The anticipated AI-driven device upgrades, coupled with the overall recovery in industry demand, have led to a resurgence in the consumer electronics industry chain, which is now being targeted by capital for its mid-report earnings inflection point.

On July 16th, the consumer electronics sector saw a strong performance, with concepts such as wireless charging, smart speakers, and TWS earphones leading the market. Data indicates that 10 consumer electronics stocks have risen by 30% since the second quarter, significantly outperforming the broader market.

Apple's supply chain stocks are leading the consumer electronics sector, with leading companies like Luxshare Precision (002475.SZ), Goertek (002241.SZ), and Dongshan Precision (002384.SZ) reaching new highs at the close. In terms of news, Morgan Stanley analyst Woodring recently predicted that Apple's iPhone shipments over the next two years will approach 500 million units, surpassing the record high of the 2021-2022 cycle.

Statistics show that since April 1st of this year, several Apple supply chain-listed companies have doubled their stock prices (compared to their yearly lows), with these companies generally having a significant proportion of Apple's mobile phone business. As expectations for the AI phone upgrade wave intensify, how will the development of AI affect the growth cycle of this round of consumer electronics, and how much will the relevant listed companies benefit?

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The consumer electronics sector is experiencing an earnings inflection point.

The curtain has closed on the 2024 semi-annual earnings forecasts for A-shares, and influenced by the recovery in industry prosperity and demand, the consumer electronics industry is witnessing an upward earnings inflection point. Wind data shows that 33 listed companies in the consumer electronics (CITIC) component sector have released mid-report earnings forecasts, with 13 expecting an increase, 4 turning losses into profits, and 1 slightly increasing, resulting in an earnings forecast positivity rate of 54.54%, higher than the overall positivity rate of A-shares' mid-report forecasts.

Regarding the reasons for the earnings growth, a review of the mid-reports by First Financial Daily reporters found that consumer electronics listed companies frequently mentioned factors such as the recovery of the consumer electronics industry, AI large model-driven demand for high-end products, and expectations for AI device upgrades.

Leading stock Luxshare Precision's performance is steady, with an expected achievement of 5.227 billion to 5.444 billion yuan in the first half of the year, a year-on-year increase of 20% to 25%. Goertek's earnings growth ranks at the forefront of the sector, with an expected net profit attributable to the parent company of 1.181 billion to 1.265 billion yuan in the first half of the year, a year-on-year increase of 180% to 200%; the expected non-IFRS net profit is 1.146 billion to 1.234 billion yuan, a year-on-year increase of 160% to 180%. Goertek stated that during the reporting period, under the company's business guidance to strengthen lean operations and repair and enhance profitability, the profitability of the smart acoustics assembly and smart hardware business has been improved.

In addition to the aforementioned leading companies, Crystal Optoelectronics (002273.SZ), Changying Precision (300115.SZ), and Xinwangda (300207.SZ) have all achieved significant earnings growth.

Several securities firms' research reports have pointed out that with the accelerated development in the AI field, especially the gradual implementation of edge AI, including expectations for AI phone upgrades, consumer electronics are at a triple inflection point of short-term stabilization and recovery, the arrival of an industry innovation cycle, and continuous catalysts from major new products.A senior executive from a publicly-listed consumer electronics company told reporters that this year, the industry demand has shown a clear trend of recovery. Compared to the industry's downward adjustment in 2023, the trend of performance recovery is definite, and the expectation of AI-driven device upgrades is the main driving force behind the continuous increase in the valuation of the sector.

A private equity fund manager interviewed by the press expressed a similar view, saying: "The companies that have seen the largest gains in this round of consumer electronics are those with a high proportion of Apple's business volume. This is mainly due to the new iPhone equipped with Apple Intelligence, which will drive the demand for upgrades and replacements. It is estimated that 90% of the old iPhones will not support AI functions, and the demand for high-precision components in AI smartphones will increase, thereby pushing up profit margins. The replacement wave is expected to enhance the profitability of the industry chain."

How will the "Apple supply chain" benefit from the AI device upgrade wave?

The recovery trend in smartphone demand is becoming increasingly clear. Canalys data shows that in the second quarter of 2024, the global smartphone market grew for three consecutive quarters, with shipments increasing by 12% year-on-year to 288 million units, reaching the highest year-on-year growth rate in three years. At the same time, Woodring predicts that Apple's iPhone shipments will exceed 500 million units in the next two years, higher than the high record between 2021 and 2022, with an expected shipment of 235 million units in the fiscal year of 2025 and 262 million units in the fiscal year of 2026. Specifically, Woodring estimates that 66% to 69% of iPhone shipments in the fiscal years of 2025 and 2026 will be new models, 2 to 6 percentage points higher than in the fiscal year of 2024, and 3 percentage points higher than the peak before the fiscal year of 2022, driving the annual growth of iPhone ASP by 4% to 5%.

In response to market expectations, on Monday Eastern Time, Apple's stock closed up 1.68% at $234.4, setting a new historical high after two trading days, with a market value exceeding $3.59 trillion.

On the other hand, the leading stocks in the A-share Apple supply chain have led the consumer electronics sector in gains, with several individual stocks' prices doubling from their lowest points of the year. Wind data shows that from April 1 to July 16, Dongshan Precision's stock price accumulated a gain of 100.78%, ranking first, with a total market value of 49.3 billion yuan; Peng Ding Holdings increased by 77%, ranking second, with a cumulative maximum increase of more than 140% calculated from the stock's low point of the year; the gains of the three leading stocks in the Apple supply chain, Blue Technology, Geer Shares, and Luxshare Precision, were 53.55%, 48.29%, and 47.87%, respectively.

A closer look at the aforementioned stocks that have risen sharply reveals that they are all core targets in the iPhone industry chain. For example, Peng Ding Holdings' PCB production scale is in the first tier globally, and the demand for PCBs in AI products is expected to increase both in quantity and price; Luxshare Precision is deeply involved in the assembly and component business of Apple's mobile phones, watches, tablets, etc.; Dongshan Precision has achieved stable supply in the system board and module board segments of Apple's mobile phones.

The aforementioned private equity person said that the follow-up and upgrade of AI hardware technology are expected to start a new round of innovation cycles and recovery cycles in the electronics industry in 2024, and listed companies in the Apple industry chain with a high proportion and large scale of mobile phone business are expected to usher in growth opportunities. Regarding the impact of the long-term performance of the leading capacity migration of the fruit chain, "In the long run, it will definitely have an impact, which is equivalent to a reduction in future Apple orders, but the manufacturing part of the migration is more about the assembly link, and there is very little precision manufacturing. The domestic Apple industry chain has been developed for more than ten years, with a higher degree of technical maturity, intelligent manufacturing capabilities, and quality stability, and has significant advantages in cost and innovation capabilities, making it an indispensable part of the global consumer electronics industry chain. If you add the price advantage, we (Apple industry chain) cannot be completely replaced in the short term." The aforementioned private equity person said, "AI functions have become the core selling point of high-end mobile phones. At the current stage, the focus of investment attention is on the performance growth driven by this round of replacement wave, thereby forming an increase in valuation."