In the context of the resonance of the "macroeconomic policy cycle, industry inventory cycle, and AI innovation cycle," the electronics Industry is expected to enter a year of valuation expansion.
According to the Zhito Finance APP, Guosen Securities has released a research report stating that the electronic market in 2024 will switch from "cyclical recovery" to "growth and innovation". At the current time, the electronic industry cycle, represented by the semiconductor industry, is still in the early stage of an upward sales cycle, and there is still room for improvement in corporate profitability; AI applications centered around voice interaction are at a critical point of large-scale commercialization, with frequent innovations being catalyzed; the investment scale of the semiconductor index, reflecting consensus on incremental funds, still has further growth potential, and the demand for weighted symbol configuration is increasing. Given the resonance rise of the "macroeconomic policy cycle, industry inventory cycle, and AI innovation cycle", the electronic industry is expected to enter a year of valuation expansion.
Guosen Securities' main points are as follows:
AI is revolutionizing human-computer interaction, smart terminals are competing intensively, and the industry is entering a year of valuation expansion.
The electronic market in 2024 will switch from "cyclical recovery" to "growth and innovation", and the industry is expected to enter a year of valuation expansion in 2025. After nearly two years of inventory destocking and supply-side clearing, the overall electronic prosperity in 2024 is showing a trend of a mild off-season in the first half and a weak peak season in the second half, with Orders and prosperity not poor but visibility low. The sector has experienced a continuous prosperity recovery in the Android industry chain at the beginning of the year, a wave of innovation in Apple's AI smartphones in the second quarter, downward adjustments in expectations under macro pressure in the third quarter, and valuation repairs strengthened by AI edge innovations against the backdrop of policy catalysis at the year-end; as of December 18, the overall electronic sector has risen 19.30%, ranking sixth in the industry, with semiconductors and consumer electronics rising 23.88% and 15.13%, respectively.
Consumer Electronics: AI is redefining the form of human-computer interaction, smart terminals are competing intensively, with a focus on the Apple supply chain and AI wearables.
Regarded as the "fourth technological revolution", AI large models have revolutionary significance in breaking down barriers between human language and machine language. By enhancing AI's natural language understanding and general reasoning capabilities, they evolve into intelligent agents (AI Agent) capable of perceiving the environment, understanding user intentions, making decisions, and taking actions, thus redefining the mode of human-computer interaction, genuinely advancing from "command-centered" to "intention-centered". "Voice" is becoming the most core medium of human-computer interaction after touch screens, mice, and keyboards, with AI terminal forms expected to transcend the limitations of the smart phone era and bloom in various forms such as glasses, TWS earbuds, toys, and robots. High-quality audio input and diversified networking capabilities also pose higher demands on the performance of edge SoCs.
Against this backdrop, Smart Phones are experiencing a comprehensive upgrade from operating system OS to hardware as the 'AI gateway' with the highest penetration rate and strongest user loyalty, which is expected to drive value growth by accelerating upgrade cycles and raising the average price in the industry. Considering the significant changes Apple is expected to make in sales rhythm, innovation of new products, and global promotion of AI systems by 2025, along with the further clarification of the expectations for its foldable devices and AI glasses in 2026, the Apple supply chain remains the main configuration line within the Consumer Electronics Sector.
Recommended Consumer Electronics Industry Chain: Lens Technology, Luxshare Precision Industry, Avary Holding, Freewon China, Zhejiang Lante Optics, Zhejiang Crystal-optech, XIAOMI-W, Amlogic, Bestechnic (Shanghai) Co., Ltd., Espressif Systems, Shenzhen Sunlord Electronics, Shenzhen Transsion Holdings Co., Ltd., DBG Technology.
AI computing power: The impending explosion of AI applications is leading to a continuous rise in computing power demand, focusing on the ASIC and Server industry chain.
Scaling laws and 'emergent' capabilities are important principles that large model training follows. With ChatGPT leading the global AI wave, tech companies at home and abroad are releasing AI large models. As of July 2024, there are approximately 1,328 AI large models globally (with the USA ranking first at 44% and China second at 36%). The acceleration of model iterations and intensified competition are apparent. Simultaneously, AI models are transitioning towards multi-modal comprehensive applications, and businesses are actively embracing the AI application market. Therefore, the continual growth in model quantity, model parameters, total data volume, and AI application demand is driving an explosive growth in global computing power.
As NVIDIA GPUs gain widespread usage in AI large model training due to continuous advancements in architecture and exponential growth in computing power, the demand for customized ASIC chips is steadily increasing to meet the higher performance and better functionality requirements of CSP customers. The pendulum of customization is gradually swinging from standardization. Correspondingly, computing infrastructure is being constructed and upgraded continuously, prompting both domestic and foreign cloud service providers to sustain high capital expenditures, leading to a significant increase in the AI server market size. It is expected that by 2026, global AI server shipments will reach 2.37 million units, corresponding to a CAGR of 26% from 2023 to 2026. Recommendations include Foxconn Industrial Internet, Wus Printed Circuit, LENOVO GROUP, Amlogic, Guosen, Montage Technology, Verisilicon Microelectronics (Shanghai) Co., Ltd., Longxin Precision, Suzhou Dongshan Precision Manufacturing, and Shenzhen Kinwong Electronic.
Semiconductors: The AI edge and domestic production have established growth opportunities, and the industry is likely to experience a double trigger during the expansion of passive funds.
According to SIA data, in 2023, China accounted for 29% of the global semiconductor sales, but the supply ratio of local enterprises was only 7%, indicating a low self-sufficiency rate. Compared to AI cloud-side, domestic semiconductor companies will achieve a higher market participation in AI edge-side innovation, and the resonance between the two establishes certainty and potential for industry growth. On a micro level, based on the Company Business Data of 146 semiconductor companies surveyed, 42% of the highest quarterly revenue is expected to occur in 2024, while only 24% of the lowest quarterly gross margin is also expected in 2024, indicating that the income and profitability of the domestic semiconductor industry have returned to an upward channel. From an industrial strategic perspective, the pull of semiconductors on GDP has a multiplier effect; it represents an important new productive force and serves as the foundation for a technologically strong nation. In the context of rising risks from increased restrictions on domestic semiconductors by the USA, the urgency for autonomy and controllability has become prominent.
Referring to semiconductor company valuations in the USA before 2014, the PHLX Semiconductor Index alongside representative stocks like NVIDIA, Qualcomm, Texas Instruments, and Taiwan Semiconductor have all exhibited long-term valuation premiums compared to the S&P 500. Currently, A-share semiconductor companies show reasonable valuation premiums. Moreover, since 2022, the proportion of holdings by passive funds in the semiconductor sector has been steadily increasing and has now surpassed that of active funds, indicating lower valuation concerns in individual stock configurations during the passive fund expansion. Combined with the industrial inventory cycle, corporate profitability cycle, and changes in capital structure, the industry is expected to witness a double trigger in 2025. Recommendations include Semiconductor Manufacturing International Corporation, Amlogic, Bestechnic (Shanghai) Co., Ltd., JCET Group Co., Ltd., NAURA Technology Group, SG Micro Corp, Espressif Systems, Montage Technology, JCET Group Co., Ltd., Advanced Micro-Fabrication Equipment Inc. China, and Weic Technology.
Automotive Electronics: The electrification and intelligence accelerate, and the domestic substitution of automotive Semiconductors holds great potential.
The electrification and intelligence of Autos are upgrading through interaction. According to Infineon’s prediction, by 2030, the global penetration rate of electric vehicles is expected to reach 45%, with a penetration rate of L2 and above for autonomous driving expected to reach 60%. Correspondingly, the automotive value system is shifting from being hardware-centric to being software-defined, with the use of automotive Semiconductors growing in parallel: high-performance SoC growth will be driven by intelligent cockpits and intelligent driving, with an increase in communication and control, Sensors, and memory chips; the power level in vehicles is rising, leading to an upgrade in power and analog power chips; according to Yole's data, the automotive Semiconductor market will grow from 52 billion dollars in 2023 to 97 billion dollars by 2029, corresponding to a compound growth rate of 11%.
With the changes in automotive architecture, the collaboration model between Semiconductors and main engine manufacturers is shifting from upstream and downstream suppliers to deep cooperative development; during the window period of supply chain transformation, the localization of automotive chips in China is accelerating. Currently, domestic suppliers account for nearly 80% of core component main drive power modules, and the proportion of domestic manufacturers for intelligent driving and intelligent cockpit chips is gradually increasing. However, fields such as power management, storage, signal chain, and Sensors remain slow to replace due to dispersed applications and still have substantial room for growth.
Recommendations: Tianyue Advanced, Guoxin Technology, Yangjie Technology, Electric Connector Technology, Wuxi Nce Power, Sai MicroElectronics, StarPower Semiconductor, Hangzhou Silan Microelectronics, Naxin Micro, Verisilicon Microelectronics (Shanghai) Co., Ltd.
Investment recommendation:
Semiconductor Manufacturing International Corporation (00981,688981.SH), Aojie Technology-U (688220.SH), Lens Technology (300433.SZ), Luxshare Precision Industry (002475.SZ), XIAOMI-W (01810), Shenzhen Sunlord Electronics (002138.SZ), Jihua Semiconductor (688141.SH), Tianyue Advanced (688234.SH), Freewon China (688678.SH), Amlogic (688099.SH), Avary Holding (002938.SZ), SG Micro Corp (300661.SZ), Hangzhou Hikvision Digital Technology (002415.SZ), Foxconn Industrial Internet (601138.SH), Wus Printed Circuit (002463.SZ), Advanced Micro-Fabrication Equipment Inc. China (688012.SH), NAURA Technology Group (002371.SZ), Bestechnic (Shanghai) Co., Ltd. (688608.SH), JCET Group Co., Ltd. (600584.SH), Will Semiconductor (603501.SH), Guoxin Technology (688262.SH), Electric Connector Technology (300679.SZ), Kangguan Technology (001308.SZ), Yangjie Technology (300373.SZ), Boe Technology Group (000725.SZ), Shanghai Bright Power Semiconductor Co., Ltd. (688368.SH), DBG Technology (300735.SZ), Weice Technology (688372.SH), Zhejiang Lante Optics (688127.SH), Zhejiang Jiemei Electronic And Technology (002859.SZ).
Risk warning: The process of domestic substitution is slower than expected; downstream demand is not as expected; risks of intensified industry competition; risks of adverse changes in international relations; risks of cyclical fluctuations in the industry; risks of volatility in the new energy market; uncertainties in the global supply chain; risks of demand for display devices not meeting expectations; risks of price fluctuations in display devices; risks in the supply of production equipment and raw materials.
