China Galaxy Securities: Increase in capital expenditure is boosting the prosperity of the AI upstream industry. We recommend five main strategies to seize investment opportunities.

China Galaxy Securities released a research report stating that looking forward to the second half of the year, it is believed that the layout around AI should continue. On the one hand, this is targeted towards the "inflation" phase of AI, entering a stage of performance realization and valuation improvement. On the other hand, it is focusing on opportunities in the AI hardware sector, including related chips and wearable devices. In addition, many new products in the Apple supply chain are about to emerge, and it is recommended to pay attention to foldable screen phones, AI glasses, AIPC, etc. The main points of view of China Galaxy Securities are as follows: The core hardware "inflation" caused by AI continues to spread From the beginning of the year to June 1st, the SW Electronics Index fluctuated -1.02%. In the first quarter of 2026, the total revenue of the SW electronics sector was 1111.356 billion yuan, a year-on-year increase of +33.22%, with a net profit of 63 billion yuan, a year-on-year increase of +76.9%. The performance of sectors such as storage, PCB, domestic computing power, semiconductor equipment, and materials has all significantly improved. From the trend of the market, the initial US-Iran war had a certain impact on the technology sector at the beginning of the year, but as tensions between the US and Iran eased, the reduced external liquidity pressure drove a significant market upward trend starting from early April. The core hardware industry "inflation" caused by AI continues to spread, with semiconductors, PCBs, passive components, power semiconductors, etc., becoming the main themes of the market. Weak downstream demand coupled with rising prices of upstream storage and other components are putting pressure on consumer electronics terminals. Token index level growth, high increase in North American CSP capital expenditure, AI hard technology prosperity on the rise Token supports the entire AI ecosystem. The global large model token call volume has increased from approximately 0.25T in September 2024 to an average of approximately 20T per day (20.6T on April 13, 2026), with an annual growth rate of approximately 1144%. Major North American CSPs have raised their 2026 capital expenditure. Microsoft officially set its full-year 2026 capital expenditure guidance at 190 billion US dollars, far exceeding the market's previous expectation of 154.6 billion US dollars. Amazon's 2026 full-year capital expenditure guidance is 200 billion US dollars, far exceeding the market's previous expectation of 150 billion US dollars. In 2026, the total capital expenditures of the top five CSPs globally are expected to reach 760 billion US dollars, a year-on-year increase of 102.56%. The massive capital expenditure by cloud service providers is driving the upturn of the AI hard technology prosperity cycle. Strong demand for high-end AI chips, accelerated localization of AI chip production, domestic chip factories and equipment likely to see both volume and price increases AI chips are the core foundation of computing power industry. Core chips represented by GPUs account for over 80% of the cost structure in servers. The US has blocked AI chip technology to China, and China is accelerating domestic substitution through technological innovation and supply chain collaboration. Companies like Huawei, Cambricon, among others, have enhanced the performance of mature process chips through architectural innovation, with the Ascend 910B chip approaching the international mainstream GPU level. As Moore's Law approaches its limit, Huawei's "Time Law" substitutes "time scaling" for "geometric scaling," which is expected to help promote domestic substitution of AI chips. The semiconductor manufacturing sector is bottoming out, and the foundry industry is entering a new growth cycle. The dual demand resonance of AI + automotive electronics is reshaping the mature foundry prosperity, and domestic wafer factories are completely emerging from the downturn, with a logic of continuous realization of volume-price increases. Domestic semiconductor equipment currently has a leading edge in areas such as photoresist lithography, etching, PVD, CVD, ALD, ion implantation, and cleaning. Boom in AI algorithm construction drives long-term increase in storage prices, HBM ratio of investment sheets to continue to rise With the upcoming release of NVIDIA's new Rubin Ultra platform, the capacity of HBM per single GPU configuration will further increase to 384GB, combined with the continuous increase in shipments of AI ASICs, which will drive the demand for HBM to soar once again. TrendForce estimates that the proportion of HBM investment sheets in the overall DRAM investment sheets will increase from 18% in 2025 to approximately 30% in 2027; the proportion of HBM bit supply will also increase from 8% to approximately 13%. In addition, with the explosive growth in end-side AI technology, the 3D stacked DRAM solution is becoming a key technological path to break through traditional storage bottlenecks. AI revolution drives high growth in AIPCB, fast growth in HDI and multilayer boards Under the leadership of the AI revolution, the downstream industries of servers/data storage, network communications, automotive electronics, etc., will continue to grow, driving high multilayer boards and HDI boards to maintain high growth rates. According to Prismark data, the AI server-related PCB market will achieve a compound annual growth rate of 18.7% from 2024 to 2029; among them, the compound annual growth rate of AI server-related HDI is 29.6%, and the compound annual growth rate of AI-related 18-layer and above multilayer boards is 33.8%. In the medium to long term, the PCB industry will continue to follow trends of high frequency, high speed, high precision, and high integration. AI servers and data centers drive CCL volume and price increases PCBs are mainly composed of CCLs, copper traces, and insulating layers/protective layers. CCL accounts for 50%-60% of the value volume in AIPCB. The research and development and production of low dielectric, low loss CCLs have accelerated, and products of M8 and below have entered mass production as of 2025. The demand structure of CCL continues to shift to emerging areas. In the field of AI computing power, AI servers, data centers, etc., drive the demand for high-layer, low loss CCLs. Since 2026, leading CCL companies have continued to experience significant price increases, with prices having increased four times since the beginning of the year; companies like Shengyi Technology, Nanya New Material Technology, have followed suit. The trend of price increases is expected to continue in the second half of 2026, with materials such as copper foil and electronic cloth in the CCL constituting benefiting. AI servers and new energy vehicles drive demand growth in MLCC, large potential for domestic substitution The usage of MLCC in AI servers is about 8-12 times that of traditional general-purpose servers. The usage of MLCC in pure electric vehicles is about 6 times that of gasoline vehicles. In addition, the increase in the penetration rate of intelligent driving will significantly increase the usage of high-end MLCC. The Chinese MLCC market is dominated by Japanese and South Korean manufacturers, with Murata and Samsung Motors together holding over 50% of the market share; leading Chinese mainland companies like Chaozhou Three-Circle (Group), Microchip Technology, and Guangdong Fenghua Advanced Technology are rapidly rising, collectively holding 10.4% market share. Ceramic powder supply is dominated by Japanese and American manufacturers. The Chinese company Shandong Sinocera Functional Material has a market share of 10%, while Japanese manufacturers dominate about 75% of the high-end ceramic powder market, leaving a large space for domestic substitution. Business of AI data centers drives high growth in performance of contract manufacturers, AI chips and data centers drive demand for liquid cooling The consumer electronics contract manufacturing sector mainly focuses on companies expanding into the AI computing power infrastructure field, such as Foxconn Industrial Internet, Huaqin Co., Ltd., Universal Scientific Industrial (Shanghai) Co., etc. NVIDIA's VeraRubin chip, which will be released in the second half of 2026, will adopt a full liquid cooling design. High thermal conductivity and power drive the use of liquid cooling in AI data centers. The general architecture of liquid cooling systems mainly includes outdoor cooling sources, CDU cooling distribution units, and liquid-cooled cabinets. The application of single-phase plate-type liquid cooling in liquid-cooled data centers exceeds 90%, with a high level of technical maturity. Recommendations for five main themes to capture investment opportunities Firstly, strong demand for high-end AI chips, acceleration of autonomous and controllable AI chip production, and the potential for domestic chip factories and equipment to see both volume and price increases. Regarding AI chips, it is recommended to pay attention to companies like Cambricon, Hygon Information Technology, Muxi Shares, and BIREN TECH. For semiconductor manufacturing, it is recommended to focus on Semiconductor Manufacturing International Corporation, and Shanghai Huali. For semiconductor equipment, it is recommended to pay attention to NAURA Technology Group, Advanced Micro-Fabrication Equipment Inc. China, among others. Secondly, the surge in AI algorithm construction demand drives long-term increase in storage prices, with the HBM ratio of investment sheets to continue to rise. For the storage industry chain, it is recommended to focus on companies like Montage Technology, Shenzhen Longsys Electronics, Biwei Storage, Shenzhen Techwinsemi Technology, etc. Thirdly, the AI revolution drives high growth in AIPCB, with fast growth in HDI and multilayer boards. AI servers, data centers, new energy vehicles, etc., drive high growth in CCL demand. For the PCB sector, it is recommended to focus on companies such as Victory Giant Technology, Shennan Circuits, Shengyi Electronics, Shenzhen Kinwong Electronic, etc. For the CCL sector, it is recommended to focus on companies like KB LAMINATES, Nanya New Material Technology. For copper foil, it is recommended to focus on companies like Jiujiang Defu Technology, Hubei Zhongyi Technology Inc., etc. Fourthly, the surge in demand for MLCC in AI servers and new energy vehicles, with great potential for domestic substitution of high-end MLCC. Listed companies in the domestic MLCC industry chain include Chengdu Hongming Electronics, Dalian Dalicap Technology, Shandong Sinocera Functional Material, etc. Fifthly, the business of AI data centers drives high performance growth in contract manufacturing companies, with AI chips and data centers driving demand for liquid cooling. It is recommended to focus on companies such as YD Electronic Technology, Luxshare Precision Industry, Lingyi Itech, Shenzhen Hongfuhan Technology, Jones Tech Plc, etc. Risk warning: The risk of North American CSP capital expenditure falling short of expectations; The risk of AI server demand falling short of expectations; The risk of consumer electronics recovery falling short of expectations; The risk of domestic substitution falling short of expectations; The risk of accounts receivable recovery falling short of expectations.