China Merchants Securities: PCB industry boom and upward AI computing power/terminal and automotive intelligence drive growth

The Zhitong Finance App learned that China Merchants Securities released a research report saying that overall demand in the PCB industry is picking up. The economy continues to recover this year, and valuations have been repaired. The PCB/CCL industry has both cyclical and growth attributes. Innovations such as superimposing computing power+AI end side are expected to drive the industry into a new round of growth, and can still be actively watched. Compared with the 5G upward cycle of 19-21, this round of AI-driven technological innovation will continue for a longer period of time and generate broader market demand. The domestic PCB industry continues to upgrade and expand high-end production capacity and lay out overseas production capacity, and the release of performance is continuous.

The main views of China Merchants Securities are as follows:

The latest trend in the industrial chain: demand for H1 inventory replenishment drives the operating rate up, and the off-season of the industry is not weak. After entering H2, the new product cycle and the AI-driven boom drove the operating rate to maintain a high level of operation.

Overall demand is picking up. Demand for AI computing power is still strong, driven by large-scale model training and continuous optimization and iteration of AI applications; demand for consumer electronics continues to pick up, driven by short-term subsidy policies, and the new demand brought about by end-side AI upgrades represented by Apple in the medium to long term is worth looking forward to;

In terms of automobile intelligence, as the TSLFSD version continues to be iterated and is expected to be promoted globally, the smart driving experience is expected to be greatly improved. The bank also observed that the smart driving function in the domestic car market is expected to sink further next year, which will drive the upgrading of car board specifications and the improvement of ASP;

In terms of autonomy and control, the amount of domestic computing power chips is imminent, and the domestic replacement process for high-end carrier boards is also accelerating; CCL's short-term boom is picking up, and demand for high frequency and high speed on the computing power side is expected to drive a new round of industry growth.

The PCB sector continues to recover this year, and valuations have recovered. The PCB/CCL industry has both cyclical and growth attributes. Innovations such as superimposed computing power+AI end side are expected to drive the industry into a new round of growth, and can still be actively watched.

Prosperity tracking: The new product cycle drives a continuous recovery in terminal demand and a recovery in the overall operating rate of the industry.

Demand for downstream terminals: Overall demand for mobile phones and other consumer terminals continued to pick up, AI computing power construction drove the need for server and switch upgrades, and automobile sales performed well in the second half of the year.

Inventory: Taiwan's PCBCP value rose to 0.5 in November. The overall CP value this year was better than the same period last year. Domestic PCB manufacturers' inventories increased, and DOI continued to decline, indicating a moderate increase in overall demand. Capacity supply: The overall operating rate of PCB manufacturers has been rising steadily in Q4. Between 80-95%, industry capacity expansion has slowed in the past three years. It is expected that next year they will enter a new round of structural capacity expansion, mainly in the fields of high-end HDI, high-multilayer hard boards and high-end substrates, and are also expanding overseas.

Product price: Copper prices have fluctuated downward recently. The prices of the three main materials of copper foil, resin, and glass cloth are still at the bottom. Short-term CCL and PCB prices are relatively stable. PCB overall outlook: PCB revenue from Taiwanese stocks declined slightly in November, with cumulative revenue +6% year-on-year for the first 10 months. Prismark expects Q4 to show a month-on-month upward trend.

AI computing power: Manufacturers that focus on Nvidia's GB series design changes, ASIC demand, and domestic computing power demand unleash potential. Manufacturers with excellent product technology and production capacity layout expect to continue to improve profitability.

Broadcom's recent financial report has exceeded expectations for ASIC's future guidance. It is believed that the total demand for AIXPU and the Internet market is expected to reach 60 to 90 billion US dollars. Major overseas technology companies all need self-developed computing power chips. Combined with large-scale competition from domestic Internet manufacturers, it is expected to drive a new round of computing power competition, and there is still potential for computing power demand to be released.

Driven by AI technology and applications, servers will be the fastest growing application area for PCBs. The CAGR is expected to reach 11.6% to US$14.2 billion in 23-28 years. AI servers represented by the Nvidia GB series have seen a significant increase in demand for stand-alone multi-layer and HDI, and the demand for high-speed data transmission is driving a significant upgrade in base material specifications. PCBASP for AI servers has increased several times compared to normal models, and GB200 will begin shipping at the end of Q4 and mass delivery next year; new general-purpose server platforms (supporting PCIe 5.0) will rapidly increase in penetration rate and 800G switches will gradually become mainstream in the market next year. Stand-alone ASP is also expected to increase dramatically.

Consumer electronics: Consumer subsidies are expected to boost demand for mobile phones and other terminals. The medium- to long-term focus on end-side AI upgrades will bring new demand.

In the short term, the consumer subsidy policy is expected to boost demand for various types of 3C terminals such as mobile phones. Jiangsu and other places have introduced subsidy policies for 3C products such as mobile phones and tablets, and it is expected that intensive subsidy policies will continue to boost domestic demand in the future. In the medium to long term, consumer electronics technology companies, led by Apple, are speeding up the AI upgrade process for smart terminals, which is expected to drive PCB board upgrades and switching requirements for mobile phones and PC terminals.

On the Apple side, next year, iPhone AI and lightweight upgrades will drive innovation in soft and hard board design concepts, processes, and materials. Driven by AI, the price trend of high-end products continues, and market sales also exceed expectations, which is expected to drive the penetration rate of HDI/SLP in Android flagship devices.

Automobile intelligence: The iteration of TSLFSD is expected to enter China and the decline of intelligent domestic driving will accelerate the intelligent upgrading process of automobiles and drive an increase in the value of automotive PCBs.

Tesla released a new RoboTaxi model CyberCab in October. The FSD continues to iterate and is expected to enter China and Europe 25Q1 to promote the intelligent automobile process. Meanwhile, in the face of fierce market competition, domestic car companies will also accelerate the intelligent upgrading of automobiles. According to the bank's tracking of the industry chain, it is expected that the domestic smart driving function will further sink to the price range of 100,000 to 200,000 yuan for models next year.

Meanwhile, the demand for high multi-layer boards, hard and soft combination boards, and HDI boards required for smart driving has increased dramatically. Currently, the overall demand in the automotive board market is stable, and domestic and foreign manufacturers are optimistic about subsequent ADAS and intelligence to drive high-margin product shipments.

Autonomous and controllable: The release of new domestic computing power products is imminent. Focus on ABF carrier board assets to reevaluate opportunities to benefit from domestic substitution trends.

A number of domestic AI computing power chips, represented by the Huawei Ascend 910C and Cambrian Jisiyuan 590, are about to be launched, and performance continues to improve. Domestic smart computing power policy dividends continue to be released, computing power infrastructure is expected to develop rapidly, and demand is expected to be released next year.

Domestic replacement of advanced packaging substrates required for computing power chips will also be accelerated. Domestic carrier board manufacturers, such as Shennan Circuit and Xing Sen Technology, have increased CapEx and production capacity construction in the FC-BGA carrier board field. Currently, they have mass production capacity for products below 20 layers, and are expected to meet domestic AI chip packaging requirements next year.

Globally, there is an oversupply of overall production capacity in the carrier board market. AI-related products are the main driving force for future growth, and it is expected that 2026 may return to a healthy supply and demand relationship.

CCL: The short-term economy has rebounded. Focus on the release of demand for high-frequency and high-speed materials on the computing power side and changes in the pattern.

The total output value of Taiwanese stock CCL/FCCL in November was NT$342.4/880 million, +15.4%/-1.5% YoY, indicating that overall demand remained strong. Taiwan stocks, Taiwan Optoelectronics, Lianmao, Taiyao, etc. are all optimistic that demand for various types of servers and switches will drive the growth trend of high-frequency and high-speed materials in 25-26, and will continue to expand M6-M8 production capacity. According to DigiTimes, the demand for high-end CCL and the CAGR of production capacity supply for 24-26 AI servers was 26%/7%, respectively, and the tight supply and demand relationship may continue for a long time.

According to the bank's tracking, at present, domestic CCL leader Shengyi Technology's S8/S9 materials have obtained small-batch orders in the N customer computing power supply chain, and is expected to gain a considerable share next year. Short-term CCL has benefited from frequent domestic subsidy policies, and the recovery in demand has led to a recovery in the economy. The bank as a whole believes that the global economy is expected to continue to pick up in the future. Combined with the interest rate cut cycle, upstream raw material prices will be in an upward channel, and the two factors of demand and inventory are expected to drive CCL as a whole to be in a price increase channel in the medium to long term.

Investment advice: The PCB industry chain still suggests focusing on medium- to long-term investment opportunities in sectors such as computing power boards, Apple AI, CCL, and domestic substitution.

1) In terms of computing power boards: In the context of the shortage of high-end production capacity in the industry, Nvidia technology iteration gives new manufacturers an opportunity to enter the supply chain, and leading overseas CSP self-developed computing power systems and ASIC demand potential also have opportunities to introduce new PCB manufacturers. Combined with the release of domestic computing power demand, it is recommended to focus on leading manufacturers: Shanghai Electric Power Co., Ltd. (002463.SZ), Shennan Circuit (002916.SZ), Shenghong Technology (300476.SZ), Shengyi Electronics (688183) 600183.SH .SH) and flexible manufacturers: Jingwang Electronics (603228.SH), Fangzheng Technology (600601.SH), Guanghe Technology (001389.SZ), Shiyun Circuit (603920.SH), etc.;

2) Consumer electronics: AI-driven terminal innovation. Apple's end-side hardware will usher in major innovation in 25-27. Both software and hard boards have technology upgrades. It is recommended to focus on Pengding Holdings (002938.SZ) and Dongshan Precision (002384.SZ);

3) Automobile intelligence: The iteration of TSLFSD and the launch of RoboTaxi will further accelerate the evolution trend of electric vehicle intelligence and ADAS. This has led to a rapid increase in demand for automotive HDI, high-multi-layer boards, etc. It is recommended to focus on Shiyun Circuits (603920.SH), Jingwang Electronics (603228.SH), Shanghai Electric Power Co., Ltd. (002463.SZ), etc., which exceed expectations in the medium- to long-term performance and have a deep layout in automotive intelligence;

4) Autonomous and controllable: Focusing on the application prospects of domestic large models is expected to encourage a new round of computing power competition by domestic Internet vendors, superimposing upward flexibility in asset revaluation of domestic computing power chips in a context where mass production is imminent, such as Shennan Circuit (002916.SZ), Shengyi Technology (600183.SH), and Xingsen Technology (002436.SZ).

5) CCL: Optimistic about Shengyi Technology (600183.SH), which is progressing beyond expectations in AI computing power (S8/S9, PTFE), advanced sealing board substrates, and consumer electronics boards for customer A in the coming year, and is also concerned about Huazheng New Materials (603186.SH), South China New Materials (688519.SH), and Jiantao laminated boards (01888).

Risk warning: Macroeconomic sentiment has declined, trade frictions have intensified, demand for data centers falls short of expectations, and industry competition has intensified.