2024-08-15
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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice
01 First acquaintance with PCB: the mother of electronic products, it is hard not to be tempted 03 How to look at PCB: medium-sized business, it is recommended to start from these two points
）Where there is electricity, there is PCB
Printed Circuit Board, abbreviated as PCB, is also known as printed circuit board, which is named because of its manufacturing process of "electronic printing".
The function of PCB is to act as a carrier for electrical interconnection of electronic components and a supporting base. It not only provides electrical impedance characteristics such as electrical insulation for the circuit, but also carries the functions of digital/analog signal transmission, power supply, and radio frequency signal transmission/reception of electronic equipment.
In fact, understanding PCB is not that complicated. At home, different electrical appliances need to be connected through complex circuits. Electronic devices are similar. The components inside need to be connected through circuits to operate. However, today's electronic devices are increasingly pursuing miniaturization, so components such as chips, capacitors, inductors, resistors, relays, etc. need to be connected through miniaturized circuits on PCB boards instead of directly using bulky wires.
This has led to the situation that wherever there is electricity, there is PCB. Its downstream applications cover many industries such as consumer electronics, PCs, communications, automotive electronics, aviation, etc., so PCB is also affectionately called the mother of electronic products.
The market size of the PCB industry has been growing continuously over the years, following the development of the digital economy, with periodic fluctuations. According to data from Prismark, the most authoritative statistical agency in the industry, the global PCB market size reached US$81.7 billion in 2022, with a compound growth rate of about 3.8% in the past. At this rate, it is expected that by 2027, the global PCB market size will exceed US$100 billion for the first time.
What does 100 billion US dollars mean? Semiconductors, which are also components, have a global market size of 500-600 billion US dollars. The PCB market will reach 1/5 of the semiconductor market, which is obviously a large market that cannot be ignored. In addition, China's PCB industry is far ahead of semiconductors in the world and is a very competitive link.
Figure: Global PCB output value statistics, source: Prismark
2) China’s PCB industry is the world’s largest due to industrial transfer
Over the past decade, the compound growth rate of China's PCB industry output value has reached 8%, which is almost twice the global industry growth rate of 3.8%. PCB is an industry with relatively balanced capital, labor and technology intensity. Therefore, in the past, the industry followed the changes in the electronics industry and the pursuit of low costs, shifting from the United States, Europe, Japan to South Korea, Taiwan, and finally to mainland China.
It can be said that PCB and China are a match made in heaven. First of all, China is the world's main PCB consumption region, and it has all-round advantages in labor, resources, policies, and industrial agglomeration on the production side. Finally, in the past 30 years, with the help of Taiwanese and Hong Kong businessmen, mainland China has finally formed the world's largest PCB industry cluster in the Pearl River Delta and the Yangtze River Delta.
From the perspective of production capacity, China surpassed Japan in 2006 to become the world's largest PCB producer. Today, mainland China's production capacity accounts for an astonishing 54% of the world's total. Japan and Taiwan, China, only retain part of the high-end PCB production capacity. Today, Chinese PCB companies have started a wave of building factories in Southeast Asia, such as Thailand and Vietnam, showing the demeanor of industry leaders.
In terms of technology, the strength of domestic PCB companies should not be underestimated. For example, in the case of the soft board FPC used in Apple mobile phones, Pengding Holdings and Dongshan Precision have replaced Japanese companies and occupied the main market share. In cooperating with Tesla's smart car strategy, domestic companies such as Shiyun Circuit and Dongshan Precision have come to the forefront; and for the HDI boards in the latest AI servers, domestic companies such as Shanghai Electric and Shenghong Technology are also showing a trend of surpassing Taiwanese companies.
According to Prismark's forecast, even by 2028, China will still firmly hold the top spot in PCB. Even Southeast Asia, where its share has increased the fastest, has benefited from Chinese companies' past investment in new production capacity rather than the rise of its local companies.
3) Every innovation will not be absent
Without going into too much history, just looking at the past six years, PCB has been deeply involved in three major industrial innovations:
Taking the AI computing-related PCB, which is the hottest product in the industry recently, as an example, by disassembling NVIDIA's full range of products, we can clearly see the trend of PCB participating in technological innovation.
1) NVIDIA's DGX architecture server uses a double-layer structure of GPU tray and motherboard tray. The GPU tray holds the GPU module, including 1 UBB and 8 OAMs, which are all newly added PCB materials; 2) NVIDIA's latest upgraded GB200 NVL72 rack server includes 18 compute trays and 9 NVlink switch trays, which require multiple PCBs to support. The value of PCBs required for a single server reaches tens of thousands of dollars.
And with the upgrade of AI servers, the server industry's demand for PCBs will gradually switch to HDI. Therefore, HDI will be the fastest growing PCB subcategory in the next five years. According to Prismark's forecast, the CAGR of HDI will reach 16% from 2023 to 2028.
As server usage increases and product standards are upgraded to HDI, the PCB industry has begun to see a structural explosion. The PCB market required in AI servers is expected to grow rapidly from less than US$400 million at present to around US$4 billion by 2025.
Along with AI servers, AI systems, storage, network equipment such as switches, and optical modules also require more and higher-level PCBs, once again injecting new growth momentum into this mature industry.
02Looking at PCB again: Back to reality, why is it not so attractive?
The market size of 100 billion US dollars is huge and will continue to grow, with significant technological innovations every now and then. In addition, Chinese PCB companies are very competitive and enjoy the advantages of industrial clusters.
In theory this should be a track with long slopes and thick snow, but the reality is far from satisfactory.
Although the story of the PCB industry is very attractive, when you look deeper, you will find that this industry is not easy to analyze, and investing in it is even very torturous. Even if you look back and select Pengding Holdings, Shanghai Electric Co., Ltd. and Shenzhen South Circuit, the three A-share PCB companies with the largest current market value, the sharp fluctuations in stock prices in the past few years have been very painful, and many other small companies have even experienced a process of value destruction.
1) The biggest characteristic of the industry is that it is scattered
Unlike other technology industries, the technical barriers of PCB are not high. There have been basically no revolutionary major technological changes since 2006. At the same time, the PCB industry chain is relatively short, and the materials and equipment involved are relatively few. It uses three major base materials, namely copper foil, glass fiber cloth, and resin, to first make copper clad laminates (CCL), and then use a simplified process similar to semiconductors to make finished PCB boards. There is not much worth mentioning about the technology.
It is precisely because of this that the difficulties in research and investment have formed three "scattered":
When the three scattered points are multiplied, this will cause a major problem for investment, and the winning rate will drop rapidly. The slope is indeed long enough, but it is a bumpy road.
The result of mapping to the industrial law is that this industry seems to be very large, but it is obviously very difficult to make so many products and serve so many downstream and customers. Take Pengding, the world's largest revenue company, as an example, it only occupies 6-7% of the global market share.
The logic that the strong will always be strong in other fields is difficult to work in this industry. It seems that a company can become a leader by relying on aggressive capacity expansion or some historical opportunity such as industrial transfer. This is also the reason why the flags on the top of the PCB industry have changed frequently in the past few decades.
Chart: PCB classification, Source: Shenzhen South Circuit's prospectus
2) The battle over the growth trap: what is the value of the industry?
In the methodology of value investing, a concept called value trap is often mentioned. It means that investors buy stocks based on low valuations, but ignore the possible business or financial problems behind these stocks, and ultimately cheap stocks can fall even cheaper.
But for investors in growth stocks, few people mention a similar concept, that is, the growth trap. Many industries or companies seem to be growing at first, but after a few years, the revenue side does achieve high growth, but the profit or cash flow tells you that it is all a false alarm.
The most impressive thing is the nationwide LED craze in 2013. Ten years later, although the domestic LED industry has achieved its goal of becoming the world's number one, investors are left with nothing. The PCB industry is also an industry close to a growth trap.
We have selected Zhending Technology, Xinxing Electronics, Pengding Holdings, Shanghai Electric Co., Ltd., and Shenzhen South Circuit, which are recognized as the best companies in the industry. Judging from their ROE levels, excluding the inherent cyclical fluctuations of the industry itself, the central level may be around 13-14%, which is considered passing but can hardly be called excellent.
You have to know that these are the best PCB companies among the most hardworking and competitive Chinese people, and their ROE can only reach this level, and this does not take cash flow into consideration.
Why has it come to this?
Although it is an electronics industry, innovation has never been the main theme of the PCB industry. From the previous discussion, it is not difficult to see that the innovation of PCB is a passive innovation that accompanies the downstream, which does not conform to the sexiest story in the technology industry, that is, supply creates demand. In other words, the innovation of PCB is the result, not the cause.
The real innovators are downstream customers, so the value of PCBs is in the hands of customers and suppliers do not have much say. This leads to the inability to sustainably form a sector effect from the perspective of the larger industry.
As a runner-up, PCB, except for a few products such as ABF substrates, does not have the same strong scale effect and manufacturing barriers as wafer foundry in terms of manufacturing process. This eventually led to an awkward situation where the industry is large and strong, but the companies are small and scattered.
So the snow on this track is actually not thick enough.
Chart: The ROE level of leading PCB companies is not high. Source: Company financial reports
For the PCB industry, it is a long slope with thick snow on the surface, which is an advantageous track for the Chinese; but after in-depth analysis, we can draw the following conclusions: the slope is long but bumpy, and there is snow but it is not thick. The final result is that it is difficult to roll a snowball, and the small snowball that may be accumulated with great difficulty may easily return to zero in one day due to some changes.
So from the perspective of positioning, PCB is a pretty good industry. If we go further down to the enterprise, it is just a medium-sized business, which is worth grasping in stages or locally, but it is difficult to establish long-term belief.
As for how to grasp the stage by stage, the author has the following two thoughts for your comments.
1. Focus on structural growth
Although PCB is asset-heavy, due to the dispersion of downstream, it often has the characteristics of being not bright in the east and bright in the west. At the same time, it does not have such a strong cyclicality, and it is difficult to make money by relying on huge price fluctuations. Therefore, the foothold of the industry is still innovative growth.
As mentioned above, the most accurate positioning of PCB should be accompanying innovation. Then from the perspective of industry development rules, there are two inevitable directions of accompanying innovation that really need to be paid attention to: 1) smaller, corresponding to multi-layer and flexible PCB; 2) higher, including high frequency and high speed.
As electronic devices, such as smartphones and wearable devices, develop towards miniaturization and portability, PCBs also need to achieve smaller sizes to meet more stringent space and performance requirements. For example, Apple mobile phones have led the innovation of flexible boards in the past, making FPC leader Pengding Holdings the company with the largest PCB revenue in the world.
On the other hand, the innovation of microelectronics is developing in the direction of high frequency and high speed. High frequency is due to the increasingly high frequency used in the propagation of electromagnetic wave signals. Huawei and ZTE's 5G equipment is unique in the world. The changes in AUU and BUU have brought about an explosive demand for high-frequency and high-speed PCB boards. In this round of AI wave, high computing power requires that signals can be transmitted quickly between different chips. High-speed boards represented by HDI have taken advantage of the trend and continue to be in short supply.
Focus on these two directions and related downstreams. If a company happens to be in the trend of downstream innovation, it will likely enjoy a round of high growth in value revaluation. But at the same time, other categories of PCBs may still be unpopular. The pessimism of PCB companies is not the same. We only need to look at the lucky ones who are in the trend.
2. Embrace your top customers
There are many types of PCBs, and manufacturers usually provide customized solutions based on customer needs, involving many aspects such as PCB board type, material, number of layers, line width/line spacing, board thickness, production capacity, etc. This also leads to the fact that although customers have a lot of say, they cannot get rid of excellent PCB suppliers. After all, in their key products, maintaining a multi-supplier system is not only disadvantageous, but also prone to quality problems.
We have seen that in the long-term business competition, domestic PCB companies have increasingly become core partners of downstream major customers. Apple, Nvidia, Tesla, Amazon, Huawei, ZTE, etc. all have the shadow of Chinese companies.
This is very important for grasping local opportunities. If a customer has a major product iteration and innovation, its core PCB supplier will also expand in scale. This is more direct and effective than simply analyzing the downstream, because high-quality customers often determine the dynamics of the downstream, and new products generally have the most lucrative profits.
This is the conclusion:Due to the hot investment in AI computing infrastructure and AI terminals, the market's attention to PCB has continued to increase. However, the huge fluctuations of heaven and hell in one thought always make people more confused. A mountain is a mountain, a mountain is not a mountain, and a mountain is still a mountain. From an industrial perspective, peeling off layer by layer, we may get closer to the truth.
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