1. IT Hardware Sector: Maintain Preference for AI-Device Plays Amid High Uncertainty
Sector Overview: The IT Hardware sector delivered mixed results in the first half of 2024, with the robust performance of AI-infrastructure businesses offset by weaker-than-expected demand for non-AI mainstream products. Despite this, the outlook for the sector remains cautiously optimistic, especially for companies that are involved in AI-device manufacturing and ecosystem development.
- Maintain OVERWEIGHT: The sector remains overweight due to continued demand for AI-related hardware and infrastructure, but the preference is for defensive AI-device plays. Given the uncertainty around mainstream demand, AI-devices are considered a safer bet, as new hardware and operating systems (OS) launches are expected to drive growth.
Key Trends and Updates:
- AI Infrastructure Spending Remains Robust: Cloud service providers (CSPs) like Microsoft, Meta, Alphabet, and Amazon have indicated that their capital expenditure (capex) for AI infrastructure will continue to increase through FY24-25. This consistent spending will drive demand for high-performance computing (HPC) systems and AI accelerators.
- Mixed Outlook for Non-AI Products: While AI-infrastructure-related businesses continue to show strength, demand for general-purpose servers and other non-AI products has been weaker than anticipated. The global economic downturn has impacted the broader IT hardware market, with recovery in these areas slower than expected.
- NVIDIA’s Blackwell Platform: The anticipated delay in NVIDIA’s Blackwell platform production will have minimal impact on the supply chain, as most orders and shipments will commence in Q4 2024. The demand for high-performance GPUs and AI processing units will continue to drive growth.
- AI-Devices and Consumer Electronics: The market for AI-devices is expected to grow steadily, driven by innovations in edge-AI technology and more advanced devices entering the market in 2H24. However, the replacement cycle for AI-devices may not be as quick as initially projected, delaying a full recovery in this sub-sector. Moreover, AI-devices require a more mature ecosystem before significant demand can be realized.
Top Picks and Recommendations:
- Xiaomi (1810 HK): Xiaomi remains a top pick, with its AI-related businesses delivering strong results in 1H24, particularly in the IoT and Internet services segments. The company’s earnings beat expectations, driven by strong growth in its EV and IoT businesses. As the company prepares to launch an upgraded AI OS in late 2024, it is well-positioned to benefit from the growing AI-device ecosystem.
- Lenovo (992 HK): Lenovo is another preferred choice, particularly due to its leadership in the AI-PC market. The company’s strong presence in the commercial PC segment and its innovative AI-powered solutions make it a prime candidate for growth in 2H24 and beyond.
2. Exports Rebounded in August but Outlook Remains Challenging
Overview: In August 2024, exports from China showed a promising rebound, increasing by 8.7% year-on-year (YoY), up from 7.0% YoY in July 2024. This surpassed Bloomberg’s consensus forecast of 6.6%. The recovery was primarily driven by stronger demand from key markets such as the EU and ASEAN, with notable growth in sectors like automotive and high-tech products. However, while exports showed positive momentum, the outlook for the remainder of the year remains challenging due to several factors.
- Exports to Key Markets: Among the key markets, exports to the EU rebounded strongly, growing by 13.4% YoY, while exports to ASEAN maintained a robust pace of 9.0% YoY. Exports to Japan, though still weak, showed some improvement at 0.5% YoY.
- Key Export Sectors: Auto exports grew by 32.1% YoY, benefiting partly from the base effect, while high-tech product exports slowed to 9.1% YoY from 11.5% YoY in July. Mechanical and electrical products continued to lead, making up a significant portion of the export growth.
Outlook and Risks: While the export figures for August indicate a positive trajectory, the outlook remains clouded by several challenges:
- Slowdown in Global Manufacturing: Global manufacturing is decelerating, which could weigh on demand for Chinese exports in the coming months.
- Potential US Tariffs: The prospect of increased tariffs, especially if geopolitical tensions between China and the US escalate, could further dampen export prospects. The upcoming U.S. presidential elections and changes in trade policies could impact the external demand for Chinese goods.
- Weak Domestic Demand: Although exports rebounded, China’s domestic demand remained subdued, with imports growing by only 0.5% YoY, reflecting the country’s economic struggles.
Despite these headwinds, net external demand is still expected to provide a lift to China’s GDP growth in the second half of 2024. However, with global economic uncertainties and trade risks on the horizon, the positive export trend may not be sustainable.
Conclusion: In the IT hardware sector, the focus remains on AI-driven growth. Despite some near-term challenges, the demand for AI-infrastructure and AI-devices provides a solid growth avenue. Companies like Xiaomi and Lenovo are well-positioned to capture this growth, and the sector remains overweight for those focused on the AI ecosystem.
For the exports sector, while August saw a rebound, the overall outlook remains fraught with risks, particularly from geopolitical tensions and global economic headwinds. Exporters must remain cautious as uncertainties linger, especially with the potential imposition of higher US tariffs.
Thank you
