China Hardware and Semiconductors_ Initial Assessment of Potential Handset Subsidy Impact

Summary of the Conference Call on China Hardware and Semiconductors Industry Overview - The focus is on the China Hardware and Semiconductors industry, particularly the smartphone segment and the impact of potential handset subsidies [2][10]. Key Points and Arguments 1. Potential National Handset Subsidy: - Anticipated to be introduced in 1H25, following several provincial subsidy policies in 2H24. The Jiangsu province subsidy has a cap of Rmb1500, primarily benefiting mid to low-price smartphones [2][4]. - Despite these subsidies, overall smartphone sell-out shipments were weak in 2H24, declining 3% YoY [4]. 2. Market Dynamics: - The national subsidy is expected to provide a stronger driving force due to its wider regional coverage and specific brand targeting compared to provincial subsidies [2][4]. - The smartphone market is experiencing a shift, with sub-Rmb2000 phones accounting for 45-50% of shipments from 2020 to 2024 [7]. 3. Impact on Smartphone Shipments: - A Rmb400-500 subsidy could potentially drive an additional 20-40 million smartphone shipments, representing 7%-14% of the estimated 281 million shipments for 2024 [7]. 4. Company Exposure: - Companies such as Q Tech, O-film, Goodix, and Maxscend have high exposure to the Chinese smartphone market, with over 70% of their revenue and profit linked to local manufacturers [8]. - Preferred companies for investment include Xiaomi, Sunny Optical, and Will Semi due to better market capitalization, liquidity, and earnings support [2][8]. 5. Replacement Cycle: - The replacement cycle varies by price segment, with low-price segments typically having a 2-3 year cycle and high-price segments around 4-5 years [7]. Additional Important Information - Market Sentiment: The market is optimistic about the potential impact of the national subsidy, which could stimulate demand in a currently sluggish market [2][4]. - Shopping Festivals: Significant effects from the subsidy are expected during major shopping events like 618 and Double 11 in 2Q25 and 4Q25 [7]. - User Base: There are approximately 1.238 billion monthly active mobile device users in China, indicating a large potential market for smartphone replacements [7]. Companies Mentioned - Xiaomi: Expected to benefit from the subsidy due to its market position [12]. - Sunny Optical: Noted for its strong earnings support [12]. - Will Semi: Highlighted for its favorable market exposure [12]. - Q Tech, O-film, Goodix, Maxscend: Identified as companies with significant exposure to the smartphone market [8]. This summary encapsulates the key insights from the conference call regarding the potential impacts of handset subsidies on the Chinese hardware and semiconductor industry, particularly in the smartphone sector.