The electronics sector experienced a notable correction in July, primarily driven by rapid valuation expansion in prior periods and the concentrated release of mid-year earnings pressures. However, demand remains robust fueled by AI, with prices continuing to rise. Global semiconductor demand is steadily improving, and AI capital expenditure is growing quickly. The combined capital expenditure of the world's nine largest CSPs is projected to reach $886.7 billion by 2026, representing a year-over-year increase of 90%. Rapid growth in TWS earbuds, wrist-worn devices, AI servers, and new energy vehicles is expected to further drive recovery in August. On the supply side, demand in AI-related niche markets is strong, leading to tight capacity at upstream wafer foundries, which is squeezing other industries. This is pushing wafer prices higher, and the supply-demand balance in the semiconductor sector is expected to remain tight in August. In terms of pricing, some memory products continued to rise in July, with price increases spreading from memory, CPUs, and consumer electronics to power, analog, and MCU segments. AI remains the core narrative, and the localization rate of related supply chains is steadily increasing.
In July, the electronics sector fell by 34.72%, and the semiconductor sub-sector dropped by 35.38%. At the end of July, semiconductor valuations, based on a five-year historical percentile, had a PE of 85.37% and a PB of 86.32%. The Shenwan electronics industry index also declined 34.72%, with the semiconductor segment down 35.38%, compared to the CSI 300's 7.86% decline. On a five-year and ten-year historical percentile basis, the semiconductor sector's PE stood at 85.37% and 82.61%, respectively, while its PB was at 86.32% and 90.89%. In the second quarter of 2026, the electronics sector remained the top holding in public funds, with a market value of RMB 1,607.532 billion. Allocations to semiconductors accounted for 71.01% of the electronics sector's holdings and 28.34% of the total stock portfolio. Key holdings were predominantly large-cap semiconductor leaders with a market capitalization above RMB 30 billion, with the top 20 holdings accounting for 82.69% of the total semiconductor portfolio value.
Price Trends and August Outlook
Prices in the semiconductor sector showed volatility in July, with some sub-segments stabilizing or declining. The market is expected to continue fluctuating in August. In July, prices for certain memory modules remained stable, while most DRAM and Flash prices continued to rise strongly. Price increases are also being implemented in other semiconductor segments. The overall price change for memory modules in July 2026 ranged from -4.00% to 0.00%, while the price change for DRAM and Flash memory chips ranged from -1.72% to 14.72%.
Global industry leaders maintained high inventory levels in the first quarter of 2026. A sample of 143 A-share listed companies saw inventory rise in Q1 2026, with quarterly revenue growth of 32.24% and net profit growth of 180.98%, indicating that demand recovery is driving corporate performance. On the supply side, Japanese semiconductor equipment shipments in June 2026 grew by 26.95% year-over-year, with first-half growth of 12.57%, suggesting active capacity expansion over the next one to two years.
Downstream Demand Recovery
Demand for AI servers, new energy vehicles, TWS earbuds, and wearable devices is showing strong recovery. In 2026, consumer electronics may see shipment declines due to high memory prices. Global semiconductor demand is largely driven by consumer electronics, automotive, servers, and wearables, which account for over 80% of total demand. Their sales volume directly impacts upstream semiconductor demand. In Q2 2026, global smartphone shipments fell 6.00% year-over-year, with a 5.48% decline in the first half. In China, smartphone shipments dropped 15.26% year-over-year in June 2026 and 5.46% in the first half. Global new energy vehicle sales grew 9.55% year-over-year in June 2026, with first-half growth of 3.55%, while China's new energy vehicle sales rose 23.63% in June and 7.35% in the first half. Global PC shipments declined 4.88% year-over-year in Q2 2026, with a 1.40% drop in the first half.
Semiconductor Equipment Boom
The semiconductor equipment sector continues to see rising activity, with delivery pressures persisting. TSMC reported first-half 2026 revenue of NT$2.40 trillion, up 35.6% year-over-year, and raised its full-year capital expenditure guidance to USD 60-64 billion. ASML posted Q2 net sales of EUR 9.33 billion with a 54.0% gross margin, and raised its full-year net sales guidance to EUR 43-45 billion, citing strong demand for EUV and high-end DUV lithography systems. SEMI's July 14 report revised its 2026 global equipment sales forecast up to USD 165.9 billion (a 23.2% year-over-year increase) and provided a first-ever 2028 outlook of USD 229.5 billion. However, delivery lead times are also lengthening. According to supply chain feedback, the average delivery cycle for major front-end equipment has extended by approximately 50% to 100% compared to normal levels, with some machine orders already scheduled for 2027. TSMC, Samsung, and SK Hynix have all placed early orders. As overseas equipment delivery times continue to lengthen, compounded by geopolitical factors, domestic equipment is being adopted more quickly. Order visibility for local equipment manufacturers is improving, warranting a focus on core stocks in the domestic semiconductor equipment supply chain.
Investment Recommendations
Industry demand remains strong, driven by AI, and supply-side capacity expansion is slow. The high level of prosperity is expected to continue. However, high memory prices may significantly suppress demand for consumer electronics such as smartphones. Current valuations are also at historically high percentile levels. Taking these factors into account, the firm believes that the AI infrastructure boom will persist, and semiconductor localization will continue to accelerate. It recommends focusing on structural opportunities in AI and domestic substitution on dips. Key areas to watch include: (1) AI innovation-driven sectors, with computing chip stocks like 寒武纪, 海光信息, 澜起科技, 摩尔线程, 沐曦股份, and 龙芯中科; optical components like 源杰科技, 长光华芯, 中际旭创, 新易盛, 天孚通信, 光迅科技, and 东山精密; PCB stocks like 胜宏科技, 沪电股份, 深南电路, and 生益科技; memory stocks like 江波龙, 德明利, 佰维存储, 兆易创新, and 北京君正; and server and liquid cooling stocks like 英维克, 中石科技, 飞荣达, 思泉新材, and 工业富联. (2) The AIoT sector, benefiting from strong domestic and international demand, including 乐鑫科技, 恒玄科技, 瑞芯微, 中科蓝讯, 炬芯科技, 全志科技, 晶晨股份, 翱捷科技, and 泰凌微. (3) Upstream supply chain themes of domestic substitution in semiconductor equipment, components, and materials, with stocks like 北方华创, 中微公司, 拓荆科技, 华海清科, 盛美上海, 富创精密, 新莱应材, 中船特气, 华特气体, 安集科技, 鼎龙股份, and 晶瑞电材. (4) Leaders in price recovery, focusing on the power sector with 新洁能, 扬杰科技, and 东微半导; CIS with 豪威集团, 思特威, and 格科微; and analog chips with 圣邦股份, 思瑞浦, 美芯晟, and 芯朋微.
Risk Factors
(1) Risk of weaker-than-expected downstream demand recovery. (2) Risk of slower-than-expected progress in domestic substitution. (3) Risk of AI capital expenditure falling short of expectations.
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