Financial news app IZUI learned that Huafu Securities released a research report stating that with the combination of the peak season in the second half of the year and the end of inventory digestion, the electronic industry is expected to continue to recover. From the perspective of subdivision sectors, in the first half of 2024, semiconductor equipment continued to recover, and the pre-production expansion of equipment in the upswing cycle and the increase in domestic demand were the two main driving forces for the recovery of the equipment sector. The packaging and testing segment also benefits from the cyclical trend, with profits growing rapidly on a year-on-year and quarter-on-quarter basis. Due to the improvement in overseas demand, such as the increase in home appliance exports and the penetration of low-end headphones and wristbands, 24Q2 has maintained a strong growth trend. With the traditional peak season coming in the second half of the year and complete inventory digestion by downstream manufacturers, other sectors are also expected to gain momentum for recovery.

Semiconductor Equipment: Inventories and contract liabilities indicate rapid growth in future performance. In 24Q2, the total revenue of the main semiconductor equipment targets selected by Huafu Securities was 14 billion yuan, a year-on-year increase of 43% and a quarter-on-quarter increase of 26%, maintaining good growth; the net profit attributable to the parent company of the equipment sector in 24Q2 was 2.96 billion yuan, an 8% year-on-year increase. The profit growth rate of the equipment sector lags behind the revenue performance. Huafu Securities believes that the factors affecting this include the increase in research and development expenses. The inventory and contract liabilities of the equipment sector in 24Q2 increased quarter-on-quarter, reflecting the anticipated increase in equipment shipments, thus bringing about the performance release from the second half of this year to next year.

Packaging and Testing: Performance in Q2 shows a recovery trend. In 24Q2, Huafu Securities calculated that the revenue of the packaging and testing sector was 20.5 billion yuan, a 26% year-on-year increase and a 19% quarter-on-quarter increase; due to the low profit base in the same period last year, the net profit attributable to the parent company of the packaging and testing sector in 24Q2 increased by 88% year-on-year and showed a significant quarter-on-quarter growth. Considering that the second half of the year is generally the peak season for electronic demand, it is expected that the utilization rate of the packaging and testing sector will continue to rise in the second half of the year, thereby driving further improvement in performance on a quarter-on-quarter basis. On the other hand, the capital expenditure of the packaging and testing sector in 24Q2 was 4.9 billion yuan, a 15% year-on-year increase, reversing the negative growth from 23Q4 to 24Q1.

Digital Chips: CPU/GPU: Domestic substitution is crucial, with expectations for further release of 24H2 performance. Both HiSilicon and Cambricon have strong asset reserves; HiSilicon's end-of-24Q2 inventory reached 2.46 billion yuan, a quarter-on-quarter increase of 44%. Cambricon's end-of-24Q2 inventory reached 235 million yuan, an 83% quarter-on-quarter increase, with prepaid expenses of 550 million yuan, a 169% quarter-on-quarter increase. Huafu Securities expects sufficient supply, and anticipates significant performance release in 24H2, looking forward to driving revenue to a new level after the release of new products. SoC: Strong downstream demand leads to rapid performance growth. The total revenue of SoC manufacturers in 24Q2 was 5.82 billion, a 36% year-on-year increase and a 24% quarter-on-quarter increase, achieving a total net profit attributable to the parent company of 0.61 billion yuan, a 149% year-on-year increase and a 131% quarter-on-quarter increase. With the current favorable market trend, Huafu Securities expects the SoC industry to benefit from: 1) further expansion of the wearable market, opening up growth space; 2) the improvement of the competitiveness of domestic SoC companies in the overseas markets, continuously increasing market share.

Storage: The performance of storage chip manufacturers in 24Q2 is on the rise, with significant improvement on the profit side. The revenue in 24Q2 was 5.02 billion yuan, a 28% year-on-year increase and a 19% quarter-on-quarter increase. Despite the non-dull season in Q1, the revenue in 24Q2 still showed a trend of quarter-on-quarter growth. Huafu Securities believes that the performance of storage chip manufacturers in 24Q2 is being driven by the cyclical recovery, and generally holds an optimistic view for 24H2. Due to the slowdown in the growth of module prices, domestic module manufacturers in various sectors experienced a decline in profit in Q2, with a total net profit attributable to the parent company of 0.49 billion yuan, a -190% year-on-year and a -34% quarter-on-quarter. Looking forward to 24H2, in terms of demand, there is a significant increase in demand for high-speed and large-capacity storage products in the server domain. In addition to servers, important downstream markets such as smartphones and PCs are expected to continue to grow in the second half of the year, driven by the effects of the peak season and the increase in single-machine capacity due to the expansion of AI functions in terminal devices.

MCU: The industry's price war is expected to ease, with the bottom of gross profit and profit levels of various companies rebounding. After inventory digestion in 23 and 24Q1, various companies benefited from the recovery of the consumer electronics market, and their operations have improved. The sector's revenue in 24Q2 was 3.19 billion yuan, a +25% year-on-year and +20% quarter-on-quarter increase, with a net profit attributable to the parent company of 0.36 billion yuan, a 260% year-on-year and 74% quarter-on-quarter increase. In the first half of 2024, the global integrated circuit industry market demand entered a recovery period, and while MCU prices are still under pressure for adjustment, they are not the only concern for customers; industry supply and demand are gradually adjusting in a positive direction, and the competitive pressure on chip prices is expected to ease.

Power Devices: The inventory of the sector began to decline, gradually bottoming out and improving. The Q2 revenue of the power sector has recovered significantly, reflecting the improvement in downstream demand. In Q2 24, the net profit attributable to the mother of the power sector increased by 19% year-on-year and 51% compared to the previous quarter. The gross margin of the power sector in Q2 24 was 25.6%, a slight decrease of 0.6pcts from the previous quarter, and the decrease continued to narrow. The sector's inventory began to decrease on a year-on-year basis, and the inventory level has begun to optimize. In addition, due to the better revenue growth, it is expected that the inventory turnover of the power sector will further improve. Overall, low-voltage power devices are the first to recover, while insulated gate bipolar transistors (igbt) and other high-voltage power devices are also expected to bottom out and improve in the second half of the year, according to Huafu Securities.

Analog Chips: Consumer electronics demand has significantly rebounded, and the industry has entered an upsurge period. The business of the analog sector continues to improve in the same period, with high profitability. The total revenue of the analog sector in Q2 24 was 7.67 billion yuan, a year-on-year increase of 26% and a quarter-on-quarter increase of 12%. The total net profit attributable to the mother was 0.24 billion yuan, an increase of 617% year-on-year and 619% quarter-on-quarter. Huafu Securities believes that the performance of analog manufacturers in the second half of 24 is expected to continue to improve.

Computing Hardware: The upgrade and expansion of data centers driven by AI is leading to rapid revenue and profit growth in the computing hardware sector. In the first half of 2024, North American cloud service providers have been releasing open-source models, and leading cloud service providers have been increasing their annual capital expenditures, continuously increasing their investment in AI, and promoting the construction and expansion of cloud infrastructure and data centers. Benefiting from the increased demand for cloud infrastructure, the revenue and profit of the computing hardware sector grew rapidly in the first half of the year.

Consumer Electronics: In 2024, the recovery of the rising cycle met the first year of AI on the terminal side. In the first half of 2024, the smart terminal market continued to warm up, with a year-on-year increase of 6.5% in global smartphone shipments in Q2 24, and a 3.2% year-on-year increase in global PC shipments in Q2 24. The Q2 revenue of consumer electronics companies continued to warm up, and the industry's recovery trend is clear. On the profit side, the camera module manufacturers have seen a significant improvement in profitability due to increased shipments and the addition of high-value-added products. At the same time, in 24, the continuous landing of products is expected in the terminal AI, becoming a new hot direction for consumer electronics. Listed consumer electronics companies are optimistic about the further stimulation of market demand from the terminal AI.

Cyclical Sector: The continued recovery in business conditions is significantly driven by AI. The cyclical sector's business conditions are continuing to improve, and Huafu Securities is bullish on the sustainable driving effect of AI carriers from servers to C-end hardware. The passive component sector did not experience a downturn in the first half of 24, with the leading domestic passive component company's revenue and profit achieving comprehensive growth. The upturn in PCB conditions, especially notable performance growth of WUS Printed Circuit, has benefited from the significant AI wave. Panel sector prices have moderately risen, and with orderly supply and warming demand, market price competition has eased, with manufacturers generally entering profitable ranges.

Investment Advice: The performance of the electronic sector has hit the bottom and rebounded, coupled with terminal AI innovations. Bullish directions for terminal AI innovations: Luxshare Precision Industry (002475.SZ), Suzhou Dongshan Precision Manufacturing (002384.SZ), Lingyi Itech (002600.SZ), Lens Technology (300433.SZ), Avary Holding (002938.SZ), WUS Printed Circuit (002463.SZ), Shennan Circuits (002916.SZ), Hangzhou Techman (603296.SH), Transsion Holdings Co., Ltd. (688036.SH), etc. Recovery sectors recommend focusing on consumer ICs, storage, cyclical sectors, etc. Storage targets recommended for focus include Gigadevice Semiconductor Inc. (603986.SH), Montage Technology (688008.SH), Purcotton Inc. (688766.SH), etc. Consumer IC targets recommended for focus are Bestechnic (Shanghai) Co., Ltd. (688608.SH), Amlogic (688099.SH), SG Micro Corp (300661.SZ), and Espressif Systems (688018.SH). Cyclical sectors recommendation includes focusing on Chaozhou Three-Circle (Group) (300408.SZ), Shenzhen Sunlord Electronics (002138.SZ), Zhejiang Jiemei Electronic and Technology (002859.SZ), etc. Domestic supply chain recommendations include focusing on computing chips, semiconductor equipment and other sectors. Computing chip targets recommended for focus include Cambricon Technologies Inc. (688256.SH), HGTECH (688041.SH), Loongson Technology Corp. (688047.SH), etc. Recommendations for semiconductor equipment include focusing on Naura Technology Group (002371.SZ), Advanced Micro-Fabrication Equipment Inc. China (688012.SH), Huahai Qingke (688120.SH), Toyou Technology (688075.SH), Wuhan Jingce Electronic Group (688223.SH), Kingsemi Co., Ltd. (688037.SH), Shenzhen Sunlord Electronics (300567.SZ), Jingce Electronic and Technology (688630.SH), etc.

Risk Warning: Unexpected delays in technological development and implementation; lower-than-expected downstream terminal shipments and demand; intensified market competition risk; geopolitical risks; and a weaker-than-expected recovery in the electronic industry's business conditions.