A recent period of significant volatility in the technology sector does not alter the fundamental positive trend expected in the second half of the year.

The trend towards a domestic self-sufficient, closed-loop system in China is becoming increasingly clear, with upward trajectories evident for semiconductor equipment, fabs, and the domestic computing power supply chain.

Simultaneously, components related to power supplies, PCBs, and memory, driven by the global AI trend, remain robust, with the momentum extending into consumer electronics.

This is further supported by strong second-quarter earnings reports from electronics companies, showing clear acceleration in sequential and year-on-year trends, leading to a firm bullish outlook on the sector's future performance.

Electronics Sector Overview and Outlook

Since July, the global technology sector has experienced substantial adjustments, with the A-share electronics sector declining by 20.5%, ranking 26th out of 30 sectors.

Breaking it down by sub-sector: semiconductors fell 19.2%, components dropped 27.5%, optoelectronics declined 19.8%, consumer electronics decreased 15.7%, and other electronic components saw a 30.7% drop.

From a fundamental perspective, the sector remains strong, with second-quarter earnings expected to be positive across the board.

The trends of domestic self-sufficiency and AI are anticipated to continue exceeding expectations in terms of growth in the second half.

There is sustained optimism for a clearer upward inflection point in the self-sufficiency direction, continued prosperity in the price increase chain driven by global AI demand, ongoing realization of earnings for component companies, and a further spread of industry chain opportunities into consumer electronics.

Domestic Self-Sufficiency and Substitution

The drive for domestic substitution is deepening comprehensively, with earnings realization entering an accelerated phase.

1) For semiconductor equipment, the accelerated expansion of mainland wafer fabs is strengthening the certainty of equipment orders, with explosive growth expected around 2026-2027.

Equipment companies, benefiting from short-term oversold rebounds and high medium-term fundamental certainty, present prominent allocation value.

2) Packaging and testing companies are finding further upside as advanced packaging capacity expands, while also benefiting from the transfer of orders and rising utilization rates.

3) Price increases for wafer foundry services are being implemented, promising earnings elasticity.

4) Regarding domestic computing power, Chinese manufacturers are accelerating their catch-up to advanced overseas products.

Order visibility for the second half of 2026 and beyond has improved significantly, with supply chain inventory preparation likely to accelerate, and expectations for rapidly growing revenue and profits are being realized faster.

AI Components and Hardware

The super-cycle of AI prosperity continues, with product iterations consistently opening new growth avenues.

1) For PCBs, AI demand remains robust, with an expected acceleration in downstream procurement for AI-grade copper-clad laminate (CCL) in the second half of 2026, further strengthening the earnings growth momentum for leading PCB manufacturers.

2) In memory, overseas original equipment manufacturers are accelerating the shift of capacity towards high-end products like High Bandwidth Memory (HBM) in the medium to long term.

Domestic manufacturers are expected to accelerate their capture of the resulting supply gap, with companies having AI exposure showing more pronounced growth elasticity.

3) For glass substrates, the push for AI computing power is driving continuous upgrades in advanced packaging, accelerating the industrialization of glass substrate carrier boards.

Manufacturers with technological and customer positioning advantages are seen as first to benefit.

Price Increase Chain Fundamentals

The fundamental trend of tightening supply and demand remains unchanged, with the sector currently in a valuation trough following a mispriced sell-off.

1) In memory, demand for storage capacity in the Agent AI era stays strong, while supply is constrained by capacity and process upgrades.

Supply-demand tightness is likely to persist into 2028.

Price increases for niche memory in the second half of 2026 are expected to outpace mainstream memory, with automotive-grade products showing better and more sustained price increases than consumer-grade ones, benefiting related design and module manufacturers.

2) For CCL, tight supply of electronic glass fabric is projected to last until the end of 2026, driving continued increases in the cost and price of copper-clad laminate.

Optimism exists for price hikes and profit elasticity in the third quarter of 2026, with tightening supply/demand and rising price trends for substrate materials also becoming clearer.

3) For AI power supplies, sustained demand release is tightening supply and demand for related components, pushing up both prices and unit value.

Supply of high-end MLCC specifications is tight, with price increases by original manufacturers still in an early stage.

Lead times for medium and low-voltage power devices continue to extend, with potential for 1-2 rounds of price increases in the second half of 2026.

Current valuations for memory, CCL, and AI power supply related stocks are seen as not fully reflecting expectations for continued price increases and profit elasticity amid tightening supply and demand, leaving the sector at low valuations with significant room for re-rating.

Consumer Electronics Recovery

The industry bottom is gradually becoming clearer, with promising room for earnings and valuation recovery.

Sequential price increases for consumer-grade memory contract prices in the third quarter of 2026 are expected to narrow significantly.

Shipments of traditional hardware like smartphones and PCs are anticipated to bottom out and recover in the second half of 2026, leading to marginal improvements in both cost pressures and demand expectations for the consumer electronics supply chain.

Focus is advised on companies with significant revenue exposure to Apple's supply chain and high-end Android devices.

Furthermore, the period from the second half of 2026 into 2027 will see a dense release cycle for new AI hardware like AI/AR glasses and OpenAI-related devices, suggesting attention on upstream SoC manufacturers with new product cycles and shipment elasticity.

Current sector valuations remain relatively low, and as cost pressures ease, demand expectations improve, and new product cycles begin, room for valuation recovery is expected to gradually open.

Key Risk Factors

Potential risks include a downturn in the global macroeconomy; changes in the international political environment and escalating trade frictions; weaker-than-expected downstream demand; slower-than-expected AI innovation or commercialization; slower innovation in the Android supply chain; slower-than-expected progress in domestic substitution; slower-than-expected expansion of domestic wafer fabs; slower-than-expected development of advanced process technology; intensified competition among downstream manufacturers; risks of raw material price increases due to inflation; risks of increased sanctions on Chinese companies by foreign entities; and significant currency fluctuations.

Investment Strategy and Focus Areas

There is firm confidence in the investment opportunities within the electronics sector following its oversold condition.

Despite significant adjustments since July and a clear retreat in valuations for related stocks, the fundamentals for areas like domestic self-sufficiency, AI components, the price increase chain, and consumer electronics have not reversed.

Valuations for some sub-sectors do not yet fully reflect expectations for subsequent order growth, continued price increases, and earnings realization, indicating strong potential for a rebound from oversold levels.

The upward inflection point for earnings in domestic semiconductor equipment and computing power is becoming clearer.

Driven by global AI demand, supply-demand prosperity in segments like PCBs, memory, and AI power supplies is expected to remain high.

Simultaneously, the AI industry chain rally is likely to gradually spread to consumer electronics, sustaining a positive view on these directions.

Recommended focus areas include: 1) Semiconductor equipment and components, benefiting from mainland fab expansion and deepening domestic substitution; advanced packaging & testing and foundry segments benefiting from rising utilization rates, advanced packaging capacity expansion, and implemented price increases.

2) Domestic computing power, benefiting from iterations of domestic chips, improved order visibility, accelerated supply chain inventory preparation, and related industry chain companies.

3) PCBs, with sustained growth in demand for AI servers and high-end computing hardware, and an expected acceleration in CCL procurement.

4) AI power supplies, benefiting from tightening supply/demand, rising prices, and increasing unit value for high-end MLCCs, inductors, and power devices.

5) Memory, where price increases for niche and automotive-grade memory are expected to be more persistent, potentially benefiting related design manufacturers fully.

6) Consumer electronics, with traditional hardware demand likely bottoming out and recovering, coupled with the start of new product cycles like AI/AR glasses.