The storage industry will be the key to the semiconductor industry’s overall value surge in 2024.
Since the second half of 2022, the entire semiconductor industry has begun to show marginal loosening, and in 2023, it entered a downward phase, experiencing approximately 5 quarters of cyclical decline. Historical data shows that the downward trend in the semiconductor industry generally lasts for 4-6 quarters. By the end of 2023, most of the supply chain inventory will be cleared, asset prices will stabilize after falling, and capacity expansion will significantly slow down. We judge that the bottom of the cycle is basically confirmed.
Looking ahead to 2024, the hardware innovations brought about by the generative AI technology revolution will become the main driving force. Microsoft is fully promoting AI to realize cloud business, and edge AI applications are accelerating significantly, with other cloud service providers following suit and increasing spending on computing infrastructure. AI applications are entering a period of comprehensive promotion, with consumer internet companies and enterprises entering the market, and computing power demand shifting from training large models to application inference. Bandwidth enhancement has become the key bottleneck for performance breakthroughs, driving HBM and memory iterations, leading to a resurgence in demand and technological innovation in the storage industry. Meanwhile, the threshold for inference chips is relatively lower, and the trend of domestic substitution will provide opportunities for domestic chip manufacturers.
Therefore, it can be expected that this year, we should see many AI smartphones and AIPC being launched one after another. The market will jointly promote AI related applications in both cloud and terminal dimensions, with the core being the combination of the two dimensions, where the cloud focuses on computing power for large models and support, while the terminal focuses more on localized and relatively private model acceleration, making this part a key focus this year.
How should the investment direction for the industry in 2024 be decided?
First, we judge that this year and next year, the major opportunities in the entire industry will be in the advanced process field of semiconductors. Specifically, the entire industrial chain of advanced manufacturing and advanced packaging in the advanced process field will become an important opportunity for industry development in the next two years. From a macro perspective, the rapid development of advanced processes will be the core direction for the entire industry this year and next. One important area is the Damascus process, especially in advanced processes, where the trend of etching technology is very obvious, and many domestic manufacturers are making breakthroughs in this direction. With the expansion of this part of capacity, it will have a significant impact on related industries. We have compiled the annual growth rate data of semiconductor front-end equipment from 2011 to 2021, where the etching segment has the highest growth rate.Therefore, if we are to make selective investments in the equipment field, etching equipment will be the main focus in the next two years, and we judge that the overall performance of corresponding targets will have significant elasticity this year.
The storage industry will be the key to the semiconductor industry’s overall value surge in 2024, and in the short term, we can focus on opportunities in the storage supporting industrial chain. In the storage field, we use 3D NAND technology, where etching is more important than photolithography in storage, especially as the number of layers continues to increase, the extremely high aspect ratio parameters are the core bottleneck affecting storage capacity expansion. Domestic manufacturers have already made significant breakthroughs in this field, so we are optimistic about future storage expansion and growth. Additionally, due to the development of artificial intelligence, CoWoS technology is becoming increasingly important. In 2023, there were some tight situations in capacity at the beginning of the year, one of the main reasons being the tight capacity of CoWoS. This technology integrates storage and chip computing parts, achieving high bandwidth and high-speed transmission performance. Therefore, in terms of storage, especially in HBM (High Bandwidth Memory), there is huge growth potential. Currently, there are no companies in China that can truly achieve HBM production, and this field is also the largest growth point for storage in AI servers.
We believe that starting in the first half of this year, the market size of server memory interface chips will see significant growth. At this point in time, a very clear and positive signal is that for the entire server-related industry, the market for DDR4 servers is beginning to transition to using DDR5 servers, and this trend is what we are currently observing. Specifically, in terms of shipment volume, shipments of DDR5 in 24Q1 have exceeded those of DDR4. Meanwhile, compared to DDR4, DDR5 memory modules have added 3 supporting chips based on RCD: SPD, TS, PMIC, which will increase the overall chip value, so during the iteration cycle of DDR5, we believe that the market size of server memory interface chips will see significant growth. Major overseas storage manufacturers have continuously exceeded expectations in 23Q3 and 23Q4, benefiting from the stabilization and recovery of consumer electronics and the hardware upgrades brought about by AI computing power, and have already welcomed a rebound. Domestic upstream supply chain manufacturers such as interface chips and EEPROM are expected to benefit significantly this year due to the overall industry recovery and product iteration trends.
Another area that needs to be focused on this year is advanced packaging technology. If we encounter bottlenecks in the process, we can achieve the integration of various chips through advanced packaging technology to achieve the required performance. The realization of ChipLet is based on the emergence of advanced packaging technology. Therefore, advanced packaging technology is also an important investment direction.In summary, whether it is advanced processes or advanced packaging, both are certain directions for semiconductor industry investment in the next two years. The successful mass production of advanced chips for Huawei’s mobile phones is a very positive signal for the domestic semiconductor industry chain. We believe that the entire semiconductor industry will also bring good returns to investors in the next two years.
What is the investment value of consumer electronics?
At this stage in the consumer electronics field, we judge that the focus should be on the domestic market. The entire industry is currently facing fierce competition, and many brands and manufacturers are facing survival tests, especially with the recovery of Huawei’s mobile terminal. This year, Huawei’s total sales are expected to increase significantly, which will bring tremendous competitive pressure to other domestic brands and manufacturers. So, how to win in this market? The key lies in innovation, as without innovation, it is difficult to attract consumers to purchase. Huawei has introduced many new technologies such as foldable phones and interconnectivity among devices, while also emphasizing pure domestic chips to attract consumers. However, we judge that the consumer electronics cycle for mobile phones has ended, and there are only some small opportunities at this stage. We believe that the entire consumer electronics market for mobile phones has gone through two phases. The first phase was from 2010 to 2013 or 2014, which was a phase dominated by sales growth. At that time, any company in Apple’s supply chain could easily double its stock price due to rapid market penetration and sales growth. Then, in 2014 and 2015, the industry faced challenges as sales growth stagnated. After that, around 2015, with the launch of large-screen Apple phones, phone prices naturally increased. In the early days, the cost of purchasing a phone was around four to five thousand yuan, while now it is generally around ten thousand yuan, roughly doubling in price. By 2018, the entire industry reached its peak, with both sales and prices hitting their highest points. Therefore, after 2018, opportunities in the consumer electronics industry became relatively limited, with mobile phones occupying a large part of the consumer electronics market.
In the next two years, we judge that the major opportunity points for mobile terminals will be in the foldable phone market, with future growth rates expected to continue exceeding 50%. This is primarily due to the decrease in costs. In the past, foldable phones cost as much as 10,000 yuan, while now the cheapest ones only cost five to six thousand yuan, and they are thinner and lighter, showing significant improvements compared to earlier products. Meanwhile, the largest panel manufacturer in China recently plans to invest hundreds of billions to build OLED production lines. This investment will not only affect the mobile phone market but will also extend to Mac and iPad fields, with iPad being the fastest, followed by Mac. This year, we may see the launch of foldable iPad, which will be an important industry trend worth close attention.Starting with mobile phones promoting OLED technology, then extending to tablets, and finally to PCs, forming a diversified product matrix, so the biggest opportunities in the next two years may lie in the screen technology field.
In 2023, the entire consumer electronics industry is not performing well, and we believe the main reason is the overall weak demand. We can see that the markets for mobile phones, laptops, and servers have all shown declines, with only AI servers and new energy vehicles performing well. Looking ahead to 2024, we can see signs of recovery growth in core electronic fields, including mobile phones, personal computers, and servers. The mobile phone market has been declining in recent years, with sales dropping to less than 1.2 billion units, having peaked at around 1.4 to 1.5 billion units. However, we judge that there will be signs of recovery this year, with an expected growth potential of over 3%.
The main incremental part this year, we judge, will be that cloud business and edge AI applications are the market’s certain trends, and the hardware innovations brought about by the AI technology revolution will become the main driving force. The demand for computing power is shifting from training large models to application inference, with bandwidth enhancement becoming the key bottleneck for performance breakthroughs, driving HBM and memory iterations, thus creating new significant investment opportunities in the storage industry. Many investors often mistakenly believe that the pull of AI computing power comes from training, but in fact, it comes more from inference. In other words, only at the inference end, when large model training is completed and real demand arises, can it produce a positive feedback effect on the entire industry.
Therefore, this year, the development of AI in terms of computing power depends on whether some eye-catching blockbuster applications appear on the application side. The latest industry dynamics for edge applications are that GPTs officially launched on January 11, having created over 3 million GPT applications, with the developer commercialization ecosystem initially taking shape, and subsequent blockbuster edge applications are likely to come from this. In terms of B-end scenarios, there is an accelerated evolution towards general AI Agent, with Microsoft releasing the Microsoft Copilot Studio based on a low-code development platform to create custom Copilot tools for enterprises. Compared to traditional products, AI PC provides an AI assistant that combines personal local data with edge large models; it can optimize and accelerate the running edge software in AI applications. The intelligent experience powered by AI is undergoing profound changes, significantly enhancing productivity efficiency for PCs. Entering the first half of this year, PCs are about to see a demand recovery. Whether in terms of computing power support from edge chips or iterative promotion at the application layer, PCs are the essential hardware that cannot be bypassed. Product upgrades and accelerated replacements will strengthen the trend over the next three years. Valuation increases will start first, and the fundamentals are expected to accelerate in the second half of the year, forming a double hit. AMD, Intel, and other major chip manufacturers, as well as terminal brands like Lenovo, are the most certain and first beneficiaries in this segment.
Is there a trend of consumer electronics in new energy vehicles?
Another key investment opportunity to focus on is in the new energy vehicle sector, where this year’s focus will be on silicon carbide and 800 volt battery technology. The power device industry is expected to see a recovery in growth in the second half of 2024, with silicon carbide MOS being a key layout direction for major domestic and foreign manufacturers. Domestic substrate technology levels have caught up with overseas leaders, and terminal module manufacturers are expected to benefit from the supply assurance and cost advantages brought by material localization. Domestic wafer production lines have also begun to be put into production and enter the verification stage, with silicon carbide MOS being the main opportunity for domestic power device manufacturers to achieve a leapfrog development in the next two years. On the other hand, intelligence is also an important trend, as various cutting-edge technologies are being applied to automobiles, so this field will also receive high attention this year. From the perspective of market size, this field is just starting, and many new business opportunities can be seen.
At this stage, we judge that the overall penetration of the 800 volt field in China is about 8 percent, and this year is also a time for accelerated upward movement, so the entire 800 volt platform should see corresponding models entering a dense release period this year. We believe that the penetration rate will increase by at least 4 percentage points, with future compound growth rates around 30%, making this year the first year of rapid growth. Therefore, this part of the entire industrial chain is a new investment opportunity in the next two years, with new energy vehicles showing a trend of consumer electronics, and the speed of product iteration significantly upgrading.
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