Electronic Cloth Sector View Update 0729

English summary

Against the backdrop of macro headwinds and tech de-rating, stock selection becomes more difficult in H2. We believe the market's choice will shift from certainty and inflation line to certainty and capacity expansion line. High-end specialty electronic cloth has an extremely low cost proportion. Taking T-cloth as an example, it accounts for less than 2% of the cost of a single ABF substrate, almost negligible. With such a low cost proportion, end customers are insensitive to price increases. Combined with 3-5x demand growth for ABF substrates next year, subsequent price increases are highly sustainable. Even without price increases, under AI computing iteration (PCB layer count doubling, area significantly increasing) and the 0-1 acceleration of domestic substitution, the absolute demand growth for high-end electronic cloth is highly certain. # Most domestic manufacturers' capacity releases are also scheduled for the year after next. Currently, core high-end electronic cloth targets have returned to around 10X PE for 2027, # we believe there is no need to be pessimistic, and active allocation is recommended. (Scarcity level: T-cloth > second-generation cloth > others). Core targets: # T-cloth: Honghe # Second-generation cloth: Fucai, Zhongcai, Honghe # E-cloth: Jushi, Honghe, Zhongcai, Fucai