According to Zhitong Finance APP, China Merchants Securities Co.,Ltd. released a research report stating that the digital chip sector, with AI chips as its core component, has driven significant gains in the overall semiconductor index. The domestic computing power and autonomous control represent long-term themes in the semiconductor sector. The firm believes that amid the fluctuating situation regarding AI computing chip sales between China and the US, domestic large model manufacturers and internet companies are expected to continuously expand their procurement and application ratio of domestic chips. Corresponding domestic chip suppliers and related industry chain systems are likely to benefit, with GPU/ASIC/switch chips and foundry services being particularly important segments with high market recognition. The firm also suggests paying attention to catch-up opportunities for companies in upstream sectors such as equipment and EDA that represent core bottleneck areas, as well as companies in subdivisions like storage, analog/power, and PCB that may benefit from the volume growth of domestic chips.
**Current Status of Domestic Computing Power: Continued Fluctuations in Special Edition Sales like NV H20, Highlighting the Necessity of Autonomous Control**
Nvidia resumed H20 supply to China. On July 14, Nvidia resumed sales of H20 to China, though China expressed concerns about H20 chip security issues. On July 31, China's Cyberspace Administration summoned Nvidia, requiring submission of relevant certification materials regarding H20 vulnerability and backdoor security issues, while central media consecutively questioned Nvidia. US officials have allowed H20 and MI308 chip supply to China. On August 11, Nvidia and AMD received US permits to export their H20 and MI308 chips to the Chinese market. Nvidia suspended H20 production, while DeepSeek-V3.1 supports domestic chip design. On August 21, Nvidia informed some component suppliers to suspend H20 production work. Simultaneously, DeepSeek released V3.1, which adopts UE8M0FP8 designed for upcoming next-generation domestic chips.
**Computing Chips: Broad $50 Billion Domestic Market Space, Domestic Computing Chip Penetration Expected to Continue Rising**
Nvidia indicated that China's AI computing chip market is worth nearly $50 billion. Nvidia and AMD's China-specific chips have had virtually no actual sales in China since Q1 2025. Domestic internet manufacturers and other core demand-side players have increased their requirements for AI computing chip localization. Domestic core GPU companies such as Huawei Ascend, Cambricon, and Hygon provide domestic alternative solutions for domestic internet companies, operators, and other clients. Previously, various GPU/CPU companies have indicated support for DeepSeek compatibility. As more large models and supporting domestic computing products develop synergistically, the domestic penetration of computing chips is expected to continue rising. Companies like VeriSilicon can leverage their one-stop chip customization service capabilities and tape-out channels to provide customized ASIC chips for major domestic clients. In the computing chip field, attention should be paid to Cambricon, Hygon, VeriSilicon, Huawei Ascend industry chain, Moore Threads, and Muxi.
**Network Chips: Ethernet Switch Chips and PCIe Switch Chips are Currently the Two Core Products on Network and Computing Sides**
1) Ethernet Switch: AI demand driving high GPU demand growth also requires synchronized supporting communication networks (switch networking). Ethernet switch chips represent a technology-intensive industry with high entry barriers, presenting an oligopolistic market structure. Currently, over 95% of the domestic high-end data center switch commercial market is monopolized by Broadcom and Marvell, with supply-side shortages driving high price increases for 25.6T and 51.2T channels. Huawei, ZTE, and other equipment manufacturers are actively developing self-research products. Additionally, Centec Communications, as a leading third-party commercial Ethernet switch chip company, is rapidly improving its product matrix, with 12.8T and 25.6T products successfully in small-volume production and 51.2T products expected to tape out in H1 2026.
2) PCIe Switch: With the proliferation of super-node architecture, PCIe switch demand in AI clusters continues to grow. PCIe protocol is a high-speed serial computer expansion bus standard. From PCIe 4.0 to PCIe 5.0, transmission rates have increased from 16GT/s to 32GT/s. By PCIe 6.0 and PCIe 7.0, transmission rates will further increase to 64GT/s and 128GT/s. The global market is dominated by Broadcom, Microchip, and other manufacturers with over 90% market share. Domestic computing and inference card interconnection needs provide incremental market and entry opportunities for domestic PCIe switches. Attention should be paid to progress by Shidu Technology, Jingxin Microelectronics, Qingxin Semiconductor, Montage Technology, and Centec Communications.
**Optical Chips: Core Components Determining Optical Module Performance and Speed**
Data center side: 1) Overseas, North American high-speed optical chip manufacturers have slow capacity expansion and prioritize local supply, causing significant supply gaps in the global market (especially 100G EML). 2) Domestically, policies strongly promote optical chip autonomous control. Combined with the silicon photonics technology transformation window, domestic manufacturers are accelerating entry into the high-growth data center market through cost-performance advantages and rapid technology iteration, capturing high-end incremental market share. Continued attention should be paid to Source Photonics, Changguang Huaxin, Sinosemic, Accelink Technologies, and Huagong Tech.
**Storage/Power and Other Computing Supporting Chips**
1) Storage: Domestic module manufacturers continue advancing enterprise-level storage, with some storage chip manufacturers entering the 3D DRAM market. Domestic storage module manufacturers are actively deploying enterprise-level storage products. Longsys has built a complete enterprise-level product line, Biwin Storage launched SP series enterprise-level PCIe SSDs, and Demin Li introduced solid-state drives and other enterprise-level storage solutions, entering major cloud service provider supply chains. As computing power gradually shifts from cloud to edge, edge devices require not only computing power but also flexibility, cost, and power consumption requirements. Some manufacturers like GigaDevice are entering the 3D DRAM market, further accelerating edge-side storage solution innovation.
2) Power: Data center multi-level power systems continue evolving. Attention should be paid to domestic power and power supply vendors. Data center multi-level power systems are gradually transitioning from PSU to Power Shelf mode. Future high-energy-density racks will gradually adopt 800V HVDC architecture. Power semiconductors, as core energy management devices, are expected to increase in usage and value. Additionally, third-generation semiconductors like SiC and GaN are expected to be more widely applied in power modules with high-voltage architecture. Domestic company Innoscience has announced cooperation with Nvidia, while attention should be paid to opportunities for traditional power semiconductor companies. For board-level tertiary power supplies, overseas companies currently mainly cooperate with major manufacturers like MPS/Infineon and NV. Domestic companies like Will Semi, Chipsea, and Chipown have successively launched multi-phase controllers and DrMOS products, expected to grow together with domestic computing industry chain core chip companies.
**Foundry: Continuously Benefits from Autonomous Control, Valuation Level Expected to Rise**
The long-term valuation improvement logic for domestic foundry leaders remains unchanged. Under US export control background, domestic computing chips will increasingly rely on SMIC's advanced process production lines. Considering stronger ASP and profitability of advanced processes, as advanced process capacity comes online and yields improve, the company is expected to see value revaluation. Hua Hong Semiconductor's new capacity mainly focuses on high-value-added products. The company also announced plans for issuing shares and paying cash to purchase Shanghai Huali Microelectronics assets, namely equity corresponding to assets (Hua Hong Fab 5) competing with Hua Hong Company in 65/55nm and 40nm processes. Benefiting from Fab 5 asset injection, the parent company's future asset quality and valuation level are expected to further improve.
**Equipment: Downstream Expansion Expectations Improve, Overall Performance Good**
Benefiting from domestic advanced logic and dual storage localization, combined with continuous new product breakthroughs, some domestic semiconductor equipment manufacturers have shown positive order growth, with further improvement in localization rates for subdivided equipment segments. Benefiting from order confirmation, new product breakthroughs, and equipment market share increases, companies like AMEC, Piotech, and ACM Research have achieved overall revenue growth meeting expectations. On the profit side, companies like Piotech and Changchuan due to scale effects and cost improvements have shown significant marginal recovery in Q2 2025 non-GAAP profits.
**Materials: Semiconductor Materials Continue Recovery with FAB Utilization Rate Improvement**
Photomask manufacturers are expected to see continued performance improvement with capacity growth and node upgrades. Target materials and CMP are advancing orderly, wet chemicals and electronic gas prices are expected to improve marginally, and advanced packaging materials continue verification and introduction.
**Assembly and Testing: Local Advanced Packaging Capabilities Recognized by GPU Companies, Focus on Computing Power Major Client Cooperation Progress**
Domestic assembly and testing companies' technical capabilities are among the leading domestic capabilities in various semiconductor segments. Currently, global CoWoS packaging is gradually transitioning from S to L. Some major domestic assembly and testing manufacturers have gradually developed CoWoS packaging capabilities. Previously, Moore Threads and Muxi prospectuses indicated joint completion of Chiplet and 2.5D packaging mass production and testing with domestic assembly and testing manufacturers, demonstrating that domestic assembly and testing manufacturers' support for domestic computing chips has reached high levels. The firm believes that under the US trend toward advanced product assembly and testing restrictions, cooperation depth and necessity between domestic assembly and testing companies and local GPU chip companies are gradually deepening. Jcet Group and Advanced Semiconductor Engineering have previously announced AI/HPC field client cooperation. Attention should be paid to domestic assembly and testing manufacturers' forward-looking deployment in advanced packaging fields, including Tongfu Microelectronics, Jcet Group, Advanced Semiconductor Engineering, and Will-Test Technology. If some companies further strengthen cooperation with GPU companies, it would be significantly positive news. Attention should also be paid to potential targets like Shenghe Jingwei industry chain.
**PCB/CCL: Accelerating High-End Capacity Supporting Supply, Expected to Deeply Benefit from Domestic Computing Chip Volume Expansion**
Objectively speaking, domestic computing chip design capabilities are already in the global first tier, but due to advanced process capacity limitations from overseas advanced equipment supply restrictions, computing chip performance still has gaps compared to overseas leading computing manufacturer products. To better leverage domestic computing chip performance and cluster effects, AI PCB and high-speed CCL materials required for domestic computing power will have correspondingly higher design specification requirements. In this round of AI computing trends, the firm has seen domestic PCB/CCL manufacturers represented by Sheng Hong Technology and Shengyi Technology shine in the global computing industry chain, achieving rapid expansion of market share in subdivided high-end markets, demonstrating the competitiveness of China's PCB industry chain in the global market. In the breakthrough process of domestic advanced processes, domestic PCB/CCL manufacturers represented by Shenznan Circuits, Founder Technology, Shengyi Electronics, Fastprint Circuit Tech, and Nanya New Material are also actively participating and cooperating, achieving capacity construction in high-end computing chip substrate segments. These all lay good industry chain foundations for the rise of domestic computing power. The firm believes that as domestic computing chips accelerate volume expansion in the future, the PCB/CCL sector is expected to deeply benefit. Attention should be paid to Shenznan Circuits, Founder Technology, Shengyi Electronics, Nanya New Material, Shengyi Technology, Fastprint Circuit Tech, and Huazheng New Material.
**EDA: Core Bottleneck Segment in Semiconductor Upstream, One of the Beneficiaries of Advanced Process and Storage Industry Development**
The US has already implemented restriction bans on EDA for China's GAA FET and below advanced processes, intending to curb China's capabilities including chip design companies to develop below 3nm. EDA represents a core bottleneck segment for China's semiconductors. Currently, Empyrean Technology has completed digital chips, storage, advanced packaging, and 3DIC products successfully introduced to domestic leading chip design and manufacturing enterprises and major storage chip enterprises. The company also cooperates deeply with mainstream domestic GPU companies, expected to deeply benefit from domestic computing chip and advanced process/storage development trends. Primarius Technologies and Semitronix continue expanding business territories through mergers and acquisitions. Future domestic EDA market share is expected to maintain upward trends.
**Risk Warning:** Semiconductor domestic substitution progress below expectations; terminal demand below expectations; inventory destocking below expectations; intensifying industry competition, etc.
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