Shanghai Electric Power Co., Ltd.: High-end PCB core supplier, digital-communication automotive two-wheel drive

Since its establishment in 1992, after years of development and long-term accumulation, the company has formed a comparative competitive advantage in technology, quality, cost, brand, scale, etc., and is in an advanced position in the industry, and is one of the important brands in the PCB industry. The company's main business has always focused on the production, sales and related after-sales service of printed circuit boards. The company's PCB products are the core application areas of communication equipment, data center infrastructure, and automotive electronics, as well as application fields such as industrial equipment and semiconductor chip testing. The main terminal applications for the company's core product printed circuit boards are the corporate communications market and the automotive application market. In 2024, Japan1 accounted for 73.81% and 22.09% of revenue, respectively.

The company's products have strong technical strength, and the products maintain high profitability

Looking at the gross margin of the company's products, the gross margin of printed circuit boards in the corporate communications market continued to rise from 10.10% in 2015 to 41.59% in the first half of 2024: the gross margin of automobile boards remained relatively stable from 18.01% in 2015 to 24.99% in the first half of 2024. Judging from the overall trend of the PCB industry, the growth rate of server applications was fastest in the first half of 2024. Due to improved inventory and gradual recovery in demand, the PCB industry is beginning to show signs of recovery. Improvements will continue at the end of the year. Inventories in most application segments will be fully normalized in the second half of 2024. 2024 is a year of recovery. Prismark predicts growth in all segments of the multi-layer PCB market. It is expected to grow from $26.5 billion in 2023 to $32.5 billion in 2028, with a five-year compound annual growth rate of about 54%. Among them, the server data storage sector will grow the strongest. The overall PCB market size for server and data storage applications is expected to increase from 9.781 billion US dollars in 2024 to 14.221 billion US dollars in 2028, 2023-2028 The CAGR compound annual growth rate is 11.6%, which is more than double the average CAGR growth rate of 5.4%.

Demand for AI chips is strong, and continuous chip delivery drives demand in the PCB field

According to Omdia data, the current rapid growth of GPUs and other accelerators used in cloud computing and data center artificial intelligence will eventually slow down, but it won't slow down until the entire industry is transformed. The market size has grown from less than 10 billion US dollars in 2022 to 78 billion dollars in 2024. Omdia expects that by 2029, the market size will eventually reach 151 billion US dollars: server PCB products need to maintain simultaneous generational changes with server chips. The product life cycle is 3-5 years, and the maturity period is generally 2-3 years. As chip platforms of various generations increase in requirements such as signal transmission rate, data transmission loss, and wiring density, server PC products also need to be upgraded accordingly. According to Guanghe Technology's prospectus, different server chips, different product architectures, and corresponding PCBs have different layers, and the corresponding board thickness and thickness ratio all change accordingly with the different chips and iterations.

The electrification and intelligence of automobiles continue to promote the needs of the PCB industry

The main reason for the growth in automotive PCB production value is the increase in the penetration rate of electric vehicles. The average PCB value per vehicle for pure electric vehicles (B3Y) is about 5 to 6 times that of traditional fuel vehicles. Among them, the one with the highest PCB value in the vehicle is the electronic control system, which accounts for about half of the vehicle's PCB value, and the BMS (battery management system) in electronic control systems currently mainly uses wire harness connections. Under the trend of electric vehicles being lightweight, FPC (Flexible PrintedCircuit, Flexible Printed Circuit Board) will gradually be adopted, which will further increase the PCB value content of electronic control systems.

As the level and penetration rate of autonomous driving continues to increase, the average number of electronic products equipped with lenses and radars per vehicle will continue to increase. Currently, automotive PCBs are mainly 4-8 layer boards, and self-driving systems often use HDI boards (High Density Interconnect) with higher unit prices, which are about 3 times that of 4 to 8 layer boards. The HDI price used in L3 and above self-driving systems can reach tens of dollars. This is also the future production value of automotive PCBs The primary source of incremental growth.

Investment advice

The main terminal applications for the company's core product printed circuit boards are the corporate communications market and the automotive application market. In 2024, H1 accounted for 73.81% and 22.09% of revenue, respectively. We expect the revenue of printed circuit boards of enterprise communication market companies to be 8.628 billion yuan, 11.291 billion yuan, and 13.247 billion yuan in 2024E-2026, respectively, up 47%, 31%, and 17% year-on-year, respectively.

The revenue of 2024E-2026E printed circuit boards in the automotive application market was 2.4 billion yuan, 2.52 billion yuan, and 3 billion yuan respectively, up 11%, 5%, and 19% year-on-year respectively.

We expect the company's total PCB market revenue of 2024E-2026E to be 11.5 billion yuan, 14.4 billion yuan, and 16.8 billion yuan, respectively. Overall company revenue of 2024E-2026E was 11.8 billion yuan, 14.7 billion yuan, and 17.1 billion yuan, respectively.

Looking at the company's previous gross margin, the gross margin of printed circuit boards used in the corporate communications market continued to increase from 10.10% in 2015 to 41.59% in the first half of 2024, mainly due to core A customers maintaining a high level of industry prosperity and growth rate. We believe that Shanghai Electric Power Co., Ltd. is an important supplier of PCBs in servers in the AI computing power era. Considering that the company's products are highly profitable and revenue continues to grow steadily, it is the first time it has been covered and given a purchase rating.

Risk warning

AI demand falls short of expectations, company R&D falls short of expectations, PCB industry competition is fierce, and PCB core upstream material costs are high