Wisdom News APP learned that CITIC Securities released a research report stating that based on 2024, the global analog chip industry has bottomed out, and various downstreams are gradually recovering. Domestic analog chip manufacturers have seen revenue turning points, and some have seen profit turning points. At the current point in time, it is more important to pay attention to the rhythm of the industry turning point and the elasticity of the next cycle than to focus on the valuation level of the year. Looking ahead, there are two investment themes in the analog chip sector: 1) manufacturers who insist on high R&D investment at the industry bottom, and have high R&D conversion efficiency and are the first to achieve high-end breakthroughs, are expected to see greater growth elasticity during the upward phase of the next cycle; 2) manufacturers who have economies of scale, perfect management system, and sufficient cash on hand at the customer and supply chain end have a higher probability of winning in the industry integration process.

The main points of the Citic Securities research report are as follows:

Analyzing the cycle position of the analog chip industry from a multidimensional perspective: it is gradually emerging from the bottom now.

Since H2 2022, due to the slow economic recovery and the gradual entry into the destocking stage of downstream areas such as consumption, automobiles, and industries, the market demand has contracted to some extent. Based on the performance of domestic and foreign manufacturers, inventory size, follow-up guidance, product delivery time and price marginal changes in the industry, CITIC Securities believes that there is hope to open a new upturn cycle in 2024:

1) Perspective of overseas manufacturers: The inventories of original manufacturers, channels, and customer terminals are basically at the bottom, and manufacturers such as TI, ADI, and MPS are gradually turning to optimistic performance guidance.

2) Perspective of domestic manufacturers: The performance of consumer electronics-related manufacturers has rebounded first, and the performance of automobile and industrial-related manufacturers has also clearly bottomed out.

3) Perspective of product delivery time and price: The product delivery time is stable and approaching the historical low, and the price reduction amplitude and scope have been significantly reduced and narrowed. Some manufacturers have even slightly raised prices for consumer part numbers.

In addition, according to WSTS predictions, the global analog chip industry is expected to achieve a growth rate of 3.7% in 2024, and the growth rate will turn positive year-on-year. Overall, CITIC Securities believes that the global analog chip market is gradually emerging from the bottom range.

The wave of mergers and acquisitions is about to begin, and the competition pattern of the domestic analog chip sector is expected to improve.

From 2018 to 2022, due to geopolitical impacts, periodic chip shortages, and capital market boosts, China's analog chip industry has grown rapidly. By the end of 2023, the number of domestic analog chip manufacturers exceeded 400. However, due to the late start, there is still considerable room for improvement in the market share of domestic manufacturers in the global market: according to statistics from Gartner, China's analog chip manufacturers accounted for approximately 11% of the global market share in 2022. TI stated that the domestic production rate of analog chips in China is about 12% in 2023.

From the perspective of development stage, most domestic manufacturers still have "small and beautiful" as their main characteristics, and some leading manufacturers are developing towards high-end and platformization. In the past two to three years, due to the large number of domestic manufacturers and the restrictions on mergers and acquisitions due to loose financing environment, there have been problems of "crowding" in the domestic analog chip market. CITIC Securities pointed out that since 2023, the downward pressure on the industry has been superimposed, and the financing environment has become tighter. The industry's merger and integration has gradually restarted, and more merger and integration projects are expected to appear in the next 1-2 years, which will drive competition in the domestic analog chip sector to improve.

Based on the above analysis, the domestic analog chip industry is expected to see profit repair.

The profit of domestic analog chip companies is more under pressure during this downward cycle, mainly due to the deterioration of the pattern and high R&D investment. These two major problems are gradually being solved:

1) Regarding the problem of pattern deterioration: After more than a year of price wars, domestic alternatives are still being promoted, and the gross profit margin of analog chip manufacturers has dropped significantly. The driving force for further price reductions by domestic and foreign manufacturers has weakened, and since April, some manufacturers have even issued price increase notices for consumer ICs. Looking ahead, with the gradual promotion of domestic industry integration, the impact of pattern deterioration on the profitability of analog chip manufacturers is expected to gradually weaken.

2) Regarding high R&D investment: From a micro perspective, some manufacturers in the domestic analog chip field have launched new product part numbers through high investment in the past few years, and some high-end subdivision tracks have also been successively broken through. By 2024, the main domestic analog chip manufacturers' revenue has returned to the growth channel, and the impact of high R&D investment on profits is expected to weaken. Looking ahead, as the industry gradually emerges from the bottom, the competition pattern gradually improves, coupled with the high R&D investment of domestic manufacturers being transformed into new part numbers and then into revenue growth momentum, the profitability of the domestic analog chip sector is expected to usher in repair.

Discussion on the valuation of the analog chip sector

For overseas manufacturers, the current PE of TI and ADI in 2024 is around 38-40 times, and the PS is around 11-13 times, both at a historically high level. However, due to the generally pressured profit margins of domestic analog chip manufacturers, the corresponding PE reference is weakened, while most domestic analog chip companies have a PS of less than 10 times in 2024. Considering that the revenue end of most domestic analog chip manufacturers has resumed growth and profitability is gradually improving in 2024, while the revenue of overseas giants TI and ADI is still in a downward trend in 2024, the valuation of domestic analog chip manufacturers from the perspective of PS is somewhat underestimated.

In addition, as the industry turning point gradually approaches (including the turning point of the cycle and industry integration), the domestic analog chip sector is expected to return to the growth path, among which leading manufacturers in high-end and platform layout are expected to have greater growth elasticity in the next cycle's upward phase. At that time, static high valuation is expected to be digested by paying more attention to the rhythm of the industry turning point in the current stage and the elasticity of the next cycle, rather than focusing on the valuation level of the year.

Risk factors: risks of slower-than-expected downstream demand recovery; risks of intensified market competition; risks of slower-than-expected new product development; risks of slower-than-expected new customer development; risks of slower-than-expected mergers and acquisitions layout.