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Monthly Commentary on Key Themes – June 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 Electric Vehicle and Battery
Industry Update:
- Solid April EV sales; EV penetration on the rise: According to CPCA, May passenger NEV wholesale volume reached 910k, +35% YoY and +16% MoM. 6 Based on the announcements of individual auto brands, BYD reported May NEV sales of 332k units, +38% YoY, nearing its historical high monthly sales of 340k units in Dec 2023, driven mainly by solid sales momentum of Honor facelift models offering minor spec upgrades but meaningful price discounts of 10-20% vs. their 2023 Champion versions.7 Other major EV brands recorded divergent performance, with NIO (+234% YoY) showing accelerating sales growth driven by discounts, while Li Auto (24 % YoY) and XPeng (+35% YoY) delivered a relatively steady growth in May.8 (for reference only, abovementioned stocks are not necessarily in the constituent list of the ETF). Based on insurance registration, new energy vehicle (NEV) penetration reached a high level of 49.3% in the last week of May.9
- Xiaomi and Huawei maintain strong momentum: Xiaomi delivered 8,646 units of SU7 in May 2024, +22% MoM. Xiaomi will continue to ramp up capacity and start double-shift production in June to ensure monthly delivery of over 10k units.10 On 31 May, Huawei AITO launched Ultra range version for AITO M7, with price range from Rmb290k to Rmb330k. Company expected M7 Ultra delivery to reach 20k units in June, bringing AITO Brand to 40k units delivery in single month.11
- Battery inventory stabilizes: According to the China Automotive Battery Innovation Alliance (CABIA), China’s EV battery installation was 35 GWh in April, +41% YoY. EV battery inventory is in a continuous destocking cycle and there are signs of bottoming out, with global battery inventory months dropping significantly to a normalized level of 1.4 months in April 2024 from 3.1 months one year ago. CATL domestic market share stabilizes MoM at 44% in April, and BYD’s share also stabilizes MoM at 28%.
- China ramps up investments in high-tech EV batteries: China is planning to invest Rmb 6bn in the all-solid-state batteries, according to China Daily. Six leading companies including CATL and BYD are expected to lead the R&D of all-solid-state batteries, as supported by the fundings by respective government departments.
- Battery material costs slightly declined in May: China’s spot lithium carbonate price declined by 4% MoM to around RMB 107 k/t at the end of May.12 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 5% in May, a positive contributor to the ETF. On 28 May, BYD unveiled its 5th generation DM-i platform, bringing greater fuel efficiency (2.9L/100km), longer range (up to 2100km), and higher thermal efficiency (46%). Based on the new DM-i, BYD also launched Qin L and Seal 06, both priced below Rmb100k, which should further accelerate share gain from JV this year. BYD’s PHEV sales continues to outgrow BEV sales, reaching record high 184k units, +54% YoY.
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. 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 declined: Solar polysilicon prices were Rmb41/kg by the end of May, further decreased by over 16% compared to one month ago, implying that most providers are cash-cost loss making. Polysilicon production is expected to decline as more capacity is going into overhaul, potentially leading to price stabilization.13
Module prices saw a mild decline, with module maker’s low utilization rate potentially extending into June, according to PV InfoLink. Solar module and inverter export volume recorded MoM improvement in April, suggesting recovering demand in Europe.
In May, the State Council released Action Plan for Energy Conservation and Carbon Reduction during 2024-25, calling for more efforts to stimulate renewable energy development in China. In addition, in a meeting with enterprises and economists, central government also express concerns over current excess investment in new energy sector, which could be counterproductive.14 This could imply a potential supply-side control by regulators, which can benefit the overall development and profitability for the industry
- Grid and power installation – Solid wind and solar installations growth; Grid investments accelerating: China’s Jan-Apr 2024 wind installations grew+19% YoY while solar installations expanded +24% YoY over the same period. In Jan-Apr 2024, the electricity grid spending in China reached Rmb122.9bn. +25% YoY.15 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,16 which bodes well for industry development.
Stock Comments
- China Longyuan Power (916 HK): recorded 30% total returns in May, a positive contributor to the Index. The company reported in-line 1Q24 results in end-April. Longyuan is expected to yield better returns from upgrades of current wind turbine, as its existing wind project portfolio largely consists of projects in regions with best wind resources in China. In addition, its green power trading can partially support renewable tariffs17, and its current valuation is still below historical average, with its derating since 1H22.
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. We are bullish on the electrical equipment players who benefit from increased grid and system investment in China and globally. They enjoyed a higher selling price and volume growth amid global equipment tightness.
China Consumer Brand
Industry Update
In April 2024, China Software industry revenues were +10.9% YoY, leading 4M24 total industry revenue growth at 11.6% to Rmb2,802bn.18 4M24 revenue from cloud computing and big data +14% YoY, while revenue from software products and Cybersecurity were slower at 9%, potentially reflecting the IT spending driven by generative AI is now still more at infrastructure side, and not yet toward platform or application software.
Stock Comments
- Thunder Software Technology: Thundersoft share price reacted positively to the recent AI PC trend, as Microsoft and Dell released AI PCs on Qualcomm chipsets. Thundersoft indicated that it is a supplier to Qualcomm's AI PC platform. Overall there has not been any quantitative data with regards to AI PC related revenue contribution to Thundersoft announced by the Company yet.
- 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.19
- Beijing Kingsoft Office Software: Chinese software companies’ stock price were generally weak for the month as market remained concerned on the subdued enterprise and local government IT spending budget. Kingsoft Office remain one of the best quality companies within China software space. Since the release of its WPS AI product in April 2024, management noted positive user feedback and the company plans to keep three types of membership from late-Jun 2024, including (1) Super membership (Rmb148/year), (2) WPS AI membership (Rmb248/year), and (3) Premium membership (Rmb348/year) covering both AI and other value-added features.
- iflytek Co: Share price has been weak for the month as market remains concerned on 2Q24 results. Since the launch of iFlytek LLM Spark in May 2023, the Company has received positive feedback from consumers, especially on products such as learning pad with 99% YoY rev. growth in 1Q. In addition, SOEs show strong interest in AI application and monetization is on the way. However, tight government budget and continuing investment are short-term headwinds, and AI revenue contribution is relatively small and cannot offset the negative impacts.
Preview
China software industry revenue growth remained muted into 2Q24, as the industry has not yet seen any inflection in terms of the weak enterprise IT spending. Overall industry growth slightly slowed down as compared to 1Q24. In addition, revenue growth outlook of vertical software continues to be under pressure especially for infrastructure, real estate, and financial services related categories. Most local software companies have slowed down their headcount expansion (avg. employees down to 11.7k in 2023 from 11.8k units in 2022)20 to pursue margin improvement. Despite slower hiring and spending, we see software companies still investing in LLM/ AI and view it as a priority for R&D spending in 2024, particularly for training in-house vertical LLMs or integrating third-party general LLMs with its applications. As result, in 2Q24 till date, the software product launches have accelerated driven by AI related software product updates.
China Cloud Computing
Industry Update
- Consumption demands in China were weak across restaurants, beer and Baijiu sectors for the month of May, mainly impacted by the extreme weather conditions. Macau's gross gaming revenue (GGR) came in at MOP20.2bn in May, tracking steadily at 78% of the pre-COVID19 level vs. 79% in April. In absolute terms, the daily GGR run-rate of MOP651mn marked a new high since reopening helped by better-than-expected performance of MOP910mn during the Labor Day holidays.
For the Labor Day holidays in particular, airfare and hotel were negatively impacted by extreme weather conditions in Southern part of China. According to the Ministry of Culture and Tourism, a total of 295mn traveled domestically on May 1-5th, +8% YoY against the high-base last year boosted by pent-up demand as the first major holiday break after mainland China removed all travel restrictions in Feb-23. Tourism revenue grew +13% yoy to Rmb167bn or 14% above pre-pandemic levels, implying each traveler still spent less than what they used to in FY19. Into the Dragon Boat Festival, domestic tourist rose 8.1% YoY to Rmb40bn, and tourists grew 6.3% YoY to 113mn (June 8-10th) driven mainly by short-haul travel.
Stock Comments
- Tingyi 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.
- Li Auto: On April 22, Li Auto cut prices of its entire model lineup except for the newly-launched L6. The cuts of Rmb18-30k – the first time the company officially cut MSRP, amid continuously intensifying competition within the China EV industry. Stock price reacted negatively to the price cut.
- Techtronic Industries: Market expects likely slower restocking since April due to: 1) softening sales at Home Depot on a sequential decline of US home sales; and 2) Milwaukee share loss in the short-term.
Preview
Into the month of May, most of the consumer sectors in China didn’t see a meaningful uptick in retail sales growth. Expectation for travel related demands were elevated prior to the Labor Day holiday, leaving limited room to beat.
Despite near-term weakness in China consumption, emerging opportunities we have identified include: 1) rising presence in the overseas market, as Chinese consumer brands now become increasingly competitive globally, 2) strong technology development in areas like electric vehicle, and 3) emergence of local consumer brands that have been gaining market share from MNCs (multinational corporations) leveraging social media and offline channels.
India Market update
Market Update
- We remain constructive on India’s growth outlook as the BJP-led New Democratic Alliance (NDA) retained its majority which will lead to macro stability, policy continuity and a number of structural reforms to be made in the third term of Modi government. The market experienced volatility when the general election results came in as a surprise compared to exit polls with the Bharatiya Janta Party (BJP) losing its single-party-majority status in the lower house of Parliament. Nevertheless, the market recovered on the following days as Prime Minister Narendra Modi secured third term with the support of allies under the NDA. We expect the government to continue to invest on infrastructure, boost manufacturing sectors, and also focus on private consumption including rural areas to drive more balanced growth in coming years.
- Domestic economy continued to remain strong in May. GST collections grew +10%yoy, manufacturing PMI came in 57.5, service PMI came in 60.2, credit growth remains buoyant growing +15.8%yoy, and passenger vehicles sales grew both on YoY and MoM basis in May. Consumer sentiment also improved further. We believe India’s economy is in the upcycle and this has more years of steady expansion ahead driven by investment, consumption as well as exports.
Stock Comments
- Bharti Airtel (BHARTI IN) improving competitive landscape of telecom sector in the country. The market has been very competitive since Reliance Jio’s entrance into the market which led consolidation of the industry. It seems industry participants are now aligned with the current market structure and expect the awaited tariff hike post-election to lead to ARPU hike in coming quarters while CAPEX has peaked out and will moderate going forward, which would lead to better returns on capital and FCF of the company.
- Titan (TTAN IN) in May post 4QFY24 results weaker than expected EBIT margin of 12.1%. While jewellery sales continued to be strong with +19%yoy growth (ex-bullion) but margin came in lower due to sharp rise in gold prices and rise in competitive intensity. Margin pressure may persist near term as gold price remains high but this is positive for mid to long term gold demand. The company continue to focus more on top-line growth than profitability, which we believe is the right strategy considering the company’s growth opportunity ahead.
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, formation of the cabinet, trend in monsoon rainfall, budget for FY2025 in July will be the major event to watch out for the market.
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 CPCA, June 2024
7 Morgan Stanley, June 2024
8 Company data, June 2024
9 Goldman Sachs, May 2024
10 Yicai, May 2024
11 CnEVPost, June 2024
12 UBS, May 2024
13 UBS, May 2024
14 SCMP, May 2024
15 CEC, May 2024
16 Xinhua, May 2024
17 Morgan Stanley, May 2024
18 MIIT, June 2024
19 Sensor Tower, June 2024
20 Goldman Sachs, June 2024
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