CIS Chip Leader Resumes Growth

In the dynamic landscape of consumer electronics, the resurgence of domestic smartphone brands, particularly Huawei, has played a pivotal role in propelling the market forwardThis revitalization has had a cascading effect on upstream suppliers, particularly those involved in chip manufacturing and component supply, leading to a windfall for companies like Weir GroupThe latter has reported record revenue for a single quarter, recording a significant recovery in profitsHowever, as the dust settles on this remarkable boom, looming competition appears to threaten future growth prospects.

As Weir Group released its forecast for the first half of 2024, investors were met with promising statisticsThe company anticipates revenue between 11.9 billion and 12.18 billion yuan, which corresponds to an impressive year-on-year increase of roughly 34% to 37.5%. Equally striking is the net profit forecast, expected to range from approximately 1.308 billion to 1.408 billion yuan—representing an astronomical growth of between 754% and 819% compared to the previous year.

Notably, the second quarter of 2024 saw Weir Group's revenue expected to range from 6.26 billion to 6.54 billion yuan

This figure, while representing a more modest growth rate of 38% to 44.5%, reflects a significantly robust profit prediction of 750 million to 850 million yuan—easily surpassing its entire profit from 2023. Even at the lower end of revenue expectations, this quarter's sales would mark an unprecedented historical high.

Analyzing the factors contributing to Weir Group's remarkable return to form reveals three key dynamicsFirstly, Huawei's triumphant return to the smartphone arena has undeniably stimulated significant demand, leading to increased shipments of CMOS sensorsSecondly, Weir’s strategic advantage lies in its ability to successfully replace Sony's products in the high-end Android smartphone segment, thereby capturing critical market shareMoreover, the company has managed to clear out much of its previous high-cost inventory, resulting in a more favorable cost structure.

However, despite the optimism surrounding Weir Group's performance, analysts caution of intensified competition ahead

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Sony, a giant in the imaging and sensor solution sector, recently hinted at its plans for market expansionDuring a business briefing on May 31, 2024, Sony's CEO revealed that the company's market share in image sensors, which stood at roughly 53% in 2023, is projected to grow to 58% by 2024. Furthermore, he emphasized an ambitious target of achieving 60% market share by 2025, a clear indication of the impending pricing wars in the CMOS sector.

Market trends offer further encouragement to the smartphone industryAccording to Canalys, global smartphone shipments reached an impressive 296 million units in the first quarter of 2024—a noteworthy rise of 10%. This momentum continued into the second quarter, where a further 6% increase was recorded, marking the highest growth in three yearsThe recovery trend also resonated well within the Chinese smartphone landscape, with domestic shipments climbing 6.5% year-on-year to about 69.26 million units in the first quarter, maintaining the upward trajectory from late last year.

Huawei's comeback in August 2023 has markedly shifted market dynamics

Reports from Canalys indicate that during the first quarter of 2024, Huawei and its sub-brand Honor were the only brands among the top five smartphone manufacturers to achieve positive shipment growthHuawei alone shipped 11.7 million devices, reflecting a staggering 70% increase, while Honor’s shipments grew by 9%. This resurgence propelled Huawei's domestic market share back up to 17%, reclaiming its status as the market leader—a testament to its role as the driving force behind China's smartphone resurgence.

As attention shifts towards the second quarter, the sales data from China's renowned "618" shopping festival provides additional insightsResearch from Counterpoint shows that smartphone sales during this period grew a healthy 6.8% compared to last year, with Huawei being the standout winner, reporting a growth of 42.4% in shipments

In contrast, Xiaomi, Vivo, and Honor saw more modest growth rates of about 12.6%, 12.6%, and 4.3%, respectivelyRemarkably, despite Huawei’s offerings enjoying minimal discounting, models like the Mate 60 and Pura 70 series remain in high demand.

A crucial factor contributing to Weir Group’s resurgence lies in its subsidiary, Beijing Huowei, which has emerged as a key supplier of camera chips for Huawei's Mate 60 and Pura 70 seriesAdditionally, Huowei holds exclusive rights as the chip supplier for the Huawei Nova 12 series camera, further intertwining the success of Weir Group with Huawei’s soaring sales.

While both Beijing Huowei and Sony dominated the supply of camera chips to high-end Android devices prior to 2023, a notable shift is underway due to Huowei’s successful development of high-end CMOS products

In January 2023, Huowei unveiled the OV50H image sensor at CES, designed specifically for high-end smartphones and intended to rival Sony's IMX seriesThe launch of the OV50K40 mobile CMOS sensor in March 2024 further cemented Huowei’s position, boasting advanced capabilities and delivering superior dynamic range.

The momentum is palpable, as the OV50H has now replaced Sony’s products to become the primary sensor for multiple models in the Xiaomi 14 series, while the OV50K40 debuted on the Honor Magic 6. This successful penetration into the high-end smartphone market underscores Huowei's potential to disrupt Sony’s stronghold, although caution remains around market dynamics ahead.

Market analysts like the chairman of Largan Technology have voiced concerns about a potential late-year slowdown in smartphone launch activities, predicting that the high-end market could face constraints amid a cooling economy

If these projections hold true, it could adversely affect the volumes of Huowei’s newly launched productsThe successful proliferation of the OV50H and OV50K40 may be stymied, reducing their positive impact on revenue and profitability.

Amidst the recovery in the smartphone market and successful entry into the high-end CMOS segment, inventory fluctuations have also played a crucial role in Weir Group’s performanceData from Choice indicates a substantial decrease in the company’s inventory, declining from approximately 12.36 billion yuan at the end of 2022 to around 6.32 billion yuan by the end of 2023. This reduction in inventory signifies improved operational efficiency and better inventory management.

Furthermore, Weir Group operates on a Fabless model, heavily reliant on semiconductor foundries such as China’s Huahong Semiconductor and SMIC for wafer fabrication

Insights from Huahong’s financial reports reveal a significant decrease in wafer prices, down to 448 USD per wafer by early 2024, reflecting the broader trends in the industry.

In these evolving market conditions, Weir Group’s strategy surrounding inventory management and controlling manufacturing costs will be criticalWith the ongoing transition in semiconductor price trends, staying informed about fluctuations in fabrication costs driven by capacity utilization rates and changing market demands will be essential in guiding future business outlooks.

As Huahong's total capacity surged over 20% year-on-year with a capacity utilization rate climbing to 91.7% in the first quarter of 2024, one might anticipate the continuation of tight production capacities, suggesting upward pricing pressures in the CIS fabrication space

Prompted by a rise in domestic chip utilization, research predicts a tightening capacity for CIS and an associated increase in costs.

With a shift toward a more optimistic outlook among market analysts—prompted by the growth in domestic production—some expect Huahong to raise its wafer prices later in the year, further stressing cost structures for companies like Weir Group.

In conclusion, while Weir Group has enjoyed significant success recently owing to a favorable market environment and strategic positioning, the evolving landscape presents both challenges and opportunitiesMaintaining its position in the highly competitive CMOS segment will require vigilance against rising manufacturing costs and aggressive market strategies from established rivals such as SonyThe road ahead for Weir Group will hinge on its adaptability in navigating these nuances while capitalizing on the favorable momentum generated by domestic smartphone growth.