1. The upstream raw materials for high-frequency, high-speed copper-clad laminates are core materials affecting the performance of high-end PCB products.PCBs have a wide range of downstream applications and are known as the “mother of the electronics industry.”PCB, or printed circuit board, is referred to as the “mother of the electronics industry.” A PCB is a printed board that forms connections between points and prints components based on a predetermined design on a general substrate. Its main functions are: 1) to provide mechanical support for various components in the circuit; 2) to create electrical connections for various electronic components to form a predetermined circuit, acting as a relay for transmission; 3) to mark the installed components with symbols for easy insertion, inspection, and debugging. PCBs enable interconnections between electronic components, serving as a relay for transmission and supporting electronic components, thus being called the “mother of electronic products.”PCBs have a wide range of downstream applications, and the demand in high-growth sub-sectors is expected to increase rapidly in the future. The PCB market has gone through several development stages, each driven by different factors. Early drivers included PCs, feature phones, and smartphones, closely related to technological innovation and transformation. In the coming years, PCBs are expected to benefit from the demand driven by the rapid development of 5G and AI, particularly in servers. According to Prismark, in 2021, the demand for PCBs in the server/data storage and automotive sectors accounted for about 10% each, with projected CAGR for servers/automotive from 2021 to 2026 at 10%/7.5%, making them the fastest-growing sub-sectors for PCB downstream demand.5G and AI may be important drivers for future PCB market growth.The construction of 5G is entering a critical period, and the value of related PCBs is expected to increase significantly. The 14th Five-Year Plan is a key period for the large-scale application of 5G in China, focusing on promoting 5G applications in 15 industries, including new information consumption, industrial internet, vehicle networking, smart education, and smart cities. The value of PCBs in 5G macro base stations is about 3-4 times that of 4G, and the usage of PCBs per station will increase significantly. Additionally, due to the reduced coverage radius of high frequencies, more base stations are needed for the same coverage area, leading to increased PCB usage. The investment in 5G micro base stations will far exceed that of the 4G era. Furthermore, the investment in routers, switches, and IDC equipment required to carry larger bandwidth traffic will also increase, significantly boosting the demand for PCBs, especially high-end PCB products.The high demands of AI drive the usage of servers and switches, increasing the demand for high-performance PCBs. The rapid development of AI raises the requirements for computing power, and the hardware demand for servers and switches, which are core carriers and transmitters of computing power, is expected to increase. The rising requirements for computing power will continuously grow the demand for large-capacity, high-speed, high-performance cloud computing servers, leading to upgraded design requirements for PCBs, enhancing the application of high-layer, large-size, and high-speed materials.High-frequency, high-speed copper-clad laminates are core materials for high-performance PCB products.The demands for high performance in PCBs driven by 5G and AI have led to an increased demand for high-frequency, high-speed copper-clad laminates, with core focus on dielectric constant and dielectric loss. The development of high speed, high performance, and large capacity in servers has actually increased the demand for high-frequency, high-speed PCB products, and the key to achieving corresponding performance in high-frequency, high-speed PCBs lies in high-frequency, high-speed copper-clad laminates. High-frequency, high-speed copper-clad laminates are divided into two categories: high-speed copper-clad laminates, which have high signal transmission speeds, high characteristic impedance accuracy, low signal dispersion, and low loss, focusing mainly on dielectric loss (Df); and high-frequency copper-clad laminates, which operate at frequencies above 5GHz, used in ultra-high frequency fields, with ultra-low dielectric constants, focusing on dielectric constant (Dk) stability. From the perspective of downstream applications, the terminal applications of high-frequency, high-speed copper-clad laminates are in rapidly growing sub-sectors such as 5G, servers, switches, and new energy vehicles.2. Resins: The upward elasticity of high-frequency, high-speed demand benefits domestic enterprises.The Panasonic Megtron series is a major benchmark for high-frequency, high-speed copper-clad laminates.M6 and M7 are benchmark brands for high-frequency, high-speed copper-clad laminates. The Panasonic Megtron series serves as a grading benchmark in the field of high-speed copper-clad laminates, with different grades released over the years ranging from Megtron2 to Megtron8 (abbreviated as “M2,” “M8,” etc.). Different loss levels of CCL boards correspond to different uses, with M2 and M4 suitable for high-speed data transmission, servers, and routers; M6 and M7 can be used for communication infrastructure and supercomputing, being renowned benchmark brands of thermosetting high-frequency, high-speed copper-clad laminates, with Df values ranging from 0.002 to 0.005 and less than 0.002, and Dk values ranging from 3.4 to 3.6; M8 has the lowest loss, being the industry’s low transmission loss multilayer substrate material, suitable for high-speed communication network infrastructure equipment (routers, switches, etc.), which has not yet reached mass production.PPO resin has excellent comprehensive performance, suitable for high-frequency, high-speed copper-clad laminates.Among the resins used in high-frequency, high-speed copper-clad laminates, PPO exhibits superior comprehensive performance. Compared to traditional epoxy resins (EP) used in copper-clad laminates, polytetrafluoroethylene (PTFE) and polyphenylene oxide (PPO) have better dielectric properties, but the poor processing performance of PTFE limits its extensive use in copper-clad laminates. In contrast, PPO has advantages in the field of high-frequency, high-speed copper-clad laminates, including: 1) excellent dielectric characteristics: dielectric constant (Dk) as low as 2.4, dielectric loss (Df) as low as 0.001; 2) excellent heat resistance; 3) good water resistance; 4) good mechanical strength and dimensional stability.Electronic-grade PPO needs to be modified based on bulk products.Polymer PPO is difficult to meet the requirements for high-speed copper-clad laminates. PPO is a high-temperature resistant, non-crystalline thermoplastic, generally obtained by the oxidative coupling of 2,6-dimethylphenol. PPO resin has low dielectric constant and dielectric loss, and can maintain stability over a wide range of temperatures and frequencies, but pure PPO has a high molecular weight, high melting temperature, and high melt viscosity, making thermoplastic processing very difficult; it also has high solution viscosity and poor permeability, and is not resistant to certain organic solvents, making it difficult to meet the requirements for copper-clad laminates. Therefore, it needs to be modified or converted into thermosetting resin to impart new properties and good processing performance.PCIe 5.0 upgrade accelerates, raising resin material requirements.The PCIe 5.0 standard is advancing, raising the grade requirements for copper-clad laminate materials. PCIe (Peripheral Component Interconnect Express) is a high-speed serial computer expansion bus standard proposed by Intel in 2001. If hardware is likened to a city, the bus is like a highway, an important means of connecting multiple hardware. Different roads have different widths and maximum speeds, and corresponding to highways, PCIe also has different specifications, with transmission rates (maximum speed limits) and bandwidth (road width) being core performances of the PCIe bus. Common PCIe interfaces mainly come in four sizes: X1, X4, X8, and X16, with different maximum bandwidths for each size slot. The PCIe 5.0 standard was released in 2019, achieving a signal rate of 32GT/s, with X16 bandwidth (bidirectional) increased to 128GB/s, better meeting the throughput requirements of high-performance devices. Generally, the higher the signal frequency, the greater the PCB transmission loss, and the material requirements for server PCBs will also increase. In this context, higher requirements for copper-clad laminate material grades are proposed.Increased computing power demand leads to a shortage of AI chip supply.The popularity of ChatGPT has rapidly driven the demand for AI chips, leading to a shortage of NVIDIA GPUs. Shortly after the launch of ChatGPT, it became a global sensation, with increasing user visits driving a surge in computing power demand. According to estimates from OpenAI’s training cluster model, the 174.6 billion parameter GPT-3 model requires about 3000-5000 A100 GPUs. In terms of inference, assuming a single A100 GPU takes 350ms to output a single word, if the daily number of customers accessing ChatGPT is 20 million, with each customer asking the ChatGPT application 10 times a day, requiring 50 words per response, the daily GPU computation time consumption would be approximately 970,000 hours, corresponding to a GPU demand of about 41,000 units. Currently, companies like Microsoft and OpenAI are consuming a large number of GPUs for AI inference, and the supply of NVIDIA GPU products remains tight. We believe that the emergence of new AI applications like ChatGPT will bring enormous computing power demand, with computing power chips benefiting as the core underlying soil.AI servers consume more resin than ordinary servers.The amount of PPO resin consumed by a single AI server is higher than that of an ordinary server. Compared to ordinary servers, AI servers have added GPU acceleration cards, which will drive an increase in resin usage in two ways: 1) Increased PCB layers; AI server PCBs generally have 20-28 layers, while PCIe 5.0 servers generally have 16-20 layers, and ordinary servers have 12-16 layers. We take the median of the corresponding PCB layers, assuming that the PCB layers for AI server GPU, CPU motherboards, and PCIe 5.0 server CPU motherboards are approximately 24 layers, 18 layers, and 18 layers, respectively (corresponding to prepreg layers of 23, 17, and 17). 2) Increased PCB area; the addition of GPU modules means that AI servers require larger mainboards, driving an overall increase in PCB area. According to the patent description from Nord New Materials, it generally takes about 15-50g of PPO resin to manufacture a single prepreg, and considering the larger area of AI servers, we cautiously estimate that the PCB single-layer consumption for AI server GPU, CPU motherboards, and PCIe 5.0 server CPU motherboards is approximately 40g, 40g, and 20g, respectively. In summary, we estimate that the PPO consumption for a single AI server and a PCIe 5.0 ordinary server is approximately 1.60kg and 0.34kg, respectively.The next 1-2 years may be a critical positioning period for domestic resin companies.The next 1-2 years may be a key positioning period for electronic-grade PPO companies. SABIC is currently the main supplier of electronic-grade PPO resin globally. In 2007, SABIC acquired GE Plastics and its PPO-related business, and in 2012 launched electronic PPO resin SA9000, suitable for PCB laminates and copper-clad laminates. The certification barrier for PPO resin is high, requiring manufacturers to pass triple certifications from downstream CCL, PCB, and terminal server manufacturers, with the entire certification cycle taking 1-2 years. Therefore, we judge that the next two years will be a window period for electronic-grade PPO companies to position themselves. As new demand is gradually released, domestic companies are beginning to layout, with Shengquan Group starting PPO project research and development in 2019, completing pilot tests in 2020, and being the first to obtain certification from Company H. In 2021, they built an industrial production facility with an annual capacity of 300 tons; a new 1000-ton capacity is expected to be completed and put into production in the first quarter of 2024; Hebei Jianxin has a nominal capacity of 1000 tons, with progress relatively leading among domestic companies; additionally, Shandong Xingshun and Tongyu New Materials also have planned capacities.3. Electronic-grade silicon micro powder: Adapting to high-end copper-clad laminates, computing power upgrades drive high-end demand.Electronic-grade silicon micro powder is an excellent filler, highly compatible with high-frequency, high-speed copper-clad laminates.Silicon micro powder is a functional filler with excellent performance, with higher quality products aimed at electronic-grade applications. Silicon micro powder is a silica powder material processed from natural quartz or fused quartz through a series of processes such as crushing and screening. Silicon micro powder is mainly used as a functional filler and in organic polymer composites, which can reduce the production costs of polymer materials while improving the strength, rigidity, insulation, flame retardancy, and corrosion resistance of composite materials, enhancing the overall performance of the materials. Silicon micro powder is targeted at different downstream demand fields based on different quality grades, such as ordinary-grade silicon micro powder mainly used as fillers for potting materials, metal casting, coatings, etc., while higher quality, more difficult-to-produce electronic-grade silicon micro powder can be used in integrated circuits and electronic component encapsulation materials.Silicon micro powder, as a functional filler, is highly compatible with high-frequency, high-speed copper-clad laminates. As a functional filler, silicon micro powder has good dielectric loss, dielectric constant, and linear expansion coefficient, matching the technical requirements of high-frequency, high-speed copper-clad laminates, and is widely adopted by copper-clad laminate manufacturers to further fine-tune the dielectric constant of high-frequency, high-speed copper-clad laminates, reduce the linear expansion coefficient, and improve dimensional stability. High-frequency, high-speed copper-clad laminates mainly use fused silicon micro powder and spherical silicon micro powder, with particle sizes at the sub-micron and micron levels, and matching the Dk and Df characteristics of silicon micro powder according to the performance requirements of copper-clad laminates.By 2025, global demand for silicon micro powder for rigid CCL/high-end CCL is expected to reach 27/12 tons.High-frequency, high-speed copper-clad laminates and packaging substrates are expected to become the main drivers of global copper-clad laminate demand growth. According to Prismark, the demand for consumer electronics in 2022 was weak, affecting the upstream CCL materials, with global sales of rigid copper-clad laminates reaching 660 million square meters, a year-on-year decrease of 13%; however, driven by 5G and AI, the demand for high-end servers has increased, driving the demand for high-frequency, high-speed copper-clad laminates, leading to a 3% growth in global sales of special rigid copper-clad laminates (high-frequency, high-speed copper-clad laminates, packaging substrates, etc.).By 2025, global demand for silicon micro powder for rigid copper-clad laminates is expected to reach 27 tons, with over 40% for high-end CCL demand. The demand for silicon micro powder driven by server upgrades related to the AI wave is estimated at 3493 tons. Assuming that the global sales growth rates for rigid copper-clad laminates/packaging substrates/high-frequency, high-speed copper-clad laminates from 2023 to 2025 are 3%/5%/10%; and the filling rates of silicon micro powder in ordinary copper-clad laminates/high-end copper-clad laminates are 15%/30%; we estimate that by 2025, global demand for silicon micro powder for CCL is expected to reach 27.2 tons, with demand for three categories of special rigid CCL silicon micro powder expected to reach 12.1 tons, including packaging substrates, RF/microwave copper-clad laminates, and high-speed digital copper-clad laminates expected to be 2.0, 0.8, and 9.3 tons, respectively. Additionally, based on previous calculations related to PPO resin, assuming a 60% filling rate of silicon micro powder in resin, we expect that by 2025, the demand for LowDf spherical silicon driven by server upgrades related to the AI wave is expected to reach 3493 tons.By 2025, demand for silicon micro powder for traditional/advanced packaging is expected to reach 33/4 tons.By 2025, advanced packaging is expected to account for 50%, contributing significantly to the packaging market’s growth. The high requirements for computing power and storage from 5G and AI will lead to broader applications of advanced packaging with higher added value. According to GZSIA’s forecast, by 2025, the global market size for traditional/advanced packaging is expected to be $47.7 billion/$47.5 billion, with advanced packaging achieving a 50% share. At the same time, the high requirements for storage in AI servers will drive the growth of HBM demand, with the market size for 3D stacked packaging expected to achieve a CAGR of 24% from 2020 to 2026, leading the advanced packaging market. The granular encapsulation materials (GMC) used in HBM have high requirements for filler selection, including particle size and Lowα, driving the demand for high-end silicon micro powder and other fillers.By 2025, global demand for silicon micro powder for packaging is expected to reach 370,000 tons, with demand for advanced packaging silicon micro powder expected to approach 40,000 tons. We estimate that by 2025, global demand for silicon micro powder for packaging is expected to reach 367,000 tons, with demand for traditional packaging at 330,000 tons and advanced packaging at 36,000 tons. From a demand perspective, advanced packaging accounts for about 10% of the overall demand, but considering the high performance requirements for advanced packaging silicon micro powder, the price of high-end products is much higher than that of ordinary products, leading to a higher actual value share.4. Key Company AnalysisShengquan Group: A leader in synthetic resins, with biomass chemicals and hard carbon contributing to new growth.The synthetic resin business is stable, with biomass chemicals and hard carbon contributing to incremental growth. Shengquan Group is a leader in the synthetic resin and biomass chemical industry, with phenolic resin production capacity reaching 650,000 tons and furan resin production capacity reaching 120,000 tons, both ranking first in China and among the top in the world. In 2022, the company achieved sales revenue of 9.6 billion yuan and a net profit of 700 million yuan. The company’s integrated biomass refining project in Daqing has been fully put into production, efficiently purifying and utilizing the three main components of crop waste straw: hemicellulose, lignin, and cellulose, while extending the industrial chain to new energy sodium battery anode materials and biomass methanol. In November 2022, the company released a private placement proposal to raise 1 billion yuan, with a placement price of 14.26 yuan/share, fully subscribed by the actual controller Tang Diyuan.Dongcai Technology: A leading platform for film materials, with significant growth in electronic materials.The company has a rich product matrix of film materials, with a wide range of downstream application scenarios. The company has been deeply engaged in the insulation materials field for many years, continuously expanding its product matrix with advanced process reserves, now forming a material product matrix mainly consisting of new energy materials, optical films, and electronic resins, corresponding to emerging growth tracks such as photovoltaic power generation, new energy vehicles, and ultra-high voltage, as well as high-precision industries such as integrated circuits and aerospace. In recent years, the company’s performance has consistently demonstrated growth, although weak demand has affected the performance in the first half of 2023. From 2016 to 2022, the company’s revenue CAGR was 13.8%, and net profit CAGR was 46.7%, showing significant growth in profitability. From 2019 to 2022, as the company optimized its product structure and demand for new energy and ultra-high voltage surged, along with the accelerated process of domestic enterprise localization and cost advantages, the company’s revenue and net profit began to grow rapidly. However, since the beginning of 2023, some major downstream sectors, such as consumer electronics, have been in a destocking cycle, affecting the demand for the company’s products and product prices, with the company achieving revenue of 1.83 billion yuan in the first half of 2023, a year-on-year decrease of 0.3%; net profit of 220 million yuan, a year-on-year decrease of 16.0%; and non-recurring profit of 120 million yuan, a year-on-year decrease of 32.4%.Lianrui New Materials: A leading domestic silicon micro powder enterprise, with a continuous increase in the proportion of high-end products.The company has experienced rapid growth in revenue and net profit, with five-year CAGRs of 25.7% and 34.8%, respectively. In 2022, the company achieved revenue of 660 million yuan, a year-on-year increase of 6.0%, with a five-year CAGR of +25.7%; net profit was 190 million yuan, a year-on-year increase of 8.9%, with a five-year CAGR of +34.8%. The company’s revenue and performance growth is driven by the rapid growth of the electronic information industry, such as 5G and automotive electronics, while the significant effect of “domestic substitution” for higher-performing spherical silicon micro powder has become the main driving force for the company’s revenue growth. Additionally, with the further release of production capacity from fundraising projects and the trial operation of the electronic-grade new functional materials project by its wholly-owned subsidiary in the fourth quarter of 2021, the production capacity and output of the company’s core products continue to grow.Spherical silicon micro powder has become the company’s core profit product, with rapid growth in the contribution of spherical alumina powder. The sales revenue of the company’s silicon micro powder products continues to rise, with the sales revenue growth of spherical silicon micro powder being the fastest, with its revenue share increasing from 13.1% in 2016 to 53.5% in 2022, and its gross profit share increasing from 6.6% in 2016 to 58.8% in 2022. With the launch of new products of alumina powder with good thermal conductivity, the revenue share of the company’s other products has increased from 0.2% in 2016 to 11.3% in 2022, and the gross profit contribution has increased from 0.2% in 2016 to 9.4% in 2022.Report produced by: Zhongtai Securities, Sun Ying, Liu Yinan, Liu Mingzheng