In the first quarter of this year, the electronics sector has reached a significant turning point in profitability, particularly driven by advancements in AI and AI-powered cloud technologiesCompanies involved in PCB production and server-related AI initiatives, such as Huyang Electronics, Shenzhen South Circuit, Industrial Fulian, and Cambrian, are particularly noteworthy for investorsBy the second quarter, several electronic firms, including Weier and Lankai Technology, surpassed performance expectations, further validating the investment potential in AI and AI-driven cloud applications.

The PCB sector stands out as one of the fields closest to AI applications, where order levels and performance are notably prone to exceed expectations. Companies like Huyang Electronics, Shenzhen South Circuit, Jingwang Electronics, and Video Circuit have demonstrated strong performance, while upstream substrates like Shengyi Technology and Founder Technology have also benefited from increasing demand.

The SOC (System on Chip) sector has delivered impressive results recently,with companies like Rockchip and Amlogic showing significant growth in performance.

In the coming quarters, factors such as sustained order growth driven by AI, adjustments in server revenue structures that enhance profit margins, and upgrades to high-end switches will continue to stimulate the PCB sector's development.

Gradual scaling of downstream demand, the alpha effect of new products, industry rebound, and the increase in high-end product ratios will continue to boost the SOC sector.

Within the electronics sector, the SOC and storage design divisions have recently outperformed expectations, while the consumer electronics sector also showed encouraging performance in the second quarter, revealing substantial growth potential in AI and related fields.

This year, a clear turning point has emerged in the PCB industry, with revenues growing 15% and profits increasing by 40% in the first quarter.Shenzhen South Circuit, Shenghong Technology, and Shiyun Circuit are among the leading companies that experienced remarkable performance, suggesting a worry-free outlook for the year.

How have the electronics sector and its various subdivisions performed this year? What sub-sectors warrant attention?

In the first quarter of this year, the electronics sector hit a profitability turning point, particularly in the AI and AI-driven cloud directions, where we spotlighted PCB and server-related targets like Huyang Electronics, Shenzhen South Circuit, Industrial Fulian, and Cambrian. Additionally, we are optimistic about domestic core targets, such as State Power, in the storage sector.We also predicted a price-increase trend for this year.

In the second quarter, several electronic companies exceeded expectations, including Weier and Runqi Technology, confirming our previous assessments.

How is the PCB sector performing in the current boom?

The PCB sector is among the closest to AI applications, making its orders and performance prone to exceed expectations

Advertisements

For example, last year Huyang Electronics's overseas operations hinted at early AI ordersThis year's first quarter saw Shenzhen South Circuit register impressive revenue and profit margin performance, despite net profits not significantly exceeding expectationsThe company further surpassed market predictions in the second quarter, alongside others like Jingwang Electronics and Shiyun Circuit, which maintained exceptional performanceMoreover, upstream copper-clad laminate firms such as Shengyi Technology and Founder Technology have also benefitted from rising demand.

What significant developments have occurred recently in the SOC (System on Chip) sector?

The SOC sector has exhibited remarkable performance recently

Advertisements

For instance:

Rockchip's median net profit for the second quarter was approximately RMB 110 million, reflecting a year-over-year increase of 154% and a quarter-over-quarter growth of 61%.

Amlogic anticipates second-quarter revenues of RMB 1.64 billion, a 25% year-over-year increase, with quarter-over-quarter growth of 19%; net profit is projected at RMB 234 million, marking a 52% increase year-over-year and an 84% increase quarter-over-quarter.

These figures indicate a substantial performance elasticity in the SOC sector.

What are the core reasons behind the performance elasticity in the SOC sector?

Firstly, downstream demand is beginning to scale, which is not entirely consistent with market sentiments.

Moreover, the industry has moved past chaotic competition, and new products are driving supply chain developments, providing returns on R&D investments

Advertisements

Additionally, the increasing high-end product ratios play a vital roleFor example, Rockchip launched its 3,588 flagship product, while Amlogic introduced a 6-nanometer 8K chip, which provides substantial performance advantagesTherefore, the interplay between downstream demand, the alpha effect of new products, and the industry's bottoming out has propelled the SOC sector's commendable performance.

Looking ahead, what factors may continue to drive the development of the PCB and SOC sectors?

In the PCB realm, sustained order growth brought on by AI, alongside gross margin improvements due to server revenue structure adjustments, is expected to promote continued robust development

• Volatile Market Value of Leading AI Companies in the U.S.
• U.S. Stock Indices Decline This Week
• Surge in U.S. Inflation Expectations
• Good News! Foreign Capital: Bullish on Chinese Stocks!
• U.S. Interest Rates May Decline in 2025

Additionally, high-end switch upgrades will emerge as a new growth vector.

In terms of SOC, the gradual scaling of downstream demand, the alpha effect of new products, and a rebound in the industry will continue to drive its developmentAdditionally, greater proportions of high-end products will be essential, especially as emerging applications like smart headphones and wearables intensify the demand for high-performance chipsThus, a favorable outlook persists for both the PCB and SOC sub-sectors in the coming quarters.

Which sub-sectors in the electronics area are currently excelling and warrant ongoing attention?

In the electronics sphere, the SOC (System on Chip) and storage design components have recently surpassed expectations

On June 27th, published insights indicated significant improvements in performance for these sub-sectorsFurthermore, consumer electronics also performed well in Q2, despite Q1 typically being a slow seasonAs Q2 transitions into a peak stocking season, and Q3 is traditionally a high-demand period, several targets in the consumer electronics sector showed promising Q2 performance, marking them as focal points for subsequent watchingAdditionally, AI and AI-related fields are believed to hold considerable growth potential, warranting attention.

What is the current state of development in the PCB (printed circuit board) industry?

This year, the PCB industry has shown clear signs of a turning point

The entire PCB sector's revenue increased by 15% and profits grew by 40% in the first quarterFor example, Nanya's estimated second-quarter revenue reached approximately RMB 940 million, reflecting a 20% increase year-on-year and over 40% quarter-over-quarter, while net profits turned positive, exceeding RMB 45 million, a sequential increase of over threefoldThis remarkable performance isn't incidental; numerous leading companies in the PCB field, such as Huyang, Shenghong Technology, Shengyi Electronics, and Shenzhen South Circuit, have unveiled impressive mid-year results, with Shenzhen South Circuit's second-quarter net profit jumping to around RMB 580 million, exceeding a 115% increase year on year and surpassing a 50% quarter-over-quarter growth.

What factors have contributed to Shenzhen South Circuit’s impressive growth?

The significant growth in Shenzhen South Circuit's Q2 results was primarily driven by several factors:

Firstly, the overall recovery in the PCB sector has led to increases in orders across all fields, maintaining a high processing rate

Secondly, as one of the leading A1 companies in China, Shenzhen South Circuit deeply participates in the general server upgrade and product structure enhancements, boosting profitability.

Additionally, the company's optical module orders are robust, and with the increased pricing of 800G switches and the penetration of 1.6T products, corresponding PCB prices and profit margins have significantly risen.

Moreover, as a key supplier of switches and servers, the company demonstrates enhanced profitability in high-difficulty, high-end data communication products.

How has Shengyi Technology performed and what are its main growth drivers?

In the second quarter, Shengyi Technology posted approximately RMB 530 million in net profit, marking a year-over-year increase exceeding 70% and a sequential growth of around 36%. The exceeding performance relates to a recovering overall demand in the PCB sector, with the company operating at full capacity

Additionally, as copper and other raw material prices remain elevated, the company has enhanced profitability through pricing increasesFurthermore, the company’s subsidiary, Shengyi Electronics, which holds over a 60% stake, has played a catalytic role in its overall performanceDemand from the communications sector, automotive sector, and consumer products has all shown significant recovery this year, leading to an overall profit turnaround in the laminate board sectorReinforced by the firm’s strong growth profile, the successful validation of new products establishes a solid foundation for future growth.

What is the situation with other PCB-related companies?

Companies like Jingwang Electronics, Shiyun Circuit, Founder Technology, and Nanya New Materials have all experienced high-speed growth in performance this year, with most exceeding 50%. These companies are expected to sustain this positive momentum as analysts regard this year as a pivotal turning point for profit in the entire PCB sector.

How has the PCB industry performed this year? This remarkable growth has been propelled by the escalating demand for AI technologies. The advancements in AI have driven upgrades and spots within products like servers, switches, and optical modules for the companies in the industry.

Moreover, the needs for automotive and consumer electronic products have also substantially increased

The specific requirements of controlling products necessitate higher layers, materials, and processes, leading to core manufacturer orders being overwhelmed and experiencing a selection phenomenon.

Overall, companies continue to improve in structure and products, with profit margins expected to surpass initial forecasts.

The expectation is that the entire data communication sector’s boom will be confirmed, with orders and processing rates set to improve quarter-on-quarter in the short term (like in Q3), therefore suggesting worry-free performance for the entire year.

What is the outlook on the current boom in infrastructure and its implications for the PCB industry?

Presently, the large boom in infrastructure is primarily driven by the resonance between general servers and AI technology, leading to upgrades in switches and optical modules

For instance, platforms represented by PCIe5.0 are projected to achieve market penetration rates of approximately 60% in overseas markets and about 40% domestically this year.

New generations of platforms, such as the Weitel, exhibit PCB values that have increased between 50% to 100% from prior generationsFurthermore, the material requirements have upgraded from M4 to M6, and layer counts have elevated from 12-16 layers to 14-20 layers, thereby enhancing overall profit margins.

In the realm of AI servers, companies like Nvidia require higher standards as such server PCBs need to meet M8 material standards, necessitating 22-28 layers, and need to apply advanced SCI schemes

It is estimated that the overall value of AI servers is about five times that of general serversFurthermore, due to the computational power upgrades, the PCB value associated with each GPU also sees an increase.

What are the development trends for switches and optical modules?

Currently, switches are upgrading from 400G towards 800G, demanding high standards for PCBsFor instance, a 400G switch requires over 26 layers, and an 800G switch necessitates over 32 layersThis implies fewer participants in the high-end switch market, yet companies that are positioned in this field have promising growth prospectsIn terms of optical modules, the previously small market size has been expanded by adopting HCR or SLP schemes for 400G and above specifications, significantly benefiting the price and profit margins.

What are the current strategies adopted by leading PCB manufacturers in the data communication sector?

The data communication market has traditionally been a challenging field, requiring high levels of materials and layers

Historically, only a handful of established manufacturers, like Huyang Electronics, have held a dominant positionYet, in recent years, some emerging companies, including Shengyi Electronics, Jingwang Electronics, and Founder Technology, have made breakthroughs in this area. These companies have surpassed performance expectations, suggesting that their strategic positioning within the data communication sector will yield sustained growth.

What is the outlook for the PCB market moving forward?

Despite some investors considering valuations within the PCB section to be high at present, we believe that the current phase of infrastructure development represents a significant cycle comparable to the former 5G construction phase