The electronics industry is on the brink of a transformative leap, largely driven by the advances in artificial intelligence (AI). As the demands for complex computation and data processing continue to escalate, the printed circuit board (PCB) market is entering a new growth cycleMajor players in the PCB sector are increasingly incorporating AI-related products into their portfoliosConsequently, both revenue and profit margins for high-performance PCBs are expected to surge, with ongoing investments in research and development (R&D) and capacity expansion further reshaping the competitive landscape.

In the first half of 2024, industry leaders such as Huadian (002463.SZ), Shennan Circuit (002916.SZ), and Shengyi Technology (688183.SH) experienced impressive revenue growth rates of 44.13%, 37.91%, and 24.64% respectively

Notably, Huadian and Shennan achieved unprecedented profit levelsSales from their data center and communication sectors saw remarkable upticksWithin the data center domain, global expenditures among major cloud service providers have rebounded vigorously, particularly focusing on computational power investments that are driving a rising demand for AI-specific serversMeanwhile, the communication sector benefitted significantly from the escalating demand for high-speed switches and optical module products.

PCBs exhibit both capital and labor-intensive characteristics, necessitating the production of even more intricate, high-performance, and densely interconnected products to meet the complex needs of modern computing and data processingThis evolving landscape presents fresh growth opportunities for PCB manufacturers but also imposes elevated challenges regarding technological innovation and capacity responsiveness

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In the mid to long term, sectors such as AI, high-performance computing, communication infrastructure, automotive electronics, and smart consumer electronics will undoubtedly continue to create incremental demandConsequently, PCB manufacturers must sustain high levels of R&D investment to cement their industry standing while strategically planning for capacity enhancements to optimize operational efficiency.

AI has catalyzed a resurgence in industry performanceApplications in AI servers, data storage, communication systems, smart driving, and consumer electronics are long-standing drivers for the upstream PCB industryThe rapid evolution and deeper integration of AI technologies have led to a high growth trajectory in the new-generation information technology sector, which demands powerful computing capabilities and rapid network communication, consequently elevating the downstream demand for diverse PCB products, including large-size, high-layer count, high-frequency, high-density, and high-thermal dissipation variants

A notable spike in demand for high-end chips and advanced packaging solutions has also propelled sustained growth in the global packaging substrate industryIn the first half of 2024, production levels for high-performance chips and memory chips surged, leading to a restoration in demand for related packaging substrate products.

Shengyi Technology reported that its server product segment accounted for 38.21%, representing a year-on-year increase of nearly 20%. Partnering closely with end clients, the company successfully developed AI server products, with several projects achieving certification and substantial delivery in the first half of 2024, thereby enhancing its market share in the AI server domainShengyi allocated over 5% of its operating revenue toward R&D, focusing on cutting-edge applications in communication, including 5.5G, 6G, satellite communication, and 800G switches and optical modules

The firm is also harnessing AI and high-performance computing for product development in the server domain, while exploring innovations for automotive technologies such as intelligent driving assistance, power systems, and smart cockpit solutions.

During the same period, Huadian's revenue from the enterprise communication market increased by an astonishing 75.49%, with AI servers and high-performance computing-related PCB products increasing their share from approximately 21.13% in 2023 to about 31.48% in 2024. The company has initiated the technological certification process for its next-generation server products based on PCIe 6.0, with primary technologies supporting 224 Gbps speeds already pre-researchedAdditionally, OAM/UBB 2.0 products are now in mass production, and GPU products have successfully passed 6-layer HDI certification, with preparations underway for mass production

While revenue from automotive boards showed slight growth of approximately 3.94%, the gross margin faced a small decline of about 0.8 percentage points due to ongoing losses in the automotive sectorNonetheless, new automotive products, such as millimeter-wave radar, have shown continuous market growth, pushing their revenue share up from about 25.96% in 2023 to around 33.69%.

Significantly improved gross margins characterize the market recoveryAs demand in the electronics sector progressively normalizes, and inventory levels improve, the PCB industry is displaying signs of recuperationExperts anticipate that inventory levels across most sub-sectors will stabilize in the second half of the year, predicting a year-on-year market growth of approximately 5% and a 7.2% increase in areaWith prices for PCB unit area projected to remain stagnant, companies in this sector must maintain strict control over cost expenditures to enhance competitiveness through economies of scale.

Shengyi Technology's decline in product sales prices outpaced reductions in unit costs in 2023, leading to diminished gross margins and net losses

However, by the first quarter of 2024, an increased demand for multi-layer PCBs in the server market allowed the company to return to profitability, achieving a gross margin of 19.69%, an increase of 2.42 percentage points year-on-yearSimilarly, Shennan’s communication segment benefitted from heightened demand for high-speed switches and optical modules, improving its profitability across wired communication products, while significant growth in data center orders primarily resulted from the demand for AI accelerator cards and Eagle Stream platform products.

Shennan’s electronic assembly business capitalized on demand growth in data center and automotive electronic sectors, realizing a revenue increase of 42.39% year-on-year in the first half of 2024, comprising 14.55% of total revenueThe printed circuit board segment saw a growth of 25.09%, contributing 58.35% of total revenue, with a gross margin of 31.37%, an increase of 5.52 percentage points

Furthermore, their packaging substrate business achieved a remarkable 94.31% growth in main revenue, accounting for 19.18% of overall income with a gross margin of 25.46%, showing a 6.66 percentage point increase.

In contrast, Huadian reported only a minor reduction of 0.80 percentage points in gross margin for automotive boards, while margins for enterprise communication, office and industrial equipment, and consumer electronics boards increased by 8.44, 11.04, and 10.50 percentage points respectivelyThis resurgence in profit margins has not only bolstered their profitability but also secured leeway for expansion during their capacity ramp-up phaseThe first half of 2024 witnessed revenue figures reaching 5.424 billion yuan for Huadian, 8.321 billion yuan for Shennan, and 1.973 billion yuan for Shengyi, with growth rates of 44.13%, 37.91%, and 24.64% respectively

The non-recurring net profits also saw remarkable year-on-year improvements at 150.22%, 112.38%, and 3356.73% respectively, with Huadian and Shennan achieving record profit highs.

As a new growth cycle unfolds, historical observations reveal that the PCB sector has historically thrived under the guiding principle of Moore's Law, with industrial shifts once injecting vitality into emerging marketsNevertheless, the significant proportion of raw materials constituting production costs means that drastic fluctuations in copper prices can exert substantial impacts on companies' expensesMoreover, as a majority of domestic PCB products are exported, any currency exchange rate changes can greatly affect revenue streams, contributing to volatile performance metrics among PCB corporations.

The robust recovery for high-performance PCB manufacturers can be primarily attributed to the AI sector

Shengyi's communication equipment and network communication boards now constitute over 80% of their revenueHowever, the profitability of their communications products experienced a downturn as the global demand for wireless access peaked in 2021. In 2023, dropping prices in the communications segment and ongoing challenges from the East City Project led to financial losses, prompting the company to adapt by enhancing its product mix towards servers and high-speed switches, thereby reverting to a growth trajectory.

In recent years, soaring demand for computing power has intensified upgrading of core components, driving significant increases in shipments for AI servers and switchesNvidia, a world leader in AI computing chips, plans to roll out advanced data center GPUs throughout 2024 and 2025, with accompanying PCB materials expected to become increasingly complex, greatly elevating PCB value

The shipment proportion of 200Gbps, 400Gbps, and 800Gbps switches surpassed 20% of total shipments in 2023, with acceleration expected in their adoption in 2024 and 2025. The complexity and specifications required for PCBs in higher-tier switches will further enhance single-unit PCB values.

As per Huachuang Securities' insights, the assembly of GPU boards is propelling significant growth within the PCB marketFor instance, the value of individual PCBs in systems like the DGX A100 is projected to be five to six times higher than that of traditional serversIn detail, CPU boards consist of a set of components including CPU carrier boards, motherboards, and functional boards, representing about 20% of overall PCB value, while GPU board components make up an impressive 79% of the value, with accessory boards comprising the remaining 1%.

Given the heavy asset nature of the PCB industry, manufacturers must make proactive market forecasts, enabling timely adjustments to production capacity