Summary of Conference Call on Greater China Semiconductors Industry Overview - **Industry**: Greater China Semiconductors - **Focus**: Semiconductor foundry market, particularly SMIC and Hua Hong Key Points Demand and Growth Projections - **AI GPU Demand**: The proliferation of AI applications in China, supported by government policies, is expected to significantly boost domestic leading-edge foundry demand over the next two years [1][2] - **Revenue Forecasts**: Updated revenue forecasts for China AI GPU are Rmb113 billion for 2026 and Rmb180 billion for 2027, reflecting a 62% CAGR from 2024 to 2027 [2][20] Supply Dynamics - **SMIC's Expansion**: SMIC is expanding its leading-edge fab capacity, which is anticipated to alleviate equipment bottlenecks. The forecast includes a total capacity of 22kwpm for 7nm and under by 2025, increasing to 42kwpm by 2026 [1][10] - **Local Supply**: Local suppliers like Naura and AMEC are gradually replacing previously bottlenecked tools, enhancing China's ability to produce AI GPU chips [1][10] Competitive Landscape - **Mature Node Demand**: Demand for mature nodes remains weak, with oversupply in capacity. However, there is still demand from smartphone SoCs and autonomous driving semiconductors that could offset potential GPU demand weaknesses [3] - **Hua Hong's Position**: Despite raising wafer prices, Hua Hong's profitability appears weaker compared to SMIC and UMC, with an EBITDA margin of 30% in Q2 2025 compared to SMIC's 47% and UMC's 41% [3][9] Stock Recommendations - **SMIC**: Upgraded to Overweight (OW) with a price target of HK$80, reflecting strong domestic AI demand and improved gross margins [4][8] - **Hua Hong**: Downgraded to Underweight (UW) due to concerns over the sustainability of its mature node business and inventory build-up [4][9] Strategic Insights - **Self-Sufficiency in Semiconductors**: China's semiconductor self-sufficiency ratio is projected to rise to 30% by 2027, driven by advancements in local production capabilities and government support [52][60] - **AI Localization**: SMIC is positioned to benefit from strong domestic AI localization demand, supported by government initiatives and the need for advanced node manufacturing [89] Risks and Considerations - **Market Risks**: Potential risks include the possibility of local CSPs purchasing more AI chips from foreign vendors, which could impact SMIC's utilization rates and market share [94] - **Performance Variability**: The performance of local AI chips, particularly from Huawei, may face challenges compared to global competitors like NVIDIA [36][90] Additional Insights - **Huawei's Developments**: Huawei is advancing its AI chip capabilities with new product launches and improvements in interconnect bandwidth, which may enhance its competitive position in the market [35][37][38] This summary encapsulates the critical insights from the conference call regarding the semiconductor industry in Greater China, focusing on demand forecasts, supply dynamics, competitive positioning, and strategic recommendations for key players like SMIC and Hua Hong.

Group 1 - The recent escalation in US-China trade tensions resembles previous conflicts, with the US imposing significant tariffs on Chinese goods, including a proposed 100% tariff on all imports from China starting November 1 [1][3][4] - The US debt ceiling has been raised to $41.1 trillion, with a federal deficit exceeding $1.8 trillion, raising concerns about potential default risks if debts cannot be refinanced [3][4] - China's response includes increasing gold reserves and enhancing regional cooperation, such as upgrading trade agreements with ASEAN to mitigate risks from US tariffs [5][7][8] Group 2 - The US tariffs are expected to significantly increase costs for American ports, particularly for equipment imported from China, which could lead to higher logistics costs and delays in modernization [4][11] - China is diversifying its trade relationships, reducing tariffs for the EU and other regions, and focusing on regional trade agreements to lessen reliance on the US market [5][8][11] - The trade conflict has implications for global supply chains, prompting a shift towards regional cooperation and alternative currency settlements to reduce dependence on the US dollar [8][11] Group 3 - The technology sector is also affected, with the US extending chip export bans to Huawei and other companies, indicating a strategic focus on limiting China's technological advancements [9][11] - The overall trade friction suggests a potential shift in the global economic landscape, with supply chains being restructured and increased regional collaboration [11]

Core Insights - Morgan Stanley's report highlights China's ambition to become a global leader in artificial intelligence (AI) technology, driven by a robust ecosystem of talent, innovation, data, and infrastructure [1][3] - The report emphasizes the importance of applying AI to the "real economy" and commercializing AI products to enhance productivity in traditional industries [1][2] - China is focusing on market-driven AI applications, particularly in sectors like autonomous driving, smart manufacturing, and digital customer service, contrasting with the U.S. focus on broader consumer applications [1][2] Infrastructure Sector - China's AI GPU self-sufficiency is projected to increase from 34% in 2024 to 82% by 2027, with companies like Huawei and Cambricon leading innovations in chip development [5] - Lenovo's business segments are expected to benefit from the AI revolution, with a 60% year-on-year growth in its ISG segment for Q4 2024 [6] Data Center Sector - The data center industry is anticipated to see a significant increase in new bookings, growing from 2.1 GW in 2024 to 3.7 GW annually from 2025 to 2027, representing a 76% increase [8] - The rental pricing in China's data center sector has stabilized at lower levels, with improving return rates due to lower bank financing costs and faster client onboarding [8] Platform Sector - The rapid development of AI applications is expected to accelerate growth in China's IaaS/PaaS market, benefiting cloud service providers like Alibaba and Tencent [9] - Tencent's cloud business is projected to accelerate growth starting Q2 2025, as it reallocates resources to external cloud clients [9] Application Sector - In the 2C domain, AI applications are rapidly evolving, with platforms like WeChat leveraging user data to enhance user experience and drive profitability [11] - The 2B application speed is expected to surpass previous public cloud cycles, with a subscription model becoming prevalent for enterprise AI applications [11] Automotive and Robotics - The penetration rate of L2+ autonomous driving in China is expected to reach 25% by 2025, benefiting manufacturers like BYD and Geely [12] - By 2030, China's humanoid robot inventory is projected to reach 252,000 units, with significant growth anticipated in both commercial and household humanoid robots by 2050 [12] Energy and Quantum Computing - AI-driven data centers are expected to account for 10% of China's total electricity demand by 2035, with green energy initiatives gaining traction [14] - China's advancements in quantum computing, exemplified by the "Zuchongzhi 3" prototype, are set to provide new computational capabilities that will benefit AI and other industries [14] Conclusion - Despite U.S. chip restrictions, China's AI computing capabilities are advancing, with domestic semiconductor companies innovating rapidly to close the performance gap with U.S. counterparts [15]