Investment Rating - The investment rating for CR Micro (688396.SS) has been upgraded from Underweight to Equal-weight with a target price increase from Rmb28.10 to Rmb40.00 [3][5]. Core Insights - The report identifies three key investment themes in the Chinese automotive semiconductor sector: Power Discrete Devices, Advanced Driver Assistance Systems (ADAS), and Microcontrollers (MCU) [4][23]. - China's electric vehicle (EV) market is projected to grow significantly, with EV penetration expected to rise from 28% in 2024 to 42% by 2030, indicating a strong demand for automotive semiconductors [3][27]. - The report emphasizes the importance of localization in the semiconductor supply chain, noting that most global automotive chip companies are still in the early stages of implementing localization strategies in China [4][28]. Summary by Sections Investment Themes - The three key investment areas are: 1. **Power Discrete Devices**: Chinese companies have made solid progress in IGBT and SiC substrates, with opportunities in MOSFET and SiC devices [4][40]. 2. **ADAS**: The ADAS SoC market is expected to have the highest compound annual growth rate (CAGR), benefiting various suppliers including SoC vendors and peripheral chip manufacturers [4][24]. 3. **MCU**: The self-sufficiency rate for automotive MCUs is very low, at less than 5% in 2024, indicating significant growth potential for leading local companies [4][41]. Market Dynamics - China consumed 56% of the global electric vehicle production, and the report forecasts that the domestic automotive semiconductor market will continue to grow faster than global peers due to the increasing demand for EVs and government support for supply chain localization [3][27]. - The report highlights that the automotive semiconductor supply chain in Greater China currently accounts for less than 5% of the global supply, with a self-sufficiency rate of only 15% [37][38]. Company Ratings and Strategies - The report recommends specific companies for investment based on their positions in the identified themes: - **Power Semi**: Companies like Starpower (603290.SS), Yangjie Technology (300373.SZ), and SICC (688234.SS) are highlighted for their growth potential [5][23]. - **ADAS**: Companies such as Horizon Robotics (9660.HK) and Will Semiconductor (603501.SS) are noted for their strong positions in the ADAS market [5][23]. - **MCU**: GigaDevice (603986.SS) is recognized for its potential to benefit from localization trends [5][23]. Future Projections - The report anticipates that by 2027, the self-sufficiency rate for automotive chips in China will reach 28%, reflecting the ongoing efforts to enhance local production capabilities [16][53]. - The expected growth in the electric vehicle market is projected to triple by 2030, with significant implications for the semiconductor industry [33][34].

Core Viewpoint - Tata Electronics is negotiating with NXP Semiconductors to become a foundry supplier, reflecting a trend towards local semiconductor manufacturing in response to geopolitical uncertainties and supply chain shifts [1][2]. Group 1: Tata Electronics and NXP Semiconductors - Tata Group is constructing a wafer fab in Gujarat and a packaging facility in Assam, with operations expected to begin in March 2024 and chip manufacturing in 2026 [1]. - The Gujarat wafer fab will primarily produce power management ICs, display drivers, and microcontrollers (MCUs) [1]. - Tata Electronics' potential deal with NXP may mirror its existing collaboration with Analog Devices, which aims to explore semiconductor manufacturing opportunities in India [1]. Group 2: Market Trends and Geopolitical Context - The trend of local manufacturing is growing among wafer fab companies, driven by the need to cater to different regional markets [1]. - Tata Group is well-positioned to benefit from the outflow of equipment manufacturing, enhancing its competitive advantage in the semiconductor sector [1]. - Geopolitical uncertainties, including tariffs imposed by the U.S. on global imports, are influencing the semiconductor landscape, with companies like Tesla potentially becoming customers of Tata's chips [2].

Core Insights - The semiconductor industry has experienced significant changes in profitability and growth dynamics, with economic profits rising from $38 billion in 2000-2009 to $450 billion in 2010-2019, and projected to reach between $1.7 trillion and $2.4 trillion by 2040 [1][2] - The demand for artificial intelligence (AI) technology is driving substantial investment and demand in the sector, but the resulting profits are increasingly concentrated among a few key suppliers and distributors [1][2] - By 2024, the top 5% of companies in the semiconductor industry are expected to generate all economic profits, while the remaining 95% will see a sharp decline in economic value creation [1][2] Industry Recovery and Dynamics - The semiconductor industry is perceived to be recovering from a downturn between 2022 and 2024, but a deeper analysis reveals that recovery is uneven and slower than anticipated for most companies [2][12] - The expansion of the Chinese semiconductor market is putting pressure on global market shares, necessitating companies to leverage AI-driven opportunities and expand into adjacent fields [2][18] Economic Profit Trends - Economic profits in the semiconductor industry have shown strong growth, with the industry moving from 15th place in economic profit margin rankings in 2000-2004 to 3rd place in 2020-2024 [3][6] - The total economic profit generated from 2020 to 2024 is projected to be $473 billion, surpassing the profits of the previous decade [3][6] Value Creation Disparity - There is a stark disparity in value creation within the industry, with the top 5% of companies generating $121 billion and $159 billion in economic value in 2023 and 2024, respectively, while the bottom 5% are expected to incur losses of $45 billion to $70 billion [6][9] - By 2024, the top 5% of companies are projected to create $147 billion in economic profits, while the middle 90% will only generate $5 billion, and the bottom 5% will face losses of $37 billion [6][9] Inventory and Revenue Trends - Inventory levels have been a significant concern, with the ratio of inventory to next-quarter revenue rising sharply during downturns, indicating that the industry has not fully recovered [15][12] - As of 2022, inventory levels for suppliers and distributors reached 75%, while manufacturers saw levels rise to 49%, reflecting ongoing challenges in the recovery process [15][12] Chinese Market Influence - The share of revenue from the Chinese market for semiconductor companies has increased significantly, from 6% in 2010 to a projected 38% in 2024 [18][22] - Despite challenges such as U.S. sanctions on Huawei, the overall growth rate of the Chinese semiconductor industry remains robust, with an expected annual growth rate of 9% [22][23] Future Growth Opportunities - The semiconductor sector is expected to see a compound annual growth rate (CAGR) of 21% from 2019 to 2023, driven by AI applications, while the overall industry CAGR is projected at 6% [24][27] - By 2030, the semiconductor industry's revenue could reach $1 trillion, with an additional $300 billion from generative AI, highlighting the potential for accelerated growth [24][27] Strategic Actions Required - To achieve comprehensive recovery and growth, companies must rethink their business models, explore new growth opportunities, and enhance their operational efficiency through AI [27][28] - The industry must also address talent shortages and leverage AI to improve productivity and innovation, ensuring resilience against geopolitical and supply chain challenges [28][27]