The electronics industry is experiencing a profound transformation powered by artificial intelligence (AI). As the demand for more complex computational and data processing capabilities rises, the printed circuit board (PCB) market is ushering in a new growth cycleLeading firms in the PCB sector are increasing their offerings related to AI products, resulting in soaring revenues and gross profit margins for high-performance PCBsContinuous investments in research and development, along with capacity expansion, are reshaping the competitive landscape.

In the first half of 2024, leading PCB manufacturers such as Huade Electronic (002463.SZ), Shenzhen Shennan Circuit (002916.SZ), and Shengyi Technology (688183.SH) reported impressive revenue growth rates of 44.13%, 37.91%, and 24.64%, respectively

Notably, Huade and Shenzhen Shennan achieved historic profit levels, a testament to their dominance in the PCB industryThe growth in the sales of PCBs designed for data centers and communications sectors has been particularly striking, driven by a significant recovery in capital expenditures by major global cloud service providers focused on computational power investmentsThis surge has been instrumental in increasing demand for AI server-related products, while the communications sector benefits from heightened demand for high-speed switches and optical module products.

The PCB sector embodies a blend of capital and labor-intensive characteristicsThe rapid development of AI and related infrastructure necessitates increasingly complex and high-performance PCBs capable of supporting sophisticated computational and data processing demandsThis scenario creates fresh growth opportunities for the PCB market, yet it also places heightened demands on the technological innovation and responsive capacity of PCB manufacturers

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From a medium- to long-term perspective, sectors such as artificial intelligence, high-performance computing, communication infrastructure, automotive electronics, and smart consumer electronics are expected to continuously drive incremental demandPCB manufacturers must maintain robust R&D investments to secure their positions in the industry while planning capacity upgrades to enhance operational efficiency.

AI is undoubtedly a catalyst for the revival of business performance across the electronics sectorThe applications of AI servers, data storage solutions, communications, smart driving, and consumer electronics are emerging as long-term growth drivers for upstream PCB industriesAs AI evolves and its applications deepen, the new generation of information technology demands higher computational power and faster network communications, spurring rapid growth in demand for large-size, high-layer, high-frequency, and high-density PCB products

The dramatic increase in demand for high-end chips and advanced packaging has kept the global packaging substrate industry on a long-term growth trajectoryIn the first half of 2024, the production of advanced computational chips and storage chips improved, leading to a recovery in the demand for related packaging substrate products year-over-yearHowever, other sectors, such as discrete devices, optoelectronic devices, sensors, and analog chips, saw a slip in demand, indirectly affecting market growth for corresponding packaging substrate products.

In the first half of 2024, Shengyi Technology's server products accounted for 38.21% of its total, marking a notable increase of 19.58 percentage points compared to the previous yearThe company completed AI server product development in collaboration with end customers, and multiple projects received certification and achieved substantial delivery volumes in the first half of 2024, enhancing its market share in AI servers

Notably, Shengyi allocates over 5% of its revenue to R&D, focusing on PCB products in areas such as 5.5G, 6G, satellite communications, 800G switches, and optical modules in the communications sectorIn the server arena, it emphasizes AI and high-performance computing, while in the automotive space, it is innovating products for intelligent assisted driving and intelligent cockpit systems.

The revenue in the corporate communications sector for Huade Electronic increased by 75.49% year-over-year, with PCB products related to AI servers and high-performance computing rising from about 21.13% of corporate communications revenue in 2023 to approximately 31.48% in 2024. The company has begun technical certification for its next-generation general server products based on PCIe 6.0, with core technology for products supporting 224Gbps speeds reaching advanced research stages

The OAM/UBB2.0 products have been shipped in volume, while GPU-related products have passed the 6-layer HDI certification and are set for mass productionOverall, Huade’s automotive PCB segment reported a slight increase in revenue of around 3.94% year-on-year in the first half of 2024; however, margins were impacted by losses in its enterprise communications market due to the underperformance of its subsidiary, despite growth in the emerging automotive board product market, with new products like millimeter-wave radars growing their share of automotive board revenue from about 25.96% in 2023 to around 33.69% in 2024.

Gross profit margins are showing significant improvements across the industryThe recovery in electronic demand and improvements in inventory levels have contributed to an upward trend in the PCB sectorAnalysts predict that by the latter half of 2024, most applications will see a normalization of inventory levels

The PCB market value is expected to grow approximately 5.0% year-over-year, with an area increase estimated at 7.2%. However, increases in product prices per unit area are likely to remain challenging, pressuring PCB manufacturers to tightly control costs and leverage economies of scale to boost competitiveness and secure industry positioning.

Notably, Shengyi Technology faced reduced gross profit margins and net losses in 2023 due to a decline in average product sales prices surpassing the decrease in unit costsHowever, the first quarter of 2024 saw a rebound as the server market's demand for high-multi-layer PCBs grew, enhancing both production and sales volumesBy the first half of 2024, the company improved its gross profit margin to 19.69%, an increase of 2.42 percentage points year-on-year.

Deep South Electronics has benefited from the rising demand for high-speed switches and optical module products in the communications sector

The wired communications products now comprise a larger share, resulting in improved profitabilityIn data centers, orders have significantly increased year-on-year, especially for products like AI acceleration cards and the Eagle Stream platform which continue to show demand growth.

In the first half of 2024, Deep South Electronics' electronic assembly business capitalized on the demand growth opportunities in data centers and automotive electronics, achieving a revenue increase of 42.39% year-over-year, accounting for 14.55% of total revenuesIts PCB business saw a 25.09% revenue increase, making up 58.35% of overall revenues, with an impressive gross margin of 31.37%, rising 5.52 percentage pointsThe packaging substrate segment is also thriving, achieving a whopping 94.31% growth in primary business revenue year-over-year, and its gross margin rose to 25.46%, a 6.66 percentage point increase.

For Huade Electronic, the only segment with a year-on-year reduction in gross margin was the automotive board sector, which dipped by 0.80 percentage points

Conversely, the gross margins in the enterprise communications, office and industrial equipment, and consumer electronics sectors rose by 8.44, 11.04, and 10.50 percentage points, reaching 41.59%, 46.42%, and 33.35%, respectivelySuch rebounds in gross margins have enhanced profits and provided leeway for capital expansion during the ramp-up phaseHuade Electronic, Deep South Electronics, and Shengyi Technology reported revenues of 5.424 billion, 8.321 billion, and 1.973 billion respectively in the first half of 2024, marking growth rates of 44.13%, 37.91%, and 24.64%. Moreover, their net profits attributable to the parent companies increased dramatically, reaching 1.111 billion, 904 million, and 90.55 million, with yearly growth rates of 150.22%, 112.38%, and 3356.73% respectively, highlighting record profitability for Huade and Deep South.

As this new growth cycle begins, it reflects the cyclical boom of the PCB industry historically associated with Moore's Law

The industry's shifting landscape previously invigorated emerging markets, although fluctuations in raw material costs, particularly with copper, have adversely affected cost management in PCB manufacturingBeing that a significant portion of domestically produced PCBs is exported, fluctuations in currency exchange rates also impact revenues, leading to considerable performance variability across firms.

The robust resurgence of high-performance PCB manufacturers is closely tied to the AI industry's growthShengyi Technology’s communications device and network communications boards account for over 80% of total revenues and have shown considerable sensitivity to the telecommunications sector's healthThe global demand for wireless access networks peaked in 2021, impacting the company’s performance accordinglyIn 2023, declining prices in the communications sector and the ramp-up of the Dongcheng Phase IV project led to losses

However, by shifting focus to servicing the server and high-speed switch segments, the company has been able to reposition itself back on a growth trajectory.

The recent surge in demand for computational power has accelerated upgrades across core components, leading to increased shipments of AI servers and switchesIndustry titan NVIDIA plans to unveil premium data center GPUs in 2024 and 2025, which will likely require more complex PCB material processing, thus elevating the value of PCBsIn 2023, the share of 200Gbps, 400Gbps, and 800Gbps switches among overall port shipments exceeded 20%. The accelerated rollouts of 400Gbps and 800Gbps switches expected in 2024 and 2025 will only increase both the material requirements and the complexity of PCB processing, enhancing their value propositionServer PCBs must closely align with generational shifts in server chips, typically experiencing a product lifecycle of 3-5 years, with maturity phases lasting around 2-3 years.

Research firm Huachuang Securities notes that GPU boards are driving rapid growth in the PCB market, citing the example of NVIDIA’s DGX A100. A single machine's PCB can consist of CPU boards, GPU boards, and functional accessory boards, which can be worth five to six times that of traditional server PCBs

Specifically, CPU boards for GPU setups are composed of CPU carrier boards, mainboards, and functional accessory boards, comprising about 20% of the total PCB value; GPU boards consist of GPU carrier boards, NV switches, OAM, UBB, and hold nearly 79% share; meanwhile, accessory boards are composed of power supplies, hard drives, and cooling units, representing about 1% of value.

Given the capital-intensive nature of the industry, PCB companies need to proactively predict market trends, strategically expand capacities, and align investments accordinglyThe rapid evolution of AI, high-speed networking, and automotive electronics is ushering in a phase of significant growth for high-density interconnect boards, high-speed multi-layer boards, and packaging substrates—signalling a fresh growth cycle for the PCB industry as companies set performance targets and continually roll out production capabilities.

Huade Electronic’s first phase of its Thai production base is set to commence trial production in Q4 2024, along with efforts to initiate customer certification and product introductions for the new capacities.