Northeast Securities: The turning point of AI innovation on the terminal side has arrived, optimistic about the prosperity of the Apple supply chain

According to the financial news app Zhitong Finance, Northeast Securities released a research report stating that smartphones are perfectly suited for the popularization of AI on the terminal side among all terminal devices, and meet all hardware requirements for AI distribution, with obvious advantages in terminal deployment. Currently, leading smartphone companies at home and abroad are actively laying out AI smartphones. Although Apple (AAPL.US) has not directly released an AI smartphone yet, it has unveiled a brand-new personalized intelligent system, AppleIntelligence, at the 2024 WWDC. To achieve true terminal-side intelligence, AI smartphones need to integrate large models with operating systems, break the data fragmentation of individual apps, and build an AI ecosystem that connects to third-party apps. In addition, consumers still have a strong demand for innovative AI smartphones, and the mass production of AI smartphones with upgraded experiences is worth looking forward to.

Smartphones have obvious advantages in AI deployment on the terminal side, perfectly meeting the requirements for popularization and hardware. Since the emergence of GPT, the development of AI on the cloud side and the terminal side has been uneven, with the landing of the terminal side significantly lagging behind the development of the cloud side. The high investment of large model companies has not yet completed the commercial loop, urgently requiring AI application innovation. The landing of large models on the terminal side can help companies quickly seize market share, establish user base, and create conditions for further commercialization and monetization. Smartphones are perfectly suited for the popularization of AI on the terminal side among all terminal devices and meet all hardware requirements for AI distribution, with obvious advantages in terminal deployment.

Apple intensifies its efforts in AI, leading the way in achieving substantial innovation breakthroughs. Currently, international smartphone leaders such as Apple, Samsung, Google, as well as domestic smartphone leading companies like Huawei, Honor, Xiaomi, OPPO, and vivo are actively laying out AI smartphones. Although their development strategies vary, maintaining a competitive advantage through substantial investments in hardware and software is an industry consensus. Apple, for example, has not directly released an AI smartphone yet, but it unveiled a brand-new personalized intelligent system, AppleIntelligence, at the 2024 WWDC. Apple's large model can combine users' personal data to perform operations across applications to complete complex tasks as needed. On July 29th, Apple launched the AI feature test version, opening up a new experience of AppleIntelligence & Siri functions.

The accelerated integration of large models and operating systems paves the way for the gradual formation of the AI ecosystem. From chain thinking to cumulative reasoning, the problem-solving ability and practical value of large models continue to enhance. The integration of large models with operating systems in terminal deployment has become a technological trend. For AI smartphones to complete complex tasks across applications and enable AI assistants to achieve true terminal-side intelligence, it is necessary to connect third-party applications, break the data fragmentation of individual apps, and build an AI ecosystem that connects to third-party apps.

Consumer interest is growing, and the mass production of AI smartphones is worth looking forward to. The Canalys Consumer AI Preference Index shows that consumer interest in AI features on smartphones is increasing. In January 2024, Samsung released the Galaxy S24 series smartphones, which incorporate a Galaxy AI experience that integrates local and cloud AI, attracting market attention. According to Canalys, the shipment volume of the Galaxy S24 series in Q1 2024 reached 13.5 million units, a year-on-year increase of +35% compared to the previous generation Northeast Securities believes that consumers still have a strong demand for upgrading to AI smartphones with innovative features, and the mass production of AI smartphones with enhanced user experience is worth looking forward to.

LLM brings performance pressure, which may drive a new wave of smartphone upgrades. The performance of AI large models is largely determined by the number of parameters, and models with larger parameter levels impose higher requirements on smartphone hardware configurations. Although Apple has optimized some software and hardware, it can only support iPhone 15 Pro and above models. Performance pressure may create conditions for a new wave of smartphone upgrades.

Northeast Securities believes that the significant substantive innovation of Apple Intelligence, combined with the performance pressure brought by large models on the client side, is expected to drive a new wave of iPhone upgrades. It is recommended to focus on the core track of consumer electronics and the Apple industry chain.

Related targets: 1) Complete machine assembly: Luxshare Precision, Lens Technology; 2) Components: Lingyi Intelligent Manufacturing; 3) FPC/PCB: Pengding Holdings, Dongshan Precision; 4) Battery: Xinwanda; 5) Die-cutting: Hengmingda.

Risk warning: Downstream demand falls short of expectations; AI progress falls short of expectations; intensified industry competition