CMB Securities: Marginal improvement in the first quarter performance of consumer electronics companies, focusing on GPT-4o and Apple AI terminal innovation

According to the Zhitong Finance and Economics APP, CMB Securities released a research report stating that the consumer electronics industry chain's business climate has bottomed out and is rebounding. The Q1 terminal demand continues to weakly recover, with overall marginal improvement in company performance in the first quarter. Innovation such as AI integration new products and SmartEV is accelerating. Apple continues to focus on AI layout and accelerating innovation progress, emphasizing the upward valuation space of high-quality companies in the fruit chain this year. The Android chain focuses on the opportunities brought by AI innovation in the industry chain, seizing the opportunities under the industry recovery pace and trend of structural changes. Multi-modal models represented by GPT-4o have significantly upgraded practicality, and attention is recommended to the progress of AI edge application innovation. Advanced intelligent driving is accelerating landing, focusing on Huawei/Xiaomi automotive chain.

Terminal Business Climate and Innovation Tracking: Terminal demand continues weak recovery, focusing on the overall trend of AI edge innovation.

1) Mobile Phones: Android phones continue weak recovery, focusing on the improvement of GPT-4o multi-modal practicality driving edge innovation upgrade. Q1 global and domestic mobile phone shipments increased by single digits year-on-year, with domestic Android phone sales continuing to grow year-on-year in the first two weeks of April and May, in the midst of an industry warming cycle. The industry chain is expected to have low single-digit shipment growth in 2024. In terms of camps, the Android camp has healthy inventory and shows weak recovery. Attention is paid to the changes brought by Huawei's return. As for Apple, CMB Securities expects Q2 iPhone overall stocking to be good, with a low base last year, and is expected to maintain growth year-on-year. In terms of innovation, GPT-4o demonstrates more usable AI voice assistant functions on mobile phones/PCs, adding practical functions such as video interaction and emotion recognition, which is expected to further drive the upgrade of AI innovation on mobile phones and other edge devices. In addition, whether Apple will advance its AI layout at WWDC in June has attracted attention. Canalys predicts that AI phone shipments will account for 5% in 2024.

2) PC/Tablets: Demand shows weak recovery, with the new iPad Pro bringing many innovations such as AI chips/screens/appearance. Q1 PC/tablet shipments both recovered year-on-year, and the industry chain expects that the update cycle of AIPC and Windows will drive a moderate recovery of PC in 2024, and tablets are also expected to rebound. Apple's financial report indicates that iPad Q2 revenue will grow by double digits. Since the beginning of the year, AIPC has been intensively released, and the industry chain expects the main replacement cycle of AIPC to start in the second half of the year, with 60-80% of PCs compatible with AI functions by 2027. In terms of new products, the new iPad Pro is Apple's thinnest product, equipped with the new M4 chip for upgraded AI performance, and features a dual-layer series OLED screen technology and Pencil Pro to enhance the interactive experience.

3) Wearables: Demand continues to rebound, focusing on AirPods with added cameras and R&D projects integrating AI innovation. Q1 global TWS continued to rebound by +6% year-on-year to 6.5 million units, and IDC expects wearables to achieve further growth in 2024, with shipments expected to increase by +10.5% year-on-year to 560 million units, with wearable demand in emerging markets such as India still expected to be strong Many manufacturers plan to integrate generative AI into wearable devices. Recently, Apple's AirPods R&D project has attracted attention, with the possibility of adding a camera to collect surrounding information for enhancing AI functions.

4) XR: VR demand remains weak, and Apple's VisionPro is expected to be sold globally in the second quarter. Currently, VR demand is still sluggish, with sales declining year-on-year for 7 consecutive quarters. On the other hand, there is good demand for consumer-grade viewing and AR information prompts. Apple's VisionPro application ecosystem is continuously improving, with Cook stating that certain achievements have been made in the B-end. More than half of the top 100 companies globally have purchased VisionPro. CMB Securities predicts that VisionPro is expected to be listed globally in the second quarter. In terms of AR, attention can be paid to the release of new AR products from tech giants and their integration with AI, such as products from Meta/OpenAI/Google, and other manufacturers.

5) Smart Home: The trend of large-sized TVs continues, and Nintendo's next-generation console will be released before 25M3. Since the beginning of the year, demand for various categories of smart home products has continued to differentiate. The industry chain predicts that overall demand is expected to continue to recover this year. It is recommended to pay attention to the sales trends of home appliances in overseas markets. In the first quarter, TV shipments decreased by nearly 4% year-on-year, but the trend towards larger sizes led to a 2.3% increase in area. Shipments are expected to remain stable or slightly increase stimulated by major sports events. In the first quarter, smart speaker sales in China continued to decline year-on-year. Online sales of surveillance cameras in China saw a high year-on-year increase. Due to declining sales of PS5 and Switch entering the end of its lifecycle, game console sales in 24M4 declined year-on-year. Nintendo expects Switch sales to continue to decline from 24Q2 to 25Q1, but the successor product to Switch is expected to be released before 25M3.

6) Automotive: In April, the passenger car market saw a year-on-year increase but a month-on-month decrease, with mid-to-high-end autonomous driving becoming a focus of competition for car companies. In 24M4, national passenger car sales increased by 10.5% year-on-year but decreased by 10.5% month-on-month. Sales of new energy vehicles increased by 33.5% year-on-year but decreased by 3.7% month-on-month, with a market share of 36%. The year-on-year increase was mainly due to factors such as gradual market demand recovery and the release of new energy vehicles. Domestic new energy vehicle manufacturers had varying sales performances, with Li Auto and Aito ranking first and second in monthly sales among domestic new forces. In terms of policies, on April 12, the "Action Plan to Promote the Replacement of Consumer Goods with Old Ones" was released. Attention should be paid to the subsequent policy implementation and its impact on passenger car consumption. In terms of new cars, Xiaomi's SU7 had over 88,000 units locked in by April 30, with 7,100 units delivered in the first month and the 10,000th unit delivered on May 15. The target is to deliver at least 100,000 units by 2024. On April 23, Huawei's Aito new M5 was launched, and Enjoy S9 made its first appearance at the 2024 Beijing International Auto Show. Additionally, Li Auto L6 and Nio's second brand LeDao were launched on April 18 and May 15, respectively. In terms of intelligence, in April, Musk visited China, and Tesla met all 4 requirements for national automotive data security, accelerating the entry of FSD into China Industry Chain Tracking: Marginal improvement in Q1 reports, focusing on Apple AI, Huawei/Xiaomi new cars and new devices, PCB/CCL, etc.

1) Brand Merchants: Apple's hardware AI upgrade on the terminal side is accelerating, focusing on Huawei/Xiaomi's new devices and cars. Apple: Q1 performance slightly better than expected, expected low single-digit revenue growth in Q2, Apple's hardware AI upgrade on the terminal side is accelerating, Apple is very optimistic about its opportunities and advantages in generative AI (details in the text)；Huawei: Continuously focusing on Aito/IM Motors/XPeng's new cars, Pura70 and other new devices; Xiaomi: 24Q1 smartphone shipments increased significantly year-on-year, focusing on the follow-up production capacity of the SU7 new car; Transsion: Benefiting from the continued high prosperity of emerging markets downstream, Q1 revenue and profit continued to grow significantly year-on-year; Anker: Q1 performance continued to be outstanding, benefiting from the strong performance of its three major business lines, future focus on new product developments such as energy storage/security and terminal AI layout; YI Technology: Continuously improving profit quality in Q1, focusing on AI innovation integration in 2024, new products such as smart home/cleaning robots, and the growth of cloud platform business.

2) Complete Machine Assembly: Apple's leading companies in the chain performed well in Q1, focusing on the accelerating trend of AI in terminals such as PCs, smartphones, and MR. Looking at the monthly data of 6 leading OEM factories in Taiwan, the total revenue of the 24M4 complete machine factories was NT$ 898.87 billion, a year-on-year increase of +13.4% and a month-on-month increase of +6.8%, downstream demand continued to recover; companies like Pegatron, Wistron, and Compal are optimistic about the demand for AI terminals in 2024; in terms of domestic leading companies, benefiting from new product drives and their own strengths, Luxshare Precision and BYD Electronic's Q1 performance was outstanding, with a positive outlook for Q2.

3) Main Chips: Q1 revenue of domestic SoC companies improved year-on-year, overseas giants optimistic about the trend of AI in smartphones/PCs. Smartphones: Recovery in the Android market drove the increase in revenue for Qualcomm/MediaTek in 24Q1, Qualcomm's second-quarter performance guidance exceeded expectations, major manufacturers maintained a slight increase in global smartphone shipments for the full year 2024, in addition, generative AI is expected to become a key driver of increased demand for mobile applications in 2024. PCs: Revenue of major PC SoC companies increased year-on-year in 24Q1, Intel expects PC TAM for the full year 2024 to increase by a low single-digit percentage, AMD stated that AI applications will drive growth concentrated in 24H2. IoT: Domestic SoC companies saw a good year-on-year growth rate in 24Q1 due to a low base, focusing on industry recovery trends and progress in segmented tracks.

4) Optics: Mobile phone optics were in the traditional off-season in April, focusing on flagship phone optical innovations driving the second half of the year. Taiwanese optical manufacturers: Total revenue in 24M4 month-on-month +41%/month-on-month -2%, Largan Precision expects May shipments momentum to remain flat month-on-month, flagship phone lenses will be concentrated in 24H2; Sunny Optical: Mobile phone lens shipments in April increased by +6.4% year-on-year/month-on-month -9.8%, it is expected that an increase in market share of major clients in 2024 will help drive a +5% year-on-year increase in mobile phone lens shipments, with flat shipments of mobile camera modules in 2024 5) Display: In early May, the prices of 65-inch televisions and display panels continued to rise, and the new iPadPro adopted dual-layer series OLED technology. The supply structure of panels continued to optimize, with panel manufacturers adhering to production control and price adjustments. The prices of TV panels started to rise in March, with 55/65-inch prices surpassing last year's peak. In early May, 65-inch prices continued to rise, and display panel prices have been rising since March. Prices of some laptop panels started to rise in late April. In terms of innovation, Apple released its first OLED screen iPadPro, innovatively using dual-layer series OLED technology, merging and superimposing the light from two OLED panels, achieving a full-screen/HDR brightness of up to 1000/1600 nits. It is recommended to pay attention to the trend of mid-sized OLED applications.

6) Structure and Functional Components: Focus on medium to long-term innovative trends such as foldable screens, titanium alloys, microcrystalline glass, and heat dissipation materials. Metals: Following the Apple iPhone15Pro series, the Xiaomi 14 series special edition and Samsung S24Ultra all use titanium metal, with domestic suppliers such as BYD Electronics and Changying as the main players. New foldable screen products continue to be launched, with companies like Dongmu, Jingyan, and Tonglian having product layouts and customer positioning. Glass: Innovation and upgrades in microcrystalline glass materials represented by Huawei's second-generation Kunlun, Xiaomi's Longjing, Honor's Juxi, and Apple's super crystal ceramics may lead to more brand manufacturers upgrading in the glass sector in the future. Functional components: Focus on consumer terminal AI-driven innovation promoting the upgrade of heat dissipation materials and the increase in demand.

7) Charging/Connectivity: The rapid development of domestic car charging infrastructure, aided by AI applications, is driving the performance growth of major overseas manufacturers. Charging: The domestic charging infrastructure continues to grow rapidly, with an increase of 1.017 million units in China from January to April 2024, a year-on-year increase of +15.4%. The ratio of the increase in charging infrastructure to the increase in new energy vehicle domestic sales is 1:2.5 from January to April. Connectivity: Anfeno's 1Q 2024 revenue exceeded the upper limit of guidance, and total revenue in 2Q 2024 is expected to continue to grow year-on-year, with AI applications driving a double-digit growth in IT and digital communication business compared to the previous quarter. Taikoo's 1Q 2024 revenue met previous guidance, and 2Q 2024 revenue is expected to remain flat quarter-on-quarter, with the automotive business maintaining a long-term 4-6% excess growth rate expectation, and AI business doubling its revenue next year. Domestic Elelink Technology's 1Q 2024 performance significantly exceeded expectations, optimistic about the growth space of the automotive and consumer electronics business for the whole year.

8) RF/Antenna: With a higher year-on-year growth rate in Q1 due to a low base, attention is on the upgrade of mobile satellite communication functions and the progress of domestic LPAMiD leading products. Walsin's 1Q 2024 revenue was +55% year-on-year/-9% quarter-on-quarter, slightly better than the previous quarter's lower expectations. Gross margin and capacity utilization rate declined quarter-on-quarter in the off-season, and 2Q 2024 revenue is expected to grow in the low-teens percentage quarter-on-quarter. Qorvo's 1Q 2024 quarterly revenue met expectations, and factors such as destocking in June quarter will lead to a low point in gross margin, with gross margin starting to rise in the September quarter The domestic market industry inventory is at a normal level, benefiting from the low base of the same period last year and the impact of new product expansion. In 24Q1, the year-on-year performance growth of domestic industry leaders is generally high. It is recommended to pay attention to industry competition and new product progress. In terms of innovation, the Huawei Pura70 series is equipped with dual-satellite communication, supporting the transmission of image messages, leading the application of satellite communication technology on mobile phones.

9) Battery: In the short term, the prosperity is showing a continuous improvement trend, focusing on the terminal AI driving battery technology innovation and upgrade. Taiwanese consumer battery manufacturer 2443's monthly revenue in March was 15.53 billion, a year-on-year increase of +5.3% and a month-on-month increase of +6.7%. In terms of inventory, the year-on-year inventory of 24Q1 was -15.8% and the month-on-month was +2.7%, showing that the industry inventory pressure has been significantly relieved. China Merchants Securities believes that the current battery cell segment is showing a marginal improvement trend, the upstream battery raw material price reduction brings cost optimization, industry inventory has returned to a healthy level, coupled with AI empowering consumer terminal innovation continuously, is expected to drive demand recovery, promote the recovery of battery cell manufacturers' profitability, and silicon-carbon negative electrode technology is expected to be accelerated promoted, further improving battery energy density and capacity.

10) PCB: The overall industry capacity utilization rate is trending upwards, focusing on the AI computing power wave and the continuous improvement trend of HDI demand. Currently, the PCB industry chain capacity utilization rate has rebounded month-on-month, showing a sustained upward trend in prosperity. The sector as a whole presents a structural market and trend, with leading AI computing PCB hard board manufacturers such as Shanghai Electric, Shennan, Shengyi Electronics, and Sheng Hong continuing to attract market attention; HDI giant Huatong: Revenue in 24M4 was 5.86 billion, a year-on-year increase of +27% and a month-on-month increase of +7%. The company stated that the demand for HDI has increased due to demand from mobile phones/servers/automobiles/NB products/satellite communications, and its HDI capacity is relatively tight. Domestic PCB manufacturers have also indicated that their HDI capacity is currently running at full capacity; Capacity utilization rate: Overall capacity utilization rate of domestic manufacturers in April-May maintained an upward trend, mostly above 80%, with better visibility of downstream orders in 1-2 months, and Q2 capacity utilization rate is expected to increase month-on-month; Peng Ding Holdings: Revenue in April was 2.20 billion, a year-on-year increase of 52.2% and a month-on-month decrease of -2.3%, revenue performance significantly exceeded market expectations. In the short term, the company's Q2 performance may continue to improve, the company's structural optimization in A customer product business continues to stabilize gross profit margin, and A customer's Q2 mobile phone demand is stable, with new products launched in non-mobile phone areas, and orders continue to be introduced in car and AI server segments; Dongshan Precision: Q1 revenue was 7.75 billion, a year-on-year increase of +18.9% and a month-on-month decrease of -30.5%, net profit attributable to the parent company was 290 million, a year-on-year decrease of -38.7% and a month-on-month decrease of -54.2%, better than market pessimistic expectations. Q2 is expected to usher in a turning point in performance. Throughout the year, pay attention to the LED business reducing losses and the introduction of orders from core customers. The A+T long-term core strategy remains unchanged. The copper foil sector has entered an industry upswing channel, and Shengyi Technology's high-speed materials have made good progress with leading customers in the domestic and international computing power industry 11) Acoustics/Motors: The mobile optical solution brings innovation to motor applications, empowering traditional acoustics with AI, cameras, and other applications to provide a new experience. Huawei's Pura70's pop-up telescopic lens is driven by a stepper motor and gear transmission to achieve the lifting of key components; Apple, Xiaomi, Samsung, OPPO, Huawei, and others have launched smart glasses/TWS products with diversified acoustic solutions. In 24Q1, domestic manufacturers generally performed well, with ZWEEC Electric's 24Q1 performance exceeding expectations, optimistic about the long-term growth space of micro-drive systems in XR/automotive/humanoid robot fields. Shangsheng Electronics' 24Q1 revenue steadily increased, with net profit attributable to the parent company continuing to grow year-on-year. Rayson Technology's 23H2 performance met expectations, and it is expected that in 24, various aspects of the business such as acoustics/motors, optics, etc., will improve, with the consolidation of PSS expected to contribute to long-term performance growth.

12) Passive Components: In Q1, the performance of major domestic and foreign manufacturers generally improved year-on-year, focusing on the demand driven by automotive and AI applications. In 24Q1, overseas major manufacturers generally saw year-on-year revenue and net profit increases/decreases, with Murata/Kyocera/TDK expecting a year-on-year revenue increase of +3.6%/2.3%/0.1% and an operating profit increase of +39.2%/18.4%/4.1% for the next year (24Q2-25Q1). Kyocera stated that industry inventory adjustments are still ongoing, with demand expected to gradually recover from the September quarter onwards; major manufacturers generally expect electric vehicles to remain a major growth point in the next fiscal year, with a recovery in the smartphone and PC sectors, while industrial equipment is expected to remain weak. Domestically, in 24Q1, the revenue and net profit of leading manufacturers generally increased year-on-year, mainly benefiting from the recovery of downstream demand such as consumer electronics, improved capacity utilization rates, and the low base effect of the same period last year. Pay attention to the progress of new products and applications in new areas by domestic major manufacturers.

13) Equipment: The short-term outlook for 3C equipment is under pressure, waiting for the machine vision industry demand to bottom out and rebound. Downstream demand for consumer electronics, new energy photovoltaics, energy storage, etc., is sluggish, putting pressure on the short-term outlook for 3C equipment. However, the long-term growth logic of the industry and the trend of domestic substitution remain clear. AI is also expected to expand into the field of machine vision applications, with some institutions expecting the adjustment of the machine vision market to be nearing completion, and overseas leader Cognex's revenue is expected to recover with double-digit growth. Optotek's Q1 performance improved compared to the previous quarter, and the company expects a revenue growth of 10-30% in 24.

Investment Recommendations: Based on research frameworks and industry data tracking, CMB Securities believes that the consumer electronics industry chain has bottomed out and is rebounding, while industry innovation is accelerating. With leading companies in the industry chain such as terminal brands, chips, software applications, etc., jointly investing in AI technology, smart terminals are expected to usher in an AI innovation wave. The intelligentization of automobiles is in a rapid development stage, and advanced intelligent driving is rapidly being implemented.

1) Apple Chain: Apple's hardware AI upgrade on the terminal side is accelerating, actively seizing the opportunity to layout high-quality companies at low levels. CMB Securities expects that Q2 iPhone overall stocking is good, with a low base last year, it is expected to maintain growth year-on-year, and iPhone shipments in 24 are expected to remain relatively stable or only slightly decrease by single digits. In addition, non-iPhone products such as Mac, iPad, wearables, etc., are expected to grow year-on-year in 24 due to rapid destocking in the first half of 23, combined with VisionPro shipments To a certain extent, it can hedge against the decline of the iPhone, and CMB Securities believes that Apple's iPhone, wearables, and XR hardware innovations will usher in a great year in 2025-2026. CMB Securities recommends focusing on Apple's layout in generative AI. The current valuation of the domestic Apple chain is at a historical low, and many high-quality companies still have individual alpha.

2) Android Chain: Seize the opportunities under the industry's recovery pace, AI/optical innovations, and changes in the landscape. From the perspective of inventory cycles, this round of industry restocking is nearing its end. It is recommended to focus on opportunities brought by AI, optics, and other industry chain innovations. CMB Securities believe that AI layout will be a key factor in the growth divergence of Android chain companies in the next few years. In addition, pay attention to the sales trends of high-end Huawei phones, as well as the overseas market sales trends of Xiaomi, Transsion, and others.

3) SmartEV: The intelligentization of automobiles has entered a high-speed development stage, focusing on Huawei and Xiaomi's automotive chains. With the alleviation of the shortage of automotive chips, the SmartAito S7 and Aito M7 have been newly launched. CMB Securities expects that the sales volume of Huawei's Smart Selection models, including Aito and SmartAito, is expected to further break through. In addition, the Xiaomi SU7 has exceeded expectations in terms of hot sales after its launch, with over 10,000 deliveries in 43 days. It is recommended to pay attention to the progress of subsequent production capacity ramp-up and user reputation. CMB Securities are optimistic about the long-term trend in the automotive field due to ecological advantages. Finally, it is recommended to focus on excellent supply chain companies that benefit deeply from the intelligentization and electrification of automobiles, including Tier1.5, intelligent driving, intelligent cockpit, and the three-electric system.

4) XR: VisionPro is expected to be globally released in the second quarter, seize opportunities with high-quality companies in the industry chain. CMB Securities expects that Apple's VisionPro, to be released globally in the second quarter, will bring sector trends. It is recommended to focus on participating in VisionPro's exclusive assembly and deep vertical integration of components, the main camera suppliers, IPD pupillary distance adjustment module manufacturers, and metal structural component suppliers. In terms of AR, it is recommended to pay attention to the release of new products integrating AI from major technology companies.

5) Overseas Expansion: Focus on high-quality domestic brands expanding overseas. Domestic brand manufacturers have a competitive advantage in overseas markets due to the support of a complete domestic supply chain manufacturing system, grasping advantages such as channels, brands, operations, and products in overseas markets.

6) AI Applications: The practicality of AI multimodal models has been greatly upgraded, focusing on the trend of AI innovation at the edge. GPT-4o demonstrates more usable and practical functions on mobile phones/PCs; meanwhile, the Apple WWDC conference in June may also showcase Apple's AI-related layout, driving further upgrades in edge AI innovation. CMB Securities recommend focusing on: 1) Apple's progress in generative AI innovation, actively seizing opportunities for low-position layouts of high-quality companies in the Apple chain; 2) AI large models and application layouts on other brand ends; 3) GPT-4o's video interaction capabilities are expected to drive upgrades in terminal cameras, focusing on the optical chain, and more