Digital chip design and the recovery momentum of the printed circuit board industry is strong, while the sustainability of the titanium dioxide industry's recovery is questionable.

The overall net profits of some industries have significantly declined in 2022 or 2023. After a period of adjustment, many of these industries have shown signs of recovery in the first half of 2024. We want to know which industries can sustain their recovery throughout 2024 and even into 2025?

The research conclusions of this article are as follows:

First, there are eight industries that have significantly recovered in 2024: printed circuit boards, compound fertilizers, digital chip design, titanium dioxide, carbon black, papermaking, pig farming, and LED.

Second, the recovery momentum of the printed circuit board and digital chip design industries is strong; the recovery of LED, pig farming, papermaking, and carbon black industries has a certain degree of sustainability; the recovery of the compound fertilizer industry is relatively weak; the recovery of the titanium dioxide industry has a strong uncertainty.

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The specific selection method for the recovering industries in 2024 is seen in the footnote. In this article, "net profit of a certain industry" refers to the sum of the non-exceptional net profits of the listed companies in that industry on the A-share market. To allow readers to more intuitively feel the degree of decline and recovery of these industries, this article defines two indicators:

First, "degree of decline" = (2023 industry net profit - C) / C;

C is the larger of the 2021 industry net profit and the 2022 industry net profit. "Degree of decline" measures the decline in profits of a certain industry in 2023 relative to the profit peak since 2021.

Second, "degree of recovery" = 2024 mid-year industry net profit / D.Let \( D \) be the larger of the mid-year net profits for the industry in 2021 and 2022. The "recovery degree" measures the extent to which an industry's profits in 2024 have recovered relative to the peak profits since 2021. (Since only mid-year data is available for 2024, mid-year data is used for comparison.)

By screening, eight industries were obtained. Among these eight industries, which one can sustain its recovery?

In analyzing the profit prospects of an industry, in addition to examining demand, supply, and upstream costs, one should also examine the "inventory level of finished products" (hereinafter referred to as "inventory level"). When the inventory level of an industry is significantly lower than the same period, there is a trend of profit improvement for two reasons:

First, when the inventory level is low, producers have a stronger bargaining position, which is conducive to profit improvement.

Second, when the inventory level is low and the market is in an active destocking cycle, not only do producers cautiously reduce their inventory levels, but distributors and downstream manufacturers are also cautious, reducing their inventory of the product. The entire industry chain is in a state of suppressed demand, where demand is easy to rise and hard to fall. Once stimulated, demand is prone to rebound.

This article uses data from listed companies on the A-share market for analysis. Listed companies are often stronger companies in their respective industries. When they have just experienced a recession and reduced their inventory levels, it can be judged that the industry is in an active destocking cycle. At this time, if the industry's profits begin to recover, the low inventory status is conducive to the continuation of the recovery trend.

The specific research details of this article are in the footnotes, and the situation of the eight recovering industries is as follows.

Printed Circuit Boards and Copper Clad Laminates Recovery Degree 102%

Printed circuit boards are the support bodies for various electronic components and also the carriers for their interconnection. Copper clad laminates are the upstream of printed circuit boards.

In 2021, the net profit of the "printed circuit boards and copper clad laminates" industry was 15.12 billion yuan, in 2022 it was 16.08 billion yuan, and in 2023 it was 11.26 billion yuan, so the industry's degree of decline is -30% (11.26 ÷ 16.08 - 1 = -30%).In the mid-term of 2021, the industry's net profit was 6.65 billion yuan; in the mid-term of 2022, it was 6.95 billion yuan; in the mid-term of 2023, it was 4.76 billion yuan; and in the mid-term of 2024, it was 7.08 billion yuan. Therefore, the industry's recovery rate is 102%. (70.8 ÷ 69.5 = 102%).

In the mid-term of 2023, the industry's finished goods inventory turnover days were 42 days; in the mid-term of 2024, the finished goods inventory turnover days were 39 days, which is a decrease compared to the same period in 2023.

From the demand perspective, after more than a year of sluggishness, downstream demand for servers, artificial intelligence, consumer electronics, and others began to pick up. Many listed companies have indicated that they have a relatively abundant order backlog. From the perspective of inventory, the decrease in inventory turnover days by 7.1% is conducive to the recovery of the industry's profitability.

The printed circuit board industry shows a relatively certain trend of recovery. Under this trend, even if the prices of raw materials such as copper upstream rise, the industry can maintain its profitability. In summary, the recovery of the printed circuit board industry can not only be sustained but also relatively strong.

Compound fertilizer recovery rate is 72%.

Compound fertilizer is a type of chemical fertilizer that contains two or more of the nutrient elements nitrogen, phosphorus, and potassium. In contrast, fertilizers that contain only one nutrient element are called single nutrient fertilizers. About 80% of the cost of compound fertilizer comes from single nutrient fertilizers. Currently, both single nutrient fertilizer and compound fertilizer prices are at a historical bottom range.

In 2021, the industry's net profit was 2.66 billion yuan; in 2022, it was 2.9 billion yuan; and in 2023, it was 1.54 billion yuan. Therefore, the industry's decline rate is -47% (1.54 ÷ 2.9 - 1 = -47%).

In the mid-term of 2021, the industry's net profit was 1.73 billion yuan; in the mid-term of 2022, it was 2.88 billion yuan; and in the mid-term of 2024, it was 2.07 billion yuan. Therefore, the industry's recovery rate is 72% (2.07 ÷ 2.88 = 72%).

In the mid-term of 2023, the finished goods inventory turnover days were 38 days; in the mid-term of 2024, the finished goods inventory turnover days were 37 days, which shows little change compared to the same period in 2023.

From the demand perspective, there is no certain growth in the demand for compound fertilizers in 2025, and from the perspective of inventory, there is no improvement in the compound fertilizer industry.Advantageous factors include the presence of many small factories in the compound fertilizer industry. When the gross margin is very low, these small factories cease production, which in turn promotes the recovery of the gross margin. In 2024, the gross margin of the compound fertilizer industry is at a historical low, hence the likelihood of an increase in gross margin is greater than that of a decrease.

However, from the current conditions, the possibility of a significant increase in downstream demand for compound fertilizer is very small, and the recovery of the compound fertilizer industry is expected to be relatively weak.

Digital chip design recovery degree: 67%

Digital chips and analog chips play different roles in electronic systems, with digital chips dominating the field of digital signal processing.

The industry's net profit was 18.38 billion yuan in 2021, 9.66 billion yuan in 2022, and 1.8 billion yuan in 2023, so the industry's decline degree is -90% (1.8 / 18.38 - 1 = -90%).

The industry's net profit for the mid-year period in 2021 is not calculable (several companies were not listed at this time and did not disclose data), the mid-year industry net profit was 8.75 billion yuan in 2022, 1.19 billion yuan in 2023, and 5.87 billion yuan in 2024, so the industry's recovery degree is 67% (5.87 / 8.75 = 67%).

In the mid-year of 2023, the finished product inventory was 23.6 billion yuan, with a turnover period of 125 days; in the mid-year of 2024, the turnover period for finished product inventory was 95 days, a 24% decrease compared to the same period in 2023.

From the perspective of demand, the World Semiconductor Trade Statistics Organization (WSTS) forecasted in June 2024 that the global semiconductor market would achieve a 16% growth in 2024, with the Asia-Pacific region expected to achieve a 17.5% growth. This forecast is higher than its spring 2024 prediction, reflecting the recovery of demand in the computing terminal market.

The main problem faced by the chip industry in 2023 was excessive inventory, and from the perspective of inventory, the turnover days in 2024 have significantly decreased, which is conducive to the industry's continued recovery. With stable growth in demand and after the destocking process, the certainty of the chip industry's recovery is relatively strong.

Titanium dioxide industry recovery degree: 58%The chemical name for titanium dioxide is titanium dioxide. It has a high refractive index, an ideal particle size distribution, good covering power, and excellent tinting strength, making it a high-performance white pigment. It is widely used in coatings, plastics, papermaking, printing inks, and more.

The titanium dioxide industry has a high concentration, with the CR5 (market share held by the top five companies in terms of business scale) accounting for about 50% of the world's production capacity. Among them, Longbai Group (002601.SZ) has the world's number one production capacity, accounting for 16% of the world's total.

The industry's net profit was 6.77 billion yuan in 2021, 3.94 billion yuan in 2022, and 3.47 billion yuan in 2023, so the decline rate is -49% (34.7 ÷ 67.7 - 1 = -49%).

The industry's net profit in the middle of 2021 was 3.61 billion yuan, 3.08 billion yuan in the middle of 2022, and 2.11 billion yuan in the middle of 2024, so the industry's recovery rate is 58% (21.1 ÷ 36.1 = 58%).

In the middle of 2023, the number of days for finished goods inventory turnover was 56 days; in the middle of 2024, the number of days for finished goods inventory turnover was 70 days. The turnover days in the middle of 2024 increased by 25% year-on-year.

From the demand perspective, the demand for titanium dioxide will be suppressed. In 2023, China's titanium dioxide exports accounted for about 40% of the total output, and the industry is currently facing the impact of anti-dumping from regions such as the European Union, with weak export demand.

From the inventory perspective, the inventory turnover days in the middle of 2024 increased by 25% year-on-year, which is not conducive to the continued recovery of the industry's net profit. Therefore, although the net profit situation of the titanium dioxide industry in the first half of 2024 has improved, the future is not optimistic.

Coatings are the largest use of titanium dioxide, and if the real estate industry recovers in 2025, it will drive the recovery of the titanium dioxide industry.

Carbon black recovery rate 40%Carbon black is widely used in tires, rubber products, inks, coatings, plastics, and other fields. Approximately 70% of carbon black is used in rubber tires, hence the growth in the number of cars in use and car sales volume is the foundation for the demand growth in the carbon black industry.

In 2021, the net profit of the carbon black industry was 1.42 billion yuan, in 2022 it was 640 million yuan, and in 2023 it was 540 million yuan, so the rate of decline is -62%. (540 ÷ 1.42 - 1 = -62%).

In the mid-term of 2021, the industry's net profit was 1.07 billion yuan, in the mid-term of 2022 it was 450 million yuan, and in the mid-term of 2024 it was 430 million yuan, so the industry's recovery rate is 40%. (430 ÷ 1.07 = 40%).

In the mid-term of 2023, the number of days of turnover for finished goods inventory was 19 days. In the mid-term of 2024, the number of days of turnover for finished goods inventory was 16 days, a decrease of 15.8% compared to the same period in 2023.

From the perspective of demand, demand has maintained a steady and orderly growth in the past five years, and it will continue to grow at a low speed in the future.

From the perspective of inventory, the carbon black industry is relatively optimistic. The inventory at the end of 2022 was 1.57 billion yuan, while the inventory in the mid-term of 2024 was 930 million yuan, a decrease of 40.8% compared to the end of 2022. After experiencing a deep inventory reduction, the possibility of a continuous recovery in the net profit of the carbon black industry is relatively large.

Papermaking Industry Recovery Rate 34%

The products of the papermaking industry can be divided into cultural paper, packaging paper, and tissue paper, etc., and the upstream of the papermaking industry includes waste paper, wood chips, energy, chemicals, etc. In 2022, the domestic papermaking industry CR10 remained around 45%.

In 2021, the industry's net profit was 11.94 billion yuan, in 2022 it was 3.11 billion yuan, and in 2023 it was 2.74 billion yuan, so the rate of decline is -77%. (2.74 ÷ 11.94 - 1 = -77%).

In the mid-term of 2021, the industry's net profit was 9.27 billion yuan, in the mid-term of 2022 it was 4.26 billion yuan, and in the mid-term of 2024 it was 3.15 billion yuan, so the industry's recovery rate is 34%. (3.15 ÷ 9.27 = 34%).In the mid-term of 2023, the inventory turnover days for finished products was 27 days; in the mid-term of 2024, the inventory turnover days for finished products was 22 days, a decrease of 18.5% compared to the same period in 2023.

The demand changes in the papermaking industry are basically consistent with the trend of the macro economy. Since 2024, a large number of policies to promote economic development have been introduced, which will play a supporting role in the Chinese economy. Therefore, the domestic paper demand will be relatively stable in the next 6-12 months.

From the perspective of inventory, papermaking companies, in order to maintain profits, try to maintain a balance between production and sales, and the inventory level has been significantly reduced, which is conducive to the continuous recovery of the industry's net profit.

In the future, the decline in costs in the papermaking industry is expected to become a booster for the industry's profit improvement. In the first half of 2024, the price of pulp continued to rise, but in the long term, the supply of pulp, especially hardwood pulp, is relatively loose. It is expected that the price of pulp will continue to decline in the next 12 months. At the same time, the prices of raw materials such as energy and waste paper are also expected to decline.

Pig farming recovery rate 12%

In 2021, the net profit of the pig farming industry was -38.7 billion yuan, in 2022 it was 4.94 billion yuan, and in 2023 it was -25.94 billion yuan, so the decline rate is -625%. (-25.94÷4.94-1=-625%).

In the mid-term of 2021, the industry's net profit was 3.29 billion yuan, in the mid-term of 2022 it was -19.96 billion yuan, and in the mid-term of 2024 it was 0.41 billion yuan, so the industry's recovery rate is 12%. (0.41÷3.29=12%).

The ratio of pork prices to feed prices (hereinafter referred to as "pig grain ratio") can well reflect the profitability of the pig farming industry. Currently, the pig grain ratio has left the bottom area, and the industry's profitability has recovered.

Pig farming does not belong to the industrial sector, and the recovery of the industry cannot be judged from the level of finished product inventory of listed companies. Whether the profits of the pig farming industry can continue to recover in the future depends on the national pig inventory and the inventory of breeding sows.By the end of June 2024, the national pig inventory stood at 415 million heads, a decrease of 18.89 million heads, or 4.4%, compared to the end of 2023. Among them, the inventory of breeding sows was 40.38 million heads, down by 2.5%. The decline in these two figures supports the recovery of profits in the pig farming industry. At the same time, the decrease in feed prices also supports the recovery of profits in the pig farming industry.

LED Industry Recovery Degree: 11%

LED is a semiconductor solid-state light-emitting device characterized by energy saving, environmental protection, and long lifespan, and is widely used in backlight sources, display screens, automotive markets, as well as traffic information and lighting fields.

The industry's net profit was 1.59 billion yuan in 2021, -1.09 billion yuan in 2022, and -1.49 billion yuan in 2023, so the industry's decline degree is -194%. (-1.49/1.59 -1 = -194%).

The industry's net profit in the middle of 2021 was 1.53 billion yuan, 780 million yuan in the middle of 2022, and 170 million yuan in the middle of 2024, so the industry's recovery degree is 11%. (170/1.53 = 11%).

In the middle of 2023, the inventory turnover days for finished products were 85 days; in the middle of 2024, the inventory turnover days for finished products were 73 days, a decrease of 14.1% compared to the same period in 2023.

From the demand perspective, LED lighting is about to usher in a second replacement demand peak. LED lighting that began service in 2014 has gradually reached the end of its lifespan. TrendForce consulting data shows that in 2024, 5.8 billion LED light sources and lighting fixtures will reach the end of their service life and retire globally, an increase of nearly 50% compared to 2023, accounting for more than 43% of the overall LED lighting demand in 2024.

This could change the sluggish state of the LED lighting market. Moreover, the proportion of secondary replacement demand will increase year by year in the next few years.

The significant decrease in LED industry inventory days is also conducive to the continuous improvement of the industry's profitability.From the analysis above, if the macroeconomy remains stable in the second half of 2024, among the eight industries experiencing a profit recovery, the recovery momentum in the printed circuit board and digital chip design industries is relatively strong; the LED, pig farming, papermaking, and carbon black industries will see a certain degree of recovery; the compound fertilizer industry will experience a weak recovery; and the recovery of the titanium dioxide industry faces relatively strong uncertainty.

Endnotes: Research Approach and Details

We use the A-share listed companies in a certain industry as representatives of that industry, and measure the industry's profitability based on the financial performance of these companies. In this article, "net profit of an industry" refers to the sum of the non-exceptional net profits of the A-share listed companies in that industry.

First, we use a two-step process to identify industries that were in decline in 2023 and began to recover in 2024.

Step 1: Select industries that were still in decline in 2023 based on indicators. Decline here refers to a significant decrease in the industry's net profit in 2023 compared to 2021 or 2022. The specific criteria are as follows:

The industry's net profit in 2023 decreased by more than 30% compared to 2021 or 2022.

Step 2: From the results of Step 1, select industries that began to recover in the first half of 2024 based on indicators. Recovery here is measured by a year-over-year increase in industry net profit. The specific criteria are as follows:

In the mid-term of 2024, the industry's net profit is positive, and the year-over-year increase in industry net profit exceeds 40%.

Through the above two steps, we have identified the eight industries mentioned above. To give readers an intuitive sense of the degree of decline and recovery in these industries, this article defines two measurement indicators:

First, "Degree of Decline" = (Industry Net Profit in 2023 - C) ÷ C;Let C be the larger of the industry's net profit in 2021 and 2022. The "decline rate" measures the decrease in profits for an industry in 2023 relative to the profit peak since 2021.

For example: If an industry's net profit in 2021 is 10 billion yuan, in 2022 it is 6 billion yuan, and in 2023 it is 4 billion yuan. Then C = 10 billion yuan, and the industry's "decline rate" is -60%. [(4 - 10) / 10 = -60%]

Secondly, "recovery rate" = the industry's mid-year net profit in 2024 / D.

D is the larger of the industry's mid-year net profit in 2021 and 2022. The "recovery rate" measures the recovery of profits for an industry in 2024 relative to the profit peak since 2021 (since only mid-year data is available for 2024, the comparison uses mid-year data).

For example: If an industry's mid-year net profit in 2021 is 5 billion yuan, in 2022 it is 3 billion yuan, in 2023 it is 1 billion yuan, and in 2024 it is 4 billion yuan. Then D = 5 billion yuan, and the industry's "recovery rate" is 80%. (4 / 5 = 80%)

Next, analyze which industries among the above screening results will continue to improve their profit situation.

Generally, the improvement in industry profits comes from four aspects:

First, increased demand leading to higher sales volume or sales prices, or both;

Second, reduced supply leading to higher product prices;

Third, a decrease in upstream raw material prices;Fourthly, the inventory level of finished products in the industry ("finished products" can be simply understood as products) has decreased.

In the short term, if there is not much change in supply and demand, and the prices of upstream raw materials are also relatively stable, the "inventory level of finished products" will become an important factor affecting profitability.

This article uses "days of turnover of finished product inventory" to measure the inventory level of the industry. The definition of "days of turnover of finished product inventory" is as follows:

Days of turnover of finished product inventory = 365 × the sum of finished product inventory of A-share listed companies ÷ the sum of operating costs.

The lower the days of turnover of finished product inventory, the lower the inventory level.