Macro Strategy - The chemical sector has seen continuous catalysts on both supply and demand sides since 2024, with the current "anti-involution" trend enhancing the market outlook, driven by a favorable fundamental environment and potential valuation uplift from emerging industries [1][23] - More than half of the existing convertible bonds in the chemical sector are issued at the peak of the cycle, currently entering or about to enter the redemption period, coinciding with an upward cycle, leading to more proactive debt conversion measures [1][23] - The majority of chemical convertible bonds are small-cap, which, combined with their near-term characteristics, amplifies the asymmetry of returns [1][23] Currency Exchange Rate - The RMB central parity has shown a gradual appreciation trend, with the exchange rate expected to challenge the 7.15 range again, and the spot exchange rate may drop to the 7.10-7.15 range in August [1][25] - The recent strengthening of the RMB is supported by optimistic expectations from US-China trade negotiations and a robust domestic stock market [1][25] Anti-Involution Policy - The "anti-involution" price governance aims to address three main objectives: short-term regulation of price wars, medium-term capacity reduction to promote supply-demand balance, and long-term price recovery, particularly in PPI [2][26] - The previous supply-side reforms led to a 10-month recovery in PPI, and under neutral assumptions, a similar recovery may take 11-12 months, potentially reaching around 1.9% by September next year [2][26] Industry Rotation - The market is expected to remain optimistic in the third quarter, with a focus on sectors that align with upcoming policies and key events, particularly those benefiting from the "anti-involution" strategy [3][5] - Suggested sectors for investment include those with potential short-term demand improvements, such as photovoltaic, coal, and chemical industries, as well as technology sectors with recent catalysts [5][3] Company-Specific Insights - Xidi Microelectronics is positioned as a leading player in the analog chip sector, with a projected revenue growth of 32.10% year-on-year for the first three quarters of 2024, driven by significant contributions from its audio coil motor driver chip product line [11][12] - Minshida reported a 27.91% year-on-year revenue increase in its 2025 mid-year report, with expectations for continued growth in the transformer market driven by demand from sectors like new energy vehicles and wind power [13] - Gaomei's second-quarter performance is expected to turn profitable due to supply-side optimization driven by the "anti-involution" policy, with N-type silicon wafer prices rising to 1.1 yuan per piece [14][15]

Macro Strategy - The chemical sector is experiencing a favorable supply and demand dynamic, with the current "anti-involution" trend enhancing market conditions. The outlook remains optimistic due to dual catalysts: improving fundamentals and new industry layouts leading to valuation increases [1][22] - Over half of the existing convertible bonds in the chemical sector are issued at the peak of the cycle, entering redemption periods amid an upward cycle, prompting more proactive debt conversion measures [1][22] - The majority of chemical convertible bonds are small-cap, which, combined with their near-term characteristics, amplifies the asymmetry of returns [1][22] Currency Exchange - The RMB's central parity has shown a gradual appreciation trend, with the exchange rate potentially challenging the 7.15 range against the USD. The expected range for August is between 7.10 and 7.15 [1][24] - The RMB's appreciation is supported by optimistic expectations from US-China trade negotiations and a strong domestic stock market, despite a weaker immediate exchange rate [1][24] Industry Analysis - The "anti-involution" policy aims to address three main objectives: short-term regulation of price wars, medium-term capacity reduction, and long-term price recovery, particularly in the Producer Price Index (PPI) [2][25] - The PPI is expected to recover to around 1.9% by September next year, following a 10-month period of negative growth after the last supply-side reform [2][26] - The current approach to capacity reduction is shifting towards policy-guided methods rather than direct shutdowns, reflecting the need for a balanced economic impact [2][26] Sector Recommendations - The report suggests focusing on sectors that have not yet experienced significant price increases, such as photovoltaic, coal, and chemical industries, which may see short-term demand improvements [5] - The technology sector, particularly robotics, is highlighted as having potential catalysts for growth, despite previous underperformance [5] Company Insights - Xidi Microelectronics is positioned as a leading player in the analog chip sector, with a projected revenue growth of 32.1% year-on-year for the first three quarters of 2024, driven by its diverse product lines [11] - Minshida's revenue is expected to grow by 27.91% year-on-year, with a focus on high-value products in the growing fields of new energy vehicles and renewable energy [12] - Gaomei's second-quarter performance is anticipated to turn profitable, benefiting from supply-side changes and price increases in the photovoltaic sector [13][14]

Group 1: Company Overview - Recent research conducted by a well-known private equity firm, Fugao Investment, on a listed company, Xidiwei, highlighted the promising outlook of the analog chip market, with a projected global market size of $91.26 billion in 2024 and further growth to $129.69 billion by 2029 [1] - Xidiwei anticipates an increase in the self-sufficiency rate of analog chips to 16% by 2024, supported by national policy initiatives, although further improvements are necessary [1] - The company’s automotive-grade DC/DC chips have been integrated into Qualcomm's smart cockpit platform, serving multiple automotive brands, and have achieved AEC-Q100 and ISO 26262 certifications [1] Group 2: Market Position and Strategy - Xidiwei collaborates with Qualcomm in both consumer electronics and automotive electronics, while its partnership with MediaTek primarily focuses on consumer electronics [1] - The pricing of Xidiwei's products is influenced by various factors, and the company aims to enhance its gross margin through the introduction of innovative products [1] - By optimizing its supply chain management system, Xidiwei is working to reduce outsourcing production costs [1] Group 3: Demand and Future Goals - The second quarter has seen strong customer demand, with unfulfilled orders from the first quarter expected to be reflected in the second quarter [1] - Xidiwei is committed to becoming a leading international player in the analog chip sector, providing industry-leading analog and power management chips and solutions [1]

Summary of Conference Call Records Companies and Industries Involved - **Companies**: SMIC (中芯国际, 0981.HK), Hua Hong Semiconductor (华虹半导体, 1347.HK) - **Industry**: Semiconductor Manufacturing Key Points and Arguments SMIC Performance Overview - **Q1 Revenue**: SMIC's Q1 revenue was $2.2 billion, a year-on-year increase of 28%, but the quarter-on-quarter growth was only 1.8%, below expectations [1][2][4] - **Net Profit**: The net profit was $180 million, slightly below the market consensus of $221 million, affected by government subsidies and exchange rate impacts [1][4] - **Gross Margin Guidance**: The gross margin guidance for Q2 is 18%-20%, lower than the market expectation of 21% [1][4] - **ASP Decline**: Average Selling Price (ASP) decreased by 9% due to production issues and equipment stability problems [1][5] Hua Hong Semiconductor Performance Overview - **Q1 Revenue**: Hua Hong's Q1 revenue was approximately $500 million, with a year-on-year growth of less than 18% [1][2][8] - **Net Profit Decline**: Net profit dropped significantly by 88% to $3.75 million, primarily due to depreciation from new production lines and product mix adjustments [1][8] - **Capacity Utilization**: Despite challenges, capacity utilization remained above 100% [1][8] Advanced Process Contribution - **Underperformance**: The advanced process segment's contribution was below expectations due to production issues and delays in product structure [5][9] - **Production Issues**: Two production incidents occurred, one due to equipment maintenance errors and another related to the stability of newly introduced equipment [6][7] Market Dynamics and Future Outlook - **US-China Tariff Negotiations**: The impact of US-China tariff negotiations on SMIC is minimal, with direct tariff risk accounting for about 1% of revenue [3][11] - **Revenue Projections**: SMIC expects revenues of $9.6 billion, $11.9 billion, and $14.6 billion for 2025, 2026, and 2027, respectively, with net profits projected to grow significantly [3][19] - **Hua Hong Expansion Plans**: Hua Hong plans to release 40,000 wafers by the end of 2025 and aims for full capacity release by mid-2027 [3][26] Challenges and Risks - **Production Stability**: Ongoing issues with equipment stability may impact production yields and ASP in the first half of 2024 [7][10] - **Market Sentiment**: Despite short-term challenges, both companies are expected to benefit from the trend of localization and increased domestic demand [10][14] Valuation and Investment Potential - **SMIC Valuation**: Current valuation is at 2x PB, with potential for growth as performance improves and product shipments accelerate [21][25] - **Hua Hong Valuation**: Hua Hong's valuation is expected to remain above 1x PB, with significant improvements anticipated in profitability and ASP in the coming years [39][40] Key Performance Indicators to Monitor - **Capacity Expansion**: Focus on the pace of capacity expansion and technological breakthroughs [41] - **Pricing Power**: Monitoring ASP trends and cost control measures [41] - **Market Demand**: The overall semiconductor market dynamics influenced by AI and macroeconomic factors [41] Conclusion - Both SMIC and Hua Hong Semiconductor face short-term challenges but have strong long-term growth potential driven by domestic demand and technological advancements. Monitoring key performance indicators will be crucial for assessing future investment opportunities.