China smartphone market seen bottoming in Q3: analyst

UOB’s top picks are Sunny Optical and Xiaomi.

Chinese smartphone suppliers and manufacturers are headed towards a tough three months as demand for new phones is expected to only pick up in t,he fourth quarter according to a research note by UOB Kay Hian.

The country’s smartphone and component shipments were off to a weak start in the first half with firms still in their destocking phases this quarter, the brokerage said. It projected end-demand to bottom out next quarter before gradually recovering in the fourth quarter as a new round of replacement cycle kicks in.

“Interests for spec upgrades in high-end smartphones remains elevated as smartphone brands turn more positive on recovery in 2H23,” it said.

UOB sees smartphone brands leading the recovery towards the end of the year, bolstered by the “premiumisation” strategy of the original equipment manufacturers (OEMs) to support their profitability. 

OEMs are also expected to receive a boost from easing component costs throughout the year, although the declining prices will continue to hit component suppliers hard.

Gross margins have declined across the supply chain in the first quarter due to weak demand and overcapacity, and suppliers are likely to remain under pressure until user demand recovers.

The brokerage chose Sunny Optical, the mainland’s largest manufacturer of phone camera modules and lenses, as its top pick given the bright outlook for its handset business, while phone maker Xiaomi will likely be a prime beneficiary of easing component prices and recovering demand.

Camera module supplier Q Tech will also benefit from Android’s recovery while Apple supplier AAC will likely keep a solid iOS business this year on the back of resilient iPhone shipments.

China’s smartphone shipments fell 5% year on year in the first quarter, extending the market slump seen in 2022 when shipments fell to a 10-year low based on separate data from Counterpoint Research. 

For the 618 event, the country’s second largest shopping event, UOB expects high-end and entry-level models to sell the most while mid-range phones suffer “as some consumers are now favouring purchasing a second-hand high-end phone instead of a new mid-range model.”