 China dominates the printed circuit board (PCB) market with potential to supply more to servers, 5G, smartphones + EVs  Our preferred sector is copper clad laminate (CCL); leaders have strong bargaining power while product upgrades help  Initiate on Shengyi Technology at Buy, our top pick; maintain Buy on Dongshan and Holds on Han’s Laser and Shennan China dominates the global market for printed circuit boards, a crucial element of the tech supply chain and found in every electronic device. Some are worried the sector could shift to Southeast Asia given cheaper labour costs, but we see China taking more market share. The leaders are expanding into higher-end products, moving up the value chain and increasingly supplying to sectors like servers, smartphones, 5G and electric vehicles. All these moves should help China outperform the rest of the world and take 60% of the market by 2025 versus consensus for 55%.

Our preferred sub-segments. We like copper clad laminate (CCL), the raw material that PCBs are made from, as: 1) high-end CCL is essential for technology migration and generates higher prices; 2) it’s a highly consolidated market as the top five leaders have strong bargaining power; 3) the near-term moderating copper price provides relief to CCL makers on margins; and 4) tight supply of high-end CCLs will help leaders with good execution and product development gain market share. For more on CCL, see Asia Technology: Copper-clad laminate, 8 Jul 2021, Nicole Tu).

We also like flexible printed circuit boards (FPC) as: 1) it’s a stable competitive landscape with limited new supply; and 2) Apple will likely give more orders to Chinese players.

Initiate on Shengyi Technology at Buy, our top pick. Shengyi is the secondlargest CCL maker in the world. We think it can: 1) ride on the growth of China’s PCB industry; 2) benefit from strong copper prices due to active inventory management; and 3) outperform even if copper prices moderate in the coming years as the company is upgrading their product mix to high-speed and high-frequency CCL designed for 5G and servers. We believe it deserves a re-rating given the current tight supply in CCL and a fast EPS CAGR of 30% in 2020-22e vs. 14% in 2015-20.

Hence, we use a 1 SD above mid-cycle average PE to value the stock, and which derives our target price of RMB31.00, implying 29% upside.

One Buy, Two Holds: We reiterate our Buy on Dongshan Precision as we think it can gain more market share in the iPhone FPC market, and a 3Q21e orders rebound hasn’t been priced in. We also reiterate our Holds on Shennan Circuits as we are still waiting for more order visibility in telecom PCB and for Han’s Laser as we are concerned about a new round of laser equipment price competition.