China Securities: AI is the largest driving force for the semiconductor industry Cloud-end looks at domestic replacement, terminal focuses on downstream growth

We learned from China Securities that their research report suggests that the current semiconductor cycle is still in an upward trend, with AI continuing to be strong. The report also mentions that the industrial sector has entered a recovery phase. Looking ahead, China Securities believes that AI will continue to be the largest driving force for the semiconductor industry's growth, on one hand, cloud-end AI demand will continue to grow, and on the other hand, terminal AI applications are expected to accelerate deployment, and Chinese semiconductor manufacturers may significantly benefit from this process in terms of their investment logic, which can be divided into two main lines: cloud-end looks at domestic replacement, and terminal focuses on downstream growth.

Main viewpoints:

AI is the largest driving force for the semiconductor industry.

The global semiconductor industry has entered an upward cycle since Q2 of last year, with overseas industries (especially in North America) maintaining high growth rates (around 20%) driven by AI infrastructure. China's semiconductor industry has benefited relatively weakly from AI, mainly due to the recovery of consumer electronics. In H1 of this year, the sales volume of China's industrial sector entered a recovery phase, with sales growth rates rebounding.

Cloud-end looks at domestic replacement: advanced process is the foundation for domestic algorithm power, accompanied by storage/equipment upgrades.

This year, overseas AI industries have continued to exceed expectations, while domestic big models have iterated continuously, with a narrowing gap between domestic and overseas industries. This has driven domestic algorithm demand growth. At the same time, domestic algorithm supply has increased, which is expected to drive the development of the entire domestic algorithm industry chain.

Terminal looks at downstream growth: applications accelerate deployment, leading to observable growth in demand, with a focus on three major hardware upgrades: main control, storage, and sensors.

The upgrade of big models is expected to accelerate AI application deployment, and the terminal will become a key area for growth. We believe that smart hardware such as AI phones/AIoT/smart driving will bring new demand for semiconductors, and recommend focusing on three major hardware upgrades: main control, storage, and sensors.

Industry integration, capital support:

1) Mergers and acquisitions are another important trend in the semiconductor industry. Domestic companies have begun to enter a period of consolidation. Many domestic semiconductor companies have small but beautiful characteristics, with a significant gap compared to overseas giants. As the industry develops, domestic semiconductor industries will open up a new era of mergers and acquisitions.

2) A To H listing wave: The financing environment for semiconductors has improved. In the A-share market, several major semiconductor companies have accelerated their IPO progress since Q2 this year. At the same time, domestic semiconductor companies are speeding up their listing process on the Hong Kong stock exchange, including non-listed semiconductor companies and A-share listed companies that will list on the Hong Kong stock exchange again (A To H). In total, 14 semiconductor companies have filed for IPO approval since Q4 last year. The overall trend is expected to continue, with high-quality semiconductor companies having more opportunities to accelerate their growth under policy and capital market support.