The mother of electronic products is seeking the bottom in demand adjustment and cost rise

Over the past year, PCB (printed circuit board) companies, whose stock prices have been falling incessantly, finally experienced a surge after the release of the third quarter report in 2021. After the quarterly report of Chongda Technology (002815. SZ) was released, there were three consecutive boards, and Shennan Electric Circuit (002916. SZ) also reaped two consecutive boards. Even Pengding Holdings (002938. SZ), which has strong eyebrows and big eyes, also raised its limit after the financial report was released. Before that, all three were at their highest points last year, with a maximum decline of more than 50%.
Has the industry fundamentals reversed?
The mother of electronic products is seeking the bottom in demand adjustment and cost rise
Before determining whether fundamentals are reversed, it is necessary to understand what is causing the stock price to continue to decline.
As a support for electronic components, PCB can be used in many fields such as communication, consumer electronics, computers, automotive electronics, industry, aviation, and so on. It is known as the “mother of electronic products”. However, because of this, the PCB industry is greatly affected by the cyclical fluctuations in the macroeconomic and downstream industries. In the downstream distribution, communication electronics (including base stations, smartphones, etc.), computers, automotive electronics, and consumer electronics account for the largest proportion, accounting for 33%, 28.6%, 11.2%, and 14.8%, respectively.
However, in the past two years, in addition to the macroeconomic impact of the epidemic, the demand for communication electronics and consumer electronics has also changed. According to data from the Ministry of Industry and Information Technology, in 2021H1, China will add 190000 5G base stations, a year-on-year decrease of about 24.9%. The shipment volume of smart phones is also not optimistic. Although the shipment volume of smart phones has rebounded since the second half of last year, the global and domestic shipments in 2020 have both declined year-on-year.
Under the impact of the epidemic, the lack of cores has been difficult to alleviate, further affecting the demand of downstream industries such as automobiles, communications, and consumer electronics. Car manufacturers such as Volkswagen lowered their delivery and sales expectations, and Apple cut orders due to the lack of cores.
With such demand, what about upstream supply?
Upstream and downstream of PCB industry chain, source: Shengyi Electronics prospectus
The upstream industries of PCB are mainly copper clad plate, copper foil, glass fiber cloth, epoxy resin, and other industries. According to Prismark statistics, in the cost composition of PCBs in 2020, copper clad panels accounted for the largest proportion, about 30%; The cost proportion of manufacturing and labor expenses has also reached about 20%; The cost of copper foil, copper ball, and photoresist accounts for 9%, 6%, and 3%, respectively.
According to Chongda Technology, its raw material cost accounts for about 70%. It can be seen that changes in raw material prices have a significant impact on the operation of PCB enterprises. In the past year, the prices of bulk commodities such as international copper and oil have increased significantly, directly leading to the price increase of raw materials such as copper clad laminate, copper foil, and epoxy resin. Over the past year, the industry leader Jiantao Plywood has issued multiple price increase letters.
Due to the wide range of downstream industries, the concentration of China’s PCB industry is low, with over 20 listed companies in A-shares alone. Therefore, the premium ability to the downstream is weak, and costs cannot be smoothly transmitted to the downstream, so they can only be absorbed by themselves. In 2021H1, the gross profit margin on sales of Shennan Electric Circuit, Pengding Holdings, and Dongshan Precision decreased by 2.22, 2.17, and 1.66 percentage points respectively year-on-year.
The dual squeeze of demand and cost has resulted in limited operating conditions for PCB companies.
Moreover, with the continuous listing of domestic PCB companies and the gradual release of new production capacity by leading enterprises in the industry, market competition in the PCB industry has gradually intensified. In addition to the fund-raising and investment projects of newly listed companies such as Xiehe Electronics, Kexiang Shares, Aohong Electronics, and Sihui Fushi, Shennan Circuit, Pengding Holdings, and Shenghong Technology also have new capacity plans or are about to be put into production. The pressure brought about by the industry’s “insiders” cannot be ignored.
In the process of ramping up production capacity, factors such as low capacity utilization and depreciation as usual can suppress enterprise valuation in the short term.
What does the third quarter report reveal? Performance improved on a month-on-month basis
The situation improved in the third quarter, which is also the reason why the stock price of PCB companies rose sharply after the release of the third quarter report.
It can be seen simply from the growth rate of net profit attributable to the parent company and the gross profit margin on sales.
In Q2 2021, both Shennan Electric Circuit and Pengding Holdings’ net profit attributable to the parent company decreased year-on-year, with Pengding Holdings’ year-on-year decrease of 41.7%. However, in the third quarter, both of them showed positive growth, with Pengding Holding’s growth rate even reaching 77.86%%, the highest in recent two years. In terms of sales gross profit margin, the gross profit margin of Shennan Electric Circuit and Pengding Holdings increased by 0.09 and 5.09 percentage points respectively month on month in the third quarter.
Quarterly performance and gross profit margin of Shennan Circuit and Pengding Holdings, source: iFind
This performance improvement is not an exception. Dongshan Precision and Chongda Technology are also very significant. Among them, Dongshan Precision’s net profit growth rate has been positive for four consecutive quarters; In Q3 2021, the net profit attributable to the parent company of Chongda Technology increased by 101.63% year on year, after four consecutive quarters of negative year-on-year growth. The Q3 gross profit margin of the two companies also increased by 1.65 and 2.79 percentage points respectively on a month-on-month basis.
Can it last? Test the comprehensive strength of the enterprise
However, the improvement of the third quarter’s performance cannot be too optimistic.
First of all, the improvement in performance does not necessarily mean that it will continue in the future compared to the previous sluggish state. On the one hand, the rise in raw materials is not certain to reach its peak, and the international copper price is still at a high and volatile level. Goldman Sachs believes that the copper price will be another tipping point after the oil price; On the other hand, the impact of lack of cores has not been significantly alleviated, and Apple has even sacrificed iPad orders to meet iPhone needs. This will continue to affect the cost and demand of PCB companies.
The “inside roll” of the industry is not over either.
In the research report, China Merchants Securities said that by extracting the data of 23 upstream and downstream companies in the industry chain tracked by it in the past three years (2019-2021Q3), it estimated that the capacity input in Chinese Mainland exceeded the overall demand growth of the industry from the aspects of the industrial research caliber, equipment manufacturers’ order guidance, and investment planning of various industrial parks. As mentioned above, not only will the listing of new shares bring about the production of raised investment projects, but also the pressure of industry leaders such as Shennan Circuit and Pengding Holdings to expand production.https://www.slw-ele.com/
Therefore, there is still a need for PCB companies to “practice internal skills” and respond to the pressure of rising costs through refined management. At the same time, in order to truly stand out from the fierce competition, we must comply with industry trends, adjust the product structure, and increase investment in high-tech high level multilayer boards, high-end HDI boards, and IC carrier boards.