Donghai Securities: AI Computing Power Drives Growth of Upstream Outsourcing, Long-Term Prospects for Domestic Semiconductor Production Are Expected to Accelerate.

East Sea Securities released a research report stating that although industry demand remains strong under the drive of AI, the supply side inventory is low and capacity deployment is slow. However, excessively high prices may significantly suppress demand, and the trend of overheating AI investments may see a temporary relaxation. In some technology-intensive areas, U.S. policies may remain stringent, leading to high short-term costs for industries dependent on imports, while the long-term semiconductor localization is expected to continue to accelerate. With rapid changes in the global situation, it is recommended to focus on structural opportunities at low levels. Key points from East Sea Securities: Summary of March 2026 and Outlook for April In March, semiconductor industry demand remained strong under the drive of AI, prices continued to rise, and attention was drawn to structural opportunities such as AI computing power, AIOT, semiconductor equipment, key components, and price increases in storage. Global semiconductor demand continues to improve, with rapid growth in TWS earphones, wearable wrist devices, and smart homes, as well as high-speed growth in AI servers and new energy vehicles, with demand expected to continue to recover in April 2026. On the supply side, although corporate inventory levels are high and still rising, the high demand in some sub-markets brought by AI has led to price increases by upstream wafer foundries. The increase in memory prices may lead to higher costs for consumer electronics, which may result in lower shipments in 2026. However, overall, the semiconductor supply and demand pattern in April is expected to continue to improve. In March, storage prices continued to rise, and the price increase has spread from storage and consumer electronics to other semiconductor industries such as power and analog. AI remains the main narrative for the future, driving a 26.3% annual growth in global wafer foundry production value by 2025. Currently, the global geopolitical environment is tense, with high pressure on some technology-intensive areas from U.S. policies. Short-term industries that rely on imports may see a rise in costs, while the long-term localization of semiconductors is expected to accelerate. It is recommended to focus on leading companies in sub-sectors at low levels. In March, the electronic sector saw a change of -13.51%, while the semiconductor sector saw a change of -14.87%. At the end of March, semiconductor valuations were at historical levels for the past 5 years, with PE at 83.97% and PB at 71.57%. In March, the SWS electronics industry saw a change of -13.51%, with the semiconductor sector at -14.87%, while the change for the Shanghai and Shenzhen 300 was -5.53%. Looking at the past 5 and 10 years, the PE for semiconductors was 83.97% and 73.55%, while the PS was 89.01% and 93.61%, and the PB was 71.57% and 78.35%. In the fourth quarter of 2025, the stock market value of public funds' holdings in the electronics industry ranked first, reaching 673.574 billion yuan. Public funds' allocation to semiconductors accounted for 65.18% of the electronics industry, with the market value of public funds' holdings in semiconductors accounting for 13.18% of the total equity market value of public funds. The key holdings were mostly leading companies in the semiconductor sub-industry with a circulating market value of over 30 billion yuan, with the top 20 companies accounting for 87.76% of all semiconductor holdings. In the downstream demand of semiconductors, AI servers, new energy vehicles, TWS earphones, and wearable wrist devices are showing good recovery, while consumer electronics in 2026 may see a decline in shipments due to the impact of storage prices. Global semiconductor downstream demand is dominated by consumer electronics, automobiles, servers, and wearable technology, accounting for over 80%, with their sales affecting changes in upstream semiconductor demand. In 2025, global smartphone shipments grew by 1.75% year-on-year, while in mainland China, smartphone shipments in February 2026 fell by -14.61% year-on-year, with a -15.46% drop in shipments in January and February. Global PC shipments increased by 7.78% in 2025, while global tablet shipments grew by 6.28%. In January 2026, global new energy vehicle sales fell by -5.99%, with a -14.24% year-on-year drop for Shaanxi Guoxin Energy Corporation's car sales in February and a -6.86% drop in sales in January and February. TWS earphone shipments in China increased by 6.7% in 2025, while global wearable wristband devices saw a 6% year-on-year growth in 2025. Overall semiconductor prices in March continued to rise, with some sub-sectors such as storage experiencing a situation of supply exceeding demand, and this trend of price increases may continue in April. Global semiconductor sales in February 2026 increased by 61.74% year-on-year, with a 53.79% increase in sales in January and February, reflecting an overall recovery in demand. Taking storage as an example, the price change range for storage module prices in March 2026 was between -4.17% and 37.33%. The price change range for storage chips DRAM and NAND FLASH was between -0.91% and 47.89%, with prices overall continuing to rise in March. Looking at the supply side, global semiconductor equipment shipments in the fourth quarter of 2025 increased by 8.08% year-on-year, with Japanese semiconductor equipment shipments in February 2026 rising by 2.68% year-on-year, and 2.62% in January and February, suggesting a more active capacity expansion in the next 1-2 years. AI computing power drove a 26.3% year-on-year growth in global wafer foundry production value in 2025, reaching a record high. The NVIDIA GTC 2026 showcased the AI computing platform Vera Rubin, further strengthening expectations for the future trend of AI. AI computing power has become the core engine driving the growth of the global wafer foundry industry, leading to a 26.3% year-on-year growth in global foundry production value in 2025, a historic high. According to Trend Force data, the total production value of the top ten wafer foundries in 2025 reached $169.5 billion, with advanced processes benefitting from strong demand for AI server GPUs, TPUs, and flagship smartphone chips, while mature processes were supported by demand for servers and edge AI power management, with 8-inch capacity utilization maintained at high levels and showing a trend of price increases. TSMC remains at the top with a 70% market share, driven by the shipment of 3nm processes for flagship smartphone APs leading to ASP increases. Looking ahead to 2026, although high storage prices may hinder consumer electronics shipments and affect overall foundry capacity utilization, AI remains the long-term focus. NVIDIA's GTC 2026 showcased the AI computing platform Vera Rubin, which consists of 7 chips and 5 rack-level systems, with CEO Huang Renxun announcing that by 2027, sales of Blackwell and Rubin are expected to exceed $1 trillion, further underscoring the upward trend in AI computing demand and providing support for upstream foundries. Investment recommendations Recommendations include: (1) companies benefiting from strong demand in the AIOT field domestically and internationally such as Espressif Systems, Bestechnic (Shanghai) Co., Ltd., Rockchip Electronics, Shenzhen Bluetrum Technology, Actions Technology, Allwinner Technology, Amlogic, Aojet Technology, Telink Semiconductor (Shanghai) Co., Ltd. (2) Focus on AI innovation-driven sectors, such as computing power chips for companies like Cambricon, Moore Thread, Hygon Information Technology, Loongson Technology Corporation, and Montage Technology; optical devices for companies like Yuanjie Semiconductor Technology, Zhongji Innolight, Eoptolink Technology Inc., Suzhou TFC Optical Communication, and Accelink Technologies; PCB sector for companies like Victory Giant Technology, Wus Printed Circuit, Shennan Circuits, Shengyi Technology, and Suzhou Dongshan Precision Manufacturing; storage sector for companies like Shenzhen Longsys Electronics, Shenzhen Techwinsemi Technology, Biwin Storage Technology, GigaDevice Semiconductor Inc., and Ingenic Semiconductor; server and liquid cooling sector for companies like Shenzhen Envicool Technology, Jones Tech Plc, Shenzhen FRD Science & Technology, Guangdong Suqun New Material, and Industrial Fulian. (3) Expectations for domestic alternatives in the upstream supply chain of semiconductor equipment, components, and materials, focusing on companies like NAURA Technology Group, Advanced Micro-Fabrication Equipment Inc. China, Piotech Inc., Hwatsing Technology, ACM Research, Shenyang Fortune Precision Equipment, Kunshan Kinglai Hygienic Materials, Peric Special Gases, Guangdong Huate Gas Co., Ltd., Anji Microelectronics Technology, Hubei Dinglong, and Crystal Clear Electronic Material. (4) Leading companies in sectors where prices have bottomed and are recovering. Focus on power sector companies like Wuxi Nce Power, Yangzhou Yangjie Electronic Technology, and Suzhou Oriental Semiconductor; CIS companies like OmniVision Integrated Circuits Group, Inc., Sichuan Terwei, and GalaxyCore Inc.; analog chip companies like SG Micro Corp, 3peak Incorporated, Maxic Technology, Inc., and Wuxi Chipown Micro-electronics. Risk warnings: (1) Risks of downstream demand recovery falling short of expectations; (2) Risks of domestic alternative processes falling short of expectations; (3) Risks of unexpected product development progress.