Has the inflection point of consumer electronics arrived?

Consumer electronics used to be one of the best-performing sectors in A-shares. From 2007 to the present, the consumer electronics sector has risen 9 times, far outpacing the Shanghai Composite Index (-30%).

However, since the end of 2021, the consumer electronics sector has begun to languish, and the share price of consumer electronics ETFs has fallen by more than three percent. As of October 11, 2023, the consumer electronics TTM P/E ratio is 31.1x, which is at the historical quantile of 22.2% over the past decade, and the valuation is at an all-time low.

Interestingly, in the midst of all the wailing, consumer electronics suddenly began to strengthen. From October 23 to now, consumer electronics ETFs have risen more than 16%.

A very important reason for the recovery of consumer electronics stock prices is that the market is picking up. Citing BCI data, China Securities Construction Investment said that since September, the year-on-year growth rate of total weekly sales of domestic mobile phones has turned positive in most weeks. The net profit of A-share consumer electronics companies in the third quarter also turned positive from the previous negative growth.

This article holds the following views:

1. The inflection point of mobile phone sales has arrived. Many institutions predict that mobile phone sales will rebound in the fourth quarter for the first time in nearly 10 quarters. The logic lies in the fact that the replacement cycle of the last wave of smart phone sales peak is gradually coming, and major brand manufacturers have also launched blockbuster new products at this time.

2. The new wave of machines has stimulated the purchase demand of users. Compared with the past, more mobile phone brands released new phones in September and October this year, and there was a wave of new phones in the industry. And the release of Qualcomm Snapdragon 8 Gen3 and the first use of many functions of the mobile phone brand have stimulated user demand for phone purchases.

3. Supply chain companies have the greatest performance elasticity. Previously, when consumption was weak, brands continued to destock, resulting in brand inventories at a low level. Nowadays, under the catfish effect brought about by the recovery of sales and Huawei's rush to upstream production capacity, all brands of mobile phones are actively increasing orders to replenish inventory, and the demand of the industrial chain is increasing rapidly.

/ 01 / Consumer electronics bottomed out

Consumer electronics is the most eye-catching sector in the capital market recently. From October 23 to now, consumer electronics ETFs have risen more than 16%. The stocks of Tianlong Electronics, Zhongshi Technology, Shenzhen Keda and other companies have ushered in many daily limits during this time.

The stellar share price of the consumer electronics sector was driven by performance. In the third quarter, the performance of the consumer electronics sector improved significantly, and the revenue of the segment decreased by 1.6% year-on-year, narrowing from the first half of the year (-3.2%). The net profit of the consumer electronics segment increased by 1% year-on-year, a significant improvement from the first half of the year (-12.1%).

The performance of the consumer electronics sector rebounded, thanks to the recovery of terminal sales. According to Canalys data, domestic mobile phone shipments in the third quarter were 66.7 million units, a quarter-on-quarter increase from the second quarter (65.7 million units). Recently, the mobile phone market has achieved a positive year-on-year sales volume, citing BCI data, China Securities Construction Investment said that since September, most weeks, the year-on-year growth rate of the total weekly sales of domestic mobile phones has turned positive.

In the view of all industry insiders, the recent multi-week sales growth rate is expected to continue year-on-year. IDC predicts that China's smartphone market shipments are expected to usher in an inflection point in the fourth quarter of 2023, achieving the first rebound in nearly 10 quarters.

Guo Mingchi, an analyst at Tianfeng International Securities, also said on social platforms recently: "The bottom of China's mobile phone market will pass, and it is expected to regain growth, and mobile phone shipments in the fourth quarter are also expected to regain growth year-on-year and month-on-month." ”

From the shipment of key components of mobile phones, we can also see signs of recovery in the mobile phone market. MediaTek's mobile phone business revenue increased by 19% quarter-on-quarter, and Qualcomm's mobile phone business revenue exceeded the company's previous guidance, while the two manufacturers expect the growth rate of mobile phone business revenue to further accelerate in the fourth quarter.

In addition to the mobile phone market, the shipment of another major terminal consumer electronics PC has also reached the end. Western Securities, Founder Securities and other brokerages all said that the PC industry is about to pick up. PC foundry orders also prove that the PC market will usher in a recovery, and the shipments of notebook foundries such as Quanta and Compal have rebounded for many months. In September, Quanta, Compal, Wistron, and Inventec notebook shipments were 2%, 7%, 18%, and 13% month-on-month.

So how did this round of consumer electronics recovery begin?

/ 02 / The replacement cycle stimulated by the new machine tide

In previous years, only Apple's new phones were released in September. But from September to October this year, Huawei, Honor, Xiaomi and other mobile phone manufacturers unexpectedly collectively released new phones.

The new wave of mobile phone manufacturers has stimulated consumer demand. Not to mention the Mate60, which suddenly made a force after the silence, even Xiaomi, which maintained the normal rhythm of mobile phone sales, achieved a sales explosion.

Xiaomi 14 went on sale for only 5 minutes, and the sales of the whole series soared to 600% of the total sales of the first generation of the 13 series, and about a week after the sale, Xiaomi 14 sold more than one million units, and Xiaomi sales in the entire third quarter were 9.1 million units.

The new wave of machines can attract consumers to buy, partly because consumers have reached the replacement cycle. Debang Securities Research Report mentioned: "The replacement cycle of the last wave of smart phone sales peak is gradually coming, and major brand factories have launched blockbuster new products in a timely manner. ”

According to industry insiders, the replacement cycle of consumers' mobile phones has come to 30-33 months. Domestic mobile phone shipments have declined for 10 consecutive quarters. According to the 30-33 month replacement cycle of consumers, users in the previous quarter before the decline in mobile phone shipments will also enter the replacement period from the fourth quarter of this year.

When encountering the replacement period of consumers, the mobile phone industry no longer "squeezes toothpaste". Qualcomm's Snapdragon 8 Gen3 is on par with the A17 Pro in terms of its main parameters. In addition, the Snapdragon 8 Gen3 is also the first mobile phone chip with generative AI as the core, which can run a 10 billion parameter model on the terminal side, and supports the mobile phone terminal to achieve functions such as expanding the image format and intelligent elimination of video objects.

After Qualcomm squeezed the toothpaste, the performance of the Android machine has been greatly improved. For example, the Snapdragon 8 Gen3 brings mobile game graphics to the level of PC-class high-end graphics cards, and makes the mobile phone camera have a portrait super-resolution function, which can enhance and deblur the portrait clarity on the mobile phone after the frame is frozen. The Xiaomi Mi 14, which is equipped with Snapdragon 8 Gen3, has also begun to directly skip the level compared to the Apple 15 Pro.

Not only Qualcomm has made efforts, but mobile phone brands have also brought a lot of product innovation. For example, the Huawei Mate60 Pro became the first popular mobile phone to support Tiantong satellite voice calls, allowing consumers to communicate with the outside world through satellite signals without a base station signal. As Apple's main salesman, the iPhone 15 Pro is the first to create spatial video, which provides users with an immersive 3D video experience when "spatial video" captured with an ultra-wide angle and the main camera is played back on the Vision Pro headset.

It can be said that consumers ushered in the replacement cycle, and the supply-side upgrade of mobile phone manufacturers has made the consumer electronics industry begin to pick up.

/ 03 / Why does the supply chain stock price always outperform the brand?

It is worth noting that in this round of rebound, the share price growth of supply chain companies is significantly ahead of the end brands.

Since November, the stock prices of consumer electronics supply chain companies such as Chaoyang Technology, Boshuo Technology, and Hanbo High-tech have risen by more than 30%. During the same period, the share price of mobile phone brand Xiaomi rose by more than 13%.

Supply chain companies' share prices rose even more, thanks to their greater resilience. For example, the financial report of Sunny Optics, the head manufacturer of key components and cameras of mobile phones, shows that in September, the shipments of mobile phone lenses of data companies increased by 16.9% year-on-year, and mobile phone camera modules increased by 41.4% year-on-year. The year-on-year growth rate of more than 40% of shipments far exceeded the shipment growth of the mobile phone industry.

The reason why the growth rate of the industrial chain can exceed the growth rate of terminal sales is due to the demand of mobile phone manufacturers to replenish inventory. In the past few quarters, the terminal consumer electronics market such as mobile phones has been poor, and most brand manufacturers are destocking. From the first half of 2022 to the first half of 2023, Xiaomi's inventory as a percentage of assets decreased from 19.7% to 13.2%. Nowadays, the recovery of the consumer electronics industry is imminent, and most brand manufacturers choose to add orders to replenish inventory.

At the same time, Huawei's expansion of production has also brought about a catfish effect. Huawei Mate 60 series was originally planned to ship about 6 million units in China. However, Huawei's hot performance after the listing has caused Huawei to raise its shipment target to more than 20 million units. With the increase in sales target, Huawei actively replenished orders from the supply chain, and the supply chain supply exceeded demand.

Huawei is actively replenishing orders upstream, and other mobile phone brands can only follow suit. In order to avoid the upstream production capacity of zero parts being locked by Huawei, which will affect the sales rhythm of its own products, various brands of mobile phones have begun to increase orders more actively to replenish inventory, and the demand of the industrial chain has increased rapidly. Mobile phone-related IC manufacturers also pointed out that many mobile phone brand manufacturers have begun to increase orders after Huawei announced new phones.

The recovery of the consumer electronics industry will not only bring an increase in order volume to supply chain enterprises, but also bring an increase in order prices to enterprises. According to a report by Korean media Pulse, Samsung Electronics has decided to raise NAND prices by 20% in the first and second quarters of next year.

All kinds of signs show that the recovery signal of consumer electronics from terminal products to all links of the industrial chain is getting stronger and stronger. In this round of recovery, industrial chain companies may be the biggest beneficiaries.