Rubin chip has already begun mass production. Subsequently, its PCB solutions are expected to become clearer gradually in terms of materials, selection, etc., providing catalysts for the recovery/upward trajectory of the AI PCB sector. Risk factors Macroeconomic fluctuations and geopolitical risks, intensified competition in the PCB industry, fluctuation in raw material prices, lower-than-expected release of new products from overseas leading computing companies, slower-than-expected growth in AI market demand, risks of technological changes and product iterations, policy regulation and data privacy risks, and high concentration of customer risks.