The rapid iteration of AI phones and the recovery of consumer electronics have been anticipated to boost demand for related analog chips in consumer electronics. At the same time, industrial control analog chips are expected to enter the bottom-up period in H2 2024 as the downstream customers' stock cycle comes to an end.
According to the latest research report from Everbright Securities, since H2 2022, the global macroeconomic impact has caused the overall slowdown in semiconductor sales, and analog chip manufacturers have seen significant decline in revenue and profits, with overall inventory at a relatively high level. As inventories in the consumer electronics industry and others are cleared, demand is gradually picking up, and the performance of analog chip companies is expected to recover in Q1 2024. The rapid iteration of AI phones and the recovery of consumer electronics are anticipated to boost demand for related analog chips in consumer electronics. Similarly, with the downstream customers' stock cycle of industrial control analog chips entering its tailing-off phase, H2 2024 is expected to see the bottom-up period of prosperity growth.
The main points of view of Everbright Securities are as follows:
AI phones driving the wave of upgrades
The launch of the new generation of Samsung Galaxy S24 series marked the official application of generative AI, large language models, and other technologies in smart phones. The Galaxy series is equipped with Galaxy AI that combines local and cloud-based AI, reshaping the user experience of smart phones on different levels. Meanwhile, thanks to the popularity of AI and GC, the series broke the record of the fastest S series to surpass one million units in Korea. Domestic manufacturers have also been actively deploying AI large language models, introducing AI phone series products, and planning to launch the AI phone era in 2024. IDC predicts that in the Chinese market, as new chips and user scenarios iterate rapidly, the market share of the new AI phone generation will rise sharply after 2024, exceeding 50% by 2027, with a shipment volume of over 0.15 billion units. Apple released the Apple Intelligence Global Service in June 2024, which provides generative AI services, and some functions will be available from the fall of 2024. Whether this can drive customer upgrades to buy new iPhones remains to be seen.
The sustained rebound of global demand for smart phones may become the catalyst for the continued recovery of consumer electronics, with AI phones being one of the key drivers
According to IDC data, since global mobile phone shipments hit bottom in Q4 2022, the market has seen a turning point since Q3 2023, with global smart phone shipments increasing YoY by 8.5%, 7.8%, and 6.5% in Q4 2023, Q1 and Q2 of 2024 respectively. IDC predicts that AI phones will be another big growth driver after 5G high-speed mobile communications and foldable smart phones. The shipment volume of AI phones is expected to account for 19% of the entire market in 2024. In June 2024, Apple released its Apple Intelligence Global Service, which provides generative AI services. The company is also exploring more opportunities in the AI phone market.
The rebound of phones could boost demand for analog chips.
As the complexity of AI algorithms increases, the power management requirements for phones have also correspondingly increased, requiring more efficient power management chips to support high-performance computing and long-term use, achieving higher energy efficiency. In addition, AI phones require the integration of more sensors, such as cameras, fingerprint recognition, light sensors, and other sensors, whose data needs to be processed and transmitted through analog chips. The use of sensor interface chips in AI phones has increased the demand for analog chips. As the number of sensors increases, the demand for high-performance, low-power analog chips is also growing. AI phones have achieved multimodal processing capabilities by integrating more sensors and algorithms, and analog chips have provided support for multimodal processing optimization.
Overseas leading analog chip companies' guidance is trending towards optimism, and domestic revival trends are also clear.
Texas Instruments (TI) achieved successful inventory clearing in the industrial market, with a positive Q3 guidance. Its revenue in Q2 was $3.82 billion, with a net profit of $1.13 billion and an EPS of $1.22. The Q3 revenue guidance is expected to be $4.1 billion ± $0.1 billion, with a YoY decrease of -9.5% / QoQ increase of +7.3%, and an EPS guidance of $1.36 ± $0.12, with a YoY decrease of -26.5% / QoQ increase of +11.5%. The company observed that the number of order cancellations was decreasing, and delivery times were more stable. Demand in some subdivided industrial fields is bottoming out, while some are still declining.
After seven consecutive quarters of decline, Q2 2024 saw a good performance by the company in the Chinese market, with an increase of nearly 20% QoQ. Five downstream markets all achieved 15-20% QoQ growth, and different cycle phases in various terminal markets have been well corrected, with deliveries now being made to terminal demand, meaning that Chinese customers have fully adjusted their inventory. China's market was the first to adjust during the downturn, and now it is the first to show strong QoQ growth, entering the upswing cycle.
Analog chip company Analog Devices (ADI) performed well in Q2, exceeding the median expectation, with promising guidance for subsequent quarters. Its revenue in Q2 was $2.16 billion, far surpassing higher-than-expected prospects; the gross margin was 66.7%, lower than the previous year, due to factors such as the decline in income and utilization rates; the operating margin reached 39%, surpassing higher-than-expected prospects; and the EPS was $1.40, surpassing the highest level of expectations. For Q3, revenue is expected to be $2.27 billion ± $0.1 billion, with a median QoQ increase of 5%; the gross margin is expected to be slightly higher than 67%, and will slightly increase in the second half of the year.
Since the second half of 2022, the overall sales of semiconductors have slowed down due to the global macroeconomic impact, and simulation chip manufacturers' revenue and profits have shown significant decline, and overall inventory level has been relatively high. As the inventory of consumer electronics and other industries is approaching the end, demand is gradually recovering, and the performance of the simulation chip company in Q1 2024 begins to recover.
SG Micro Corp stated in June 2024 that the company's inventory level is normal and inventory turnover is healthy. As the company's business scales up in the future, inventory levels will continue to grow. AIWEI Electronics actively optimized its inventory structure in 2023 and the provision for inventory impairment reduced its net income by 77.10% compared with the same period last year. The company's inventory at the end of 2023 was about 20% lower than the same period last year.
3Peak Incorporated stated that its inventory balance at the end of Q1 2024 was CNY 0.411 billion, a decrease compared to CNY 0.428 billion at the end of Q4 2023. NanoMCU stated that the inventory turnover of most downstream industries has approached the end and began to gradually recover. Among them, downstream fields such as industrial control and power supply modules in the broad energy sector have begun to gradually recover, and some customers in the optical energy storage sector also showed signs of recovery in the second quarter. Consumer electronics is the field that emerged from inventory impact earliest.
Recommendations: (1) The simulated industry leader to benefit from the recovery of consumer electronics and industrial control: SG Micro Corp (300661.SZ); (2) Simulated companies with relatively high proportion of consumer electronics: Lixin Micro (688601.SH), AIWEI Electronics (688798.SH), Nanshan Technology (688484.SH), Deao Micro (688381.SH); (3) Simulated companies to benefit from the recovery of industrial control: 3Peak Incorporated (688536.SH), NanoMCU (688052.SH).
Risk Warning: downstream demand is lower than expected, and industry capacity clearance is lower than expected.