China Galaxy Securities: The peak season for new product stocking in the second half of the year is expected to drive a marginal recovery in the consumer electronics industry chain.

China Galaxy Securities released a report stating that in July, the domestic electronics industry exhibited a highly differentiated pattern with the semiconductor cycle seeing high-level profit recovery and sector valuation adjustments. Traditional consumer electronics faced significant pressure, while AI innovative terminals experienced impressive growth against the trend. Overall, the consumer electronics industry has completely bid farewell to the phase of widespread growth in scale and has entered a structural development cycle characterized by high-end, intelligent, and innovative products. The peak season for new product stocking in the second half of the year is expected to drive a marginal recovery in the supply chain. The main points from China Galaxy Securities are as follows: In July 2026, the domestic electronics industry showed a highly differentiated pattern with semiconductor cycle profit recovery at high levels, sector valuation adjustments, traditional consumer electronics under significant pressure, and AI innovative terminals experiencing strong growth against the trend. The core logic of the semiconductor sector continues to be driven by AI computing power leading to an increase in both quantities and prices. The prosperity of storage, advanced packaging, and computing chips remains high, leading to explosive performance recovery for domestic and foreign manufacturers. With the heavy listings of domestic equipment and storage leaders and the implementation of policies, the process of domestic substitution is accelerating; however, in July, the secondary market for technology stocks collectively adjusted, and the valuation in the semiconductor sector underwent a phase of digestion. The consumer electronics sector is being squeezed by ongoing price increases for upstream storage and main control chips, with traditional mobile phone and PC shipments hitting near record lows for the same period in recent years. The industry has entered a structural winter, but innovative categories like AI terminals, foldable screens, and smart wearables are rapidly increasing in penetration, becoming the only growth drivers for the industry. The overall characteristics of traditional reduction, innovative increase are extremely significant. Specifically, the relevant indices for the A-share electronics industry exhibited significant overall declines in July, showing considerable differentiation among sub-sectors. The SW electronic primary industry index fell by 34.72% for the month, ranking among the top three in terms of decline among SW primary industries. In the semiconductor sector, companies closely related to AI computing power and domestic substitution, such as semiconductor equipment (-7.35%) and integrated circuit packaging and testing (-15.38%), experienced significantly smaller retreats than storage (-29.83%) and passive components (-42.16%). In the semiconductor industry: some sub-categories are in a state of tight supply and demand balance, with product prices showing an upward trend. Storage chips remain in a tight supply and demand balance, driven significantly by increased demand for AI computing power. Coupled with strict capacity control by overseas manufacturers, the supply-demand dynamics for DRAM and HBM continue to be tense, with monthly price increases reported by overseas leaders like SK Hynix and Micron. High-end HBM has the most pronounced gap, with delivery cycles for orders extending to 6-8 months. NAND flash prices remain stable with robust trends, while domestic leading semiconductor IDM manufacturers listing on the STAR Market signifies that domestic DRAM storage has achieved significant independent scale, marking a milestone for domestic substitution. At the same time, a concentrated wave of price increases has begun in the global analog and power semiconductor sectors. Nearly 20 international leaders, including TI and Infineon, announced price adjustments this month, covering categories like general-purpose analog, power MOSFETs, and IGBTs, with increases concentrated between 5%-15%. The core beneficiaries are AI server power supplies and the essential demand for new energy vehicles and energy storage. Industry capacity is continuously saturated, and delivery cycles are extending. Domestic-related manufacturers are accelerating the realization of large-scale imports across multiple scenes, steadily increasing the localization rate for low-end products, while mid-to-high-end products continue to break through, improving orders and capacity utilization rates. Computing chips and advanced packaging, as the core supports of the industry, maintain a high growth trend with a full order book and supply unable to meet demand for high-end GPUs and AI inference chips. Further, the scaling deployment of Chiplet and 2.5D/3D advanced packaging technology meets the integration requirements of high-end computing chips and HBM. According to SEMI data, the growth rate for advanced packaging equipment is expected to exceed 40% for the year, while domestic packaging, equipment, and material companies accelerate production expansion and iteration, alongside continuous investment from the capital market, making it the core focus of semiconductor industrial upgrading and domestic substitution. In the consumer electronics industry: the demand for traditional terminals continues to weaken, while AI innovative categories break through against the trend, resulting in a highly differentiated structural pattern. The traditional consumer electronics market has entered a winter of stagnant growth. According to statistics from platforms like Counterpoint, global smartphone shipments fell by 11% year-on-year in the second quarter, reaching the lowest level for the same period since 2013, with the annual smartphone market expected to shrink by 12.9%. The PC market faces even greater pressure; according to IDC data, global PC shipments in Q2 2026 totaled 68.2 million units, a year-on-year decline of 4.9%. Affected by the price increases across all semiconductor categories, the monthly hardware cost for a single computer rose by up to 2000 yuan, and with terminal manufacturers inability to pass costs down, the industrys overall gross margin remains under pressure. Mainstream hardware products like Microsoft Xbox have announced price increases, highlighting the cost pressures across the entire industry chain. While traditional terminals continue to decline, AI smart upgrades have become the core growth engine of the industry, with significant structural increases. According to Gartner forecasts, the penetration rate of AI terminals is expected to see a leap in 2026, with AI PCs' penetration rate projected to reach 24% and shipments to reach 143 million units, accounting for more than half of total global PC shipments. Sales of AI smartphones and AI PCs are expected to surpass non-AI terminals for the first time this year. Foldable smartphones lead the mobile phone market with innovative forms, achieving a positive growth rate of 17% against the trend, countering the overall industry decline. The popularization of mid-range models is accelerating the opening of market space, driving demand for flexible screens, precision hinges, and other complementary industrial chains. In addition, innovative sectors such as smart wearables, AR/VR, smart home, and automotive electronics maintain steady growth, relying on scenarios like health monitoring, intelligent interaction, and smart home integration to continuously explore new consumer demands. Among them, niche hardware such as gaming display screens achieved a 12% growth against the trend. Overall, the consumer electronics industry has completely left the phase of widespread growth in scale and entered a structural development cycle characterized by high-end, intelligent, and innovative products. The new product stocking peak season in the second half of the year is expected to drive a marginal recovery in the supply chain. Risk warnings: Risks of downstream demand falling short of expectations, risks of intensified competition among peers, risks of new product development not meeting expectations, and risks from increased uncertainties due to supply chain shifts.