China IT Industry Weekly Report (2026/01/26-02/01): Strong Signals for Semiconductor Upcycle, AI Application Competition Enters New Phase

Bottom Line

This week's industry signals clearly point to the semiconductor sector entering a robust upcycle and confirm that AI competition is shifting from models to applications. Investors are advised to take immediate action to rebalance portfolio weightings from software towards hardware, particularly the semiconductor supply chain, increasing holdings in leading companies with technological barriers, cost-pass-through capabilities, and potential consolidation opportunities.

Key Developments

1. Semiconductor Industry Enters Consolidation and Broad Rally Cycle — Jiangfeng Electronics' acquisition of Kaide Quartz marks the year's first "A-share company acquiring another A-share company" case, signaling accelerated industry concentration. Concurrently, companies including Goke Microelectronics and AMEC collectively announced product price hikes, with some models increasing by up to 80%. Over 60% of A-share semiconductor companies that have disclosed performance forecasts anticipate 2025 net profit growth exceeding 20%. Portfolio Impact: Strongly recommend increasing holdings in semiconductor equipment, materials, and design companies with core IP. This round of price hikes and consolidation is driven by tight supply-demand dynamics and technological upgrades. Leading companies will benefit maximally from dual expansion in profit margins and market share. Focus on companies with layouts in key materials such as silicon wafers, quartz components, and specialty gases, as well as dominant manufacturers in product categories experiencing price increases like MCUs and Nor Flash.

2. AI Industry Scale Breaks Through Trillion Mark, Competition Focuses on "Agent" Implementation — China's core AI industry scale is projected to exceed RMB 1.2 trillion in 2025, a year-on-year increase of nearly 30%. The technological paradigm is shifting from large language model dialogue towards autonomous "Agents" capable of performing practical tasks. ByteDance (Doubao 2.0) and Alibaba (Qwen 3.5) plan to release next-generation models around the Chinese New Year, intensifying competition at the application layer. Portfolio Impact: Reduce holdings in pure software companies that only have "large model concepts" without clear commercialization paths. Instead, focus on two types of targets: first, hardware companies providing underlying computing power support for AI Agents (e.g., AI chips, servers, optical modules); second, industry-specific software solution providers with deep vertical expertise, data moats, and the ability to rapidly integrate AI Agents to achieve efficiency leaps in sectors like finance, government, and industrial.

3. Software Industry Shows Steady Growth but Profit Pressure, Structural Opportunities Emerge — China's software business revenue reached RMB 15.48 trillion in 2025, a year-on-year increase of 13.2%, indicating a solid industry foundation. However, total profit was RMB 1.88 trillion, with a growth rate of 7.3%, significantly lower than revenue growth, suggesting increased internal cost pressures or intensified competition. Portfolio Impact: Adopt a "select alpha, avoid beta" strategy for the software sector. Avoid allocating to generic software enterprises with severe homogenization. Focus on挖掘 two types of opportunities: first, software companies benefiting from "AI+" policies (e.g., Beijing establishing a national AI application pilot base) that can translate AI capabilities into pricing power and customer stickiness; second, transforming enterprises that improve profitability through AI-driven internal management and marketing upgrades (e.g., the case of Jiuqi Software).

4. Surging Raw Material Costs Transmit to Electronics Supply Chain — Prices of key metals like silver, copper, and tin surged significantly in 2025 (e.g., silver up 143%), drastically increasing cost pressures for upstream industries like passive components and triggering a new wave of price hikes. Portfolio Impact: Be cautious of ordinary hardware assembly and manufacturing firms in the mid-to-downstream of the chain with weak bargaining power, as their gross margins may be severely squeezed. Conversely, consider two types of companies: first, upstream core material suppliers with cost-pass-through capabilities; second, leaders in niche segments that achieve material substitution or reduction through technological innovation, whose competitive advantages will be amplified during this cost cycle.

Sector Pulse

Risk Watch

• Persistent Surge in Raw Material Prices Eroding Midstream Profits — If prices for upstream metals and chemical materials continue rising unabated, they will comprehensively squeeze hardware manufacturing profits, particularly affecting small and medium-sized enterprises unable to pass on costs. Probability: Medium. Impact: High.

• Intensified AI Application Competition Leading to Unproductive "Cash Burn" — The密集 launch of AI models and applications by major players may lead to market overcrowding, with some companies engaging in marketing and price wars to acquire customers, harming overall industry profitability. Probability: High. Impact: Medium.

• Geopolitical and Supply Chain Uncertainty — Diplomatic activities such as the UK Prime Minister's visit to China may bring cooperation opportunities, but risks of potential policy disruptions in the global semiconductor supply chain persist. Probability: Low. Impact: High.

Outlook

Key events and indicators to monitor next week:

• Details of the third-generation GPGPU technology roadmap and productization progress announced by Iluvatar CoreX on January 26, which are crucial for the domestic AI computing power self-sufficiency process.
• Potential technology cooperation topics, especially potential dialogues in semiconductors and AI, during UK Prime Minister Keir Starmer's visit to China (January 28-31).
• China's official January Manufacturing PMI data, to observe signals of overall economic momentum transmitting to IT hardware demand.

Positioning consideration: Tactically, next week suggests utilizing potential market volatility reactions to short-term diplomatic events or PMI data to accumulate high-quality semiconductor leaders with strong fundamentals (price hikes + positive earnings forecasts) on dips, and gradually adjust software holdings towards vertical sector leaders with proven AI Agent implementation capabilities.