THIS MATERIAL IS A MARKETING COMMUNICATION.
THE PURPOSE OF MENTIONING SECURITIES ARE ILLUSTRATIONS FOR THE MARKET OR INDUSTRY COMMENTARY ONLY
Monthly Commentary on Key Themes – July 2024
China and Asia Semiconductor
Industry Update
- SMIC 1Q results better than expected, China domestic foundry gradually recover: 1Q24 Rev of US$1.75bn (+4% QoQ) and GM of 13.7% were higher than guidance. 2Q24 revenues to grow 5%~7% QoQ, ahead of street. 2Q24 GM is guided at 9%~11% (vs. 13.7% in 1Q24), trending down on increasing depreciation. Management expects full year revenue rate to exceed industry growth (project 8% YoY growth for mature foundry), street at 10% YoY growth for FY24.1
Capacity increased to 814.5k wpm (8'' equivalent) by 1Q24, vs. 805.5k wpm in 4Q23; UT rates at 80.8%, vs. 76.8% in 4Q23. Management expects CAPEX to peak in 2024/25, and think significant capacity expansion is unlikely at the mature node even amid supply chain decoupling when UTR is too low. SMIC is adding 60k wpm this year, with 7.5bn USD CAPEX.2 - Hua Hong announced 1Q results, and investors look for analog demand to bottom out: Hua Hong guided for 2Q24 revenue of US$470-500mn (up 2-9% Q/Q), GPM 6-10%. Utilization is better sequentially thanks to sustained demand from CIS (capacity full throughout the year) and PMIC. Investors turn more positive on the stock given the relatively lower channel inventory for domestic analog suppliers.3
Stock Comments
- SMIC (+7.02%): Solid 1Q results and 2Q guidance drive the stock higher. 2Q24 revenues to grow 5%~7% QoQ, ahead of street. Investors look to buy the cycle recovery as demand gradually picks up across various downstream applications.
- TongFu Microelectronics (+9.49%): Packaging demand started to recover as the company reported solid 1Q24 results, and revenue grew 14% YoY. The company is acquiring KYEC’s China capacity which covers logic, memory and analog applications. The acquisition will help Tongfu increase its market share in the China market.4
Preview
Increasing AI adoption in the data centre and increasing penetration of AI at the edge and on-device will be the key enabler of next upcycle semiconductor as AI-enabled devices have much higher semi-content. Currently we are still in the process of cycle recovery as both stocks and earnings are below previous peak. We expect volume growth in end devices to drive broad-based semiconductor cycle recovery in 2024. 5
China Robotics and AI ETF
Industry Update:
Domestic industrial automation demand recovery remains sluggish in June. The order recovery in some traditional industries was sustained. Consumption-related downstream export demand was relatively solid but softened on a mom basis. Leading domestic companies IA orders grew slightly YoY in June, dragged by new energy industries, but were continuously gaining market share from foreign brands.
Tesla’s new generation of humanoid robot will be launched at the end of this year,6 which may speed up the growth of the global humanoid robotics market in the coming years. Tesla’s robot is leading in software and hardware integration, cost control and commercialization. Company mentioned recently that the new robot is working at the production line and being internal tested. We may expect more followers coming out after Tesla proves the mature production and manufacturing system.
Stock Comments
Zhongji Innolight (300308 CH)
1Q24 net income surged 304% YoY to Rmb1.0bn, 29% above street, thanks to strong 164% YoY revenue growth to Rmb4.8bn(26% ahead of street consensus), and 3.2ppts YoY(-2.6ppts QoQ) gross margin expansion in 1Q24 to 32.8%. During earnings call, management expected 800G ramp to accelerate sequentially and QoQ margin expansion ahead on better product mix, higher yield and cost-down. We didn’t see any fundamentals worsening in the last month. Company remains on the growth trajectory.
Nari Technology (600406 CH)
China posted the announcement to accelerate UHV lines construction in June, for which Nari is one of the key beneficiaries. Company’s new orders YTD beat expectations at 12%, vs revenue guidance of 8.6% this year. Distribution grid and digitalization capex are likely to ramp up with NEA’ latest policies.
Beijing Kingsoft Office Software (688111 CH)
The company provided preview for its upcoming quarterly results. Overall tune remained bearish with a potential downward revision of revenue and earnings, due to weak customer spending amid a continuous macro headwinds.
Preview
China industrial automation market has bottomed, though we are still not seeing any signals of out. The drag from new energy sectors are much more severe than expected and will likely last longer. On the bright side, first, demand recovery from traditional industries are better than expected. Second, exporting is accelerating despite at the very early stage and on a low base. Last but not the least, local companies are proactively optimizing their product mix and penetrating to new customers or existing customers’ new product lines, gaining market share from foreign brands, which partially offset the negative impact on sales and profits due to demand slowdown. We anticipate the L-shape recovery may continue in 3Q24.
Humanoid robot has been a key AI application trend. According to Macquarie’s recent estimates, global sales volume for humanoid robots to reach 9.4 million units by 2035E with a CAGR of 69% over 2025-2035E and market size to reach US$209bn with a CAGR of 50% over the same time. 7 Market has been doubtful on the on-the-ground presence of AI in real industrial applications. Should Tesla prove their products effectiveness in the manufacturing lines, we’ll see a reliable way for commercialization and monetization in China in the foreseeable future.
China Electric Vehicle and Battery
Industry Update:
- Solid June EV sales; EV penetration on the rise: According to CPCA, June passenger NEV wholesale volume reached 970k, +28% YoY and +8% MoM.8 Based on the announcements of individual auto brands, BYD reported June NEV sales of 342k units, +35% YoY, back to the historical peak monthly sales level in Dec 2023, driven mainly by solid demand for the DM-i 5.0, (Qin L/Seal 06) and promotions on the DM-i 4.0/Denza. 9 Other major EV brands recorded robust growth, with NIO (+98% YoY) registering record delivers of 21,209 units in June, and Li Auto seeing re-acceleration in growth (+47% YoY). (for reference only, abovementioned stocks are not necessarily in the constituent list of the ETF). Based on insurance registration, new energy vehicle (NEV) penetration was 44% in the last week of June. 10
- Xiaomi and Huawei maintain strong momentum: Xiaomi delivered 11.6k units of SU7 in June 2024,11+34% MoM. Xiaomi will continue to ramp up capacity and will accelerate delivery in July. 12 Huawei AITO M9 total order exceeded 100k units 6 months after launches, AITO M7 Ultra delivery reached 20k units 1 month after launches.13
- EV Battery sales grew by 2% MoM to 56 GWh in May, and ESS battery sales grew by 18% MoM to 22 GWh. Exports for EV batteries increased to 10 GWh and ESS batteries exports rose to 4.0 GWh in May.14 May EV battery installations reached 40GWh in May, +41% YoY. CATL reported 43% market share in domestic installations in May, +2ppts YoY, and BYD share was 29%.
- EU tariff: On 12 June, European Commission disclosed the level of provisional countervailing duties on China BEV imports. Additional duties are applied to China EV brands on top of existing 10% tariff, and individual additional duties for three sampled Chinese EV producers BYD, Geely and SAIC will be 17.4%, 20% and 38.1%, respectively. The new tariff is effective on 4 July.
- Battery material costs further declined in June: China’s spot lithium carbonate price declined by 12% MoM to around RMB 93 k/t at the end of June. 15 Battery materials prices have decreased by over 80% from its peak in 2022, supporting the continued cost optimization for battery makers and EV manufacturers.
Stock Comments
BYD (002594.CH)
BYD’s share price was up 10% in June. BYD launched Qin L and Seal 06, powered by DM-i 5, at the end of May, and recorded strong demand in June. EU’s announcement on 17.4% additional tariff on BYD export has been expected by the market, and we note that the incremental tariff is targeting BEV (Battery Electric Vehicle), but does not include PHEV (Plug-in Hybrid Electric Vehicle). This could create opportunity for BYD’s DM-i technology powered PHEVs to capture market, as its SEAL U DM-i is set to launch in Europe in 3Q24
Preview
We remain positive on the long term growth potential for EV and battery value chain, along with the upward EV penetration trajectory. Domestic old car replacement demand and export sales should support China’s resilient auto momentum and benefit leading domestic brands. We expect the China auto market to stay competitive in 2024 with strong new product line-up and technology innovations from leading EV and battery brands, and new entrants such as Xiaomi. Geopolitical tensions remain the key risks, but China EV models will still remain competitive under new tariff landscape thanks to its cost advantages. Localized production will be the longer term solution for Chinese brands. Recent signs of battery inventory cycle bottoming out after destocking last year implies a normalized industry landscape that could lead to a better margin profile for battery industry leaders.
China Clean Energy
Industry update
- Solar – Polysilicon prices further declined: Solar polysilicon prices were Rmb39/kg by the end of June16, further decreased by over 5% compared to one month ago, implying that most providers are cash-cost loss making. Polysilicon production is expected to fall by 18% MoM in June as more capacity is going into overhaul, potentially leading to price stabilization.17 Module prices remain weak, with module maker’s utilization rates increased in June. Solar module and inverter export volume recorded mild MoM improvement in May, suggesting recovering demand in Europe.
- Positive policy for Solar supply-side control: In June, China National Energy Administration's Renewable Energy Department reiterated its support for the healthy development of the solar industry. Regulator aims to guide the healthy capacity expansion for solar industry and improve technology innovation ability with enhanced industry standard. The exit of excessive capacity and more disciplined capacity expansion should support profitability improvement for major players.
- Grid and power installation – Solid wind and solar installations growth; Grid investments accelerating: China’s Jan-May 2024 wind installations grew+21% YoY while solar installations expanded +29% YoY over the same period. In Jan-May 2024, the electricity grid spending in China reached Rmb170.3bn. +22% YoY.18 Action Plan for Energy Conservation and Carbon Reduction during 2024-25 issued in May also promotes the acceleration in construction of ultra-high-voltage (UHV) transmission lines and grid system upgrades to lower renewable curtailment,19 which bodes well for industry development.
Stock Comments
China Yangtze Power (600900 CH)
Recorded 9% total returns in June. Benefiting from the strong hydropower resources, Yangtze Power reported 2Q24 power generation growth of +43% YoY to 67.9bn KWh. In addition, July water inflow in Three Gorges remained strong, implying solid momentum of hydropower resources could continue in 3Q24. Yangtze Power is currently trading at 3.4% 2024E dividend yield for 2024E, its dividend payout could be well supported due to its strong cash flow and less capex ahead.20
Preview
We are optimistic about the structural growth profile in renewable development, with China taking the leading position globally, particularly in the solar supply chain. Robust power demand growth as driven by AI and EV development is driving up global power demand. However, it is worth noting that the solar supply chain entered a consolidation phase starting 2023, as it has taken time for the industry to digest excess capacity in the past few years. We believe the profitability for the value chain will stay constrained, and players who can keep a good balance sheet and maintain technology leadership will be the long-term winners. In addition, hydro power can be a key beneficiary for potential power reform thanks to its lower cost, and more stable and manageable power output compared with wind and solar.
China Cloud Computing
Industry update
In May 2024, China Software industry revenues were +11.8% YoY, leading 5M24 total industry revenue growth at 11.6% to Rmb4,932bn. 5M24 revenue from IT services +13% YoY, while revenue from software products and cybersecurity were +9%, similar trend as compared to 4M24.
May China telecom industry revenue grew 2.5% YoY, still weak. Mobile revenue fell 5.1% YoY (-2.1% YTD) indicating ARPU pressure. May fixed line rev growth accelerated to 6.3% YoY with YTD growth of 5.2%. 5G industrial internet revenue recovered to ~16% YoY in May, a six-month high.
Stock Comments
Netease Inc Sponsored ADR
Stock price reacted positively to the recent announcement of new game release timeline. Blizzard China announced the return of World of Warcraft in China on Aug 1, and the expansion pack "The War Within" will be released globally on Aug 27. In addition, Naraka: Bladepoint Mobile
will be released on 25 Jul. It has a large pre-registration gamer base which focuses on game balance and innovations. A number of features are highlighted, such as Copilot (AI teammate), which enables gamers to interact through voice communications. In addition, new users should pick up the game play easily.
Tencent Holdings Ltd
Tencent’s overseas games continued to surprise positively since start of the year. Tencent has been expanding its games overseas via building in-house studios and acquisitions of overseas studios. These investments are starting to bear fruit, e.g. strong grossing of PUBG Mobile and Brawl Stars, according to SensorTower, July 2024.
Beijing Kingsoft Office Software. Inc. Class A
The company provided preview for its upcoming quarterly results. Overall tune remained bearish with a potential downward revision of revenue and earnings, due to weak customer spending amid a continuous macro headwind.
Thunder Software Technology Co., Ltd. Class A
Momentum tapered off post the announcement of collaboration with Qualcomm on AI PC platform as there’s no immediate revenue contribution yet.
China Consumer Brand
Industry Update
China national online retail GMV grew 13% in May, largely driven by front-loaded sales due to an earlier start of the 618 Shopping Festival and cancellation of the pre-sales period this year. For the 618 Shopping Festival that concluded on June 20th, Leading platforms no longer report headline GMV growth but market expect mid-to-high single digit industry GMV growth, and a flattish to teens sales growth for individual traditional and livestreaming e-commerce platforms. Return rated edged up for categories including apparel as consumers become more price sensitive and cautious in terms of their purchasing behaviors. Competition remained intense with leading platforms offering traffic support and promotions to attract merchants (especially small to medium-sized merchants) and consumers.
Domestic demands for sportswear, baijiu, beer and restaurant were weaker than expected into the month of June. Macau's gross gaming revenue (GGR) came in at MOP17.7bn in June at 74% of the pre-COVID19 level vs. 79%/78% in Apr/May, likely due to weaker seasonality.
Stock Comments
Fuyao Glass Industry Group Co., Ltd. Class A
The company expects a stabilized profitability level with upward potentials driven by a potential decline in soda ash cost and improving utilization rate. Moreover, a 6-7% price hike will drive revenue growth.
Tingyi (Cayman Islands) Holding Corp.
Share price reacted positively to the recent robust demand for beverage. On the other hand, demands for noodles were weak. Beverage segment grew lower than HSD% in Jan-May while Noodle segment slightly declined but turned positive in May with product upgrade. Both segments saw margin improvement YTD in both GPM and NPM.
Kweichow Moutai Co., Ltd. Class A.
First-tier wholesale ASP of Feitian Moutai declined from ~Rmb2,500 to ~Rmb2,150 mainly due to weaker than expected demands. This have resulted in some market concerns and short-term stock price pressure. In recent weeks, wholesale price rebounded to Rmb2,200+ as the company released price stabilization measures.
India Market
Industry Update
- India’s strong economic growth continued driven by robust domestic demand, supported by both consumption and investments. Private consumption is likely to become more broad-based as rural consumption improves thanks to expectations of a favorable monsoon this year. In addition, the improving outlook for global trade is leading to an uptick in exports and is likely to support the overall growth outlook. Furthermore, the softening trend in core CPI seems encouraging and price stability is expected to stay, which is also supportive to a sustained growth.
The current account recorded a surplus of 0.6% pf GDP (US$5.7bn) in 4QFY24 improved from a deficit of 1% of GDP(US$8.7bn) in 3QFY24. Merchandise trade deficit narrowed as exports improved sequentially while imports moderated slightly. Gross service exports increased 4.1% while net services exports grew 9.2%yoy in 4QFY24. The current account surplus improved to a three quarter high and overall balance of payments (BoP) surplus accelerated to US$30.8bn or 3.3% of GDP from US$6bn (0.7% of GDP) in the previous quarter. The overall BoP surplus recorded US$63.7bn or 1.8% of GDP for the full year FY24.
Stock Comments
Infosys (INFO IN) - As the industry heads towards stability in spend for 2HCY24. The companies had baked in easy assumptions on discretionary spends for the year and Infosys is likely to record sequential revenue growth based on ramps in mega deal wins of FY24. Accenture reported its results during the month and the company indicated acceleration in growth for next year also contributed to positive sentiment towards Indian IT sector.
Larsen & Toubro (LT IN) - As the market increasingly concerned on whether the government would reduce investments and increase allocation more towards on private consumption after the election. In addition, there is limited near term catalysts given relatively moderate orders. Near term, the market will be watching out for the upcoming central government budget in July.
Preview
This confluence of strong GDP growth, moderate inflation, and recovery in consumption suggests a buoyant outlook for the Indian equity markets, and we believe these conditions will be conducive to capitalizing on potential growth opportunities during this fiscal year in India. In the near term, trend in monsoon rainfall, budget for FY2025 in July will be the major event to watch out for the market.
July 23, 2024
1 Company data, June 2024
2 Company data, June 2024
3 Company data, June 2024
4 Company data, June 2024
5 Mirae Asset, June 2024
6 Company data, June 2024
7 Macquarie, June 2024
8 CPCA, July 2024
9 Morgan Stanley, July 2024
10 Goldman Sachs, July 2024
11 CPCA, July 2024
12 Company Data, July 2024
13 Huawei, July 2024
14 UBS, CABIA, June 2024
15 UBS, July 2024
16 UBS, June 2024
17 UBS, Silicon China, June 2024
18 National Energy Administration, June 2024
19 Xinhua, May 2024
20 UBS, July 2024
This document contains the opinions of Mirae Asset Global Investments (Hong Kong) Limited (“MAGIHK”) and is intended for your use only.
It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument and shall not constitute any form of regulated financial advice, legal, tax or other regulated service. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. MAGIHK makes no representation as to their accuracy or completeness and therefore do not accept any liability for a loss arising from the use of this document.
Investment involves risk. Forecasts, past information and estimates have certain inherent limitations. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these opinions are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Past performance information presented is not indicative of future performance. Before making any investment decision, investors should read the fund’s offering document for further details including the risk factors. Investors should ensure they fully understand the risks associated with the applicable investment and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice if in doubt.
Issuer: Mirae Asset Global Investments (Hong Kong) Limited (Licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance). This document has not been reviewed by the Securities and Futures Commission or the applicable regulator in the jurisdiction which this article is posted and no part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of MAGIHK.
Authors: Ahn Sol, Chan Tsz Wang Edward, Qiu Chuqi, Zhou Yuan, Bingyao Chan, Yimin Huang (Licensed by the Securities and Futures Commission for Types 4 and 9 regulated activities under the Securities and Futures Ordinance). The authors and their associate(s) do not hold the securities/fund mentioned in the article.