The relentless advancements in Artificial Intelligence (AI) are set to unlock new potential for emerging smart hardware, reshaping content creation and application scenarios in unprecedented waysAI technology has ingrained itself as a crucial component of system-on-chip (SoC) architectures, fortifying edge computing devices with enhanced processing capabilitiesThis evolution is witnessing a significant revival in the wearable technology market, hinting at dynamic shifts and multi-faceted AI upgrades in the near future.

As AI technology transforms consumer electronics, there emerges an expansive market demand for precise components such as acoustic sensors and advanced optical devicesThis creates rapid development opportunities for innovative smart hardware products such as smart glasses and augmented reality (AR) devices, which continue to gain traction in consumers' daily lives

In the A-share market, numerous companies are placing a strategic emphasis on AI-driven hardware, consistently channeling efforts into R&D and product launchesManufacturing partners are adeptly promoting iterative product upgrades, leveraging new launches from international clients to foster sustained sales growthNotably, domestically-produced SoC chips are increasingly catering to the demands of AI headphones, effectively managing voice processing and high-speed audio transmission, setting the stage for impressive performance growth in some listed companies by the third quarter of 2024.

Various technological fields such as chips, displays, and optics are now beginning to reveal their potential impact on visual hardwareInnovations in optical display technology, computation, and perception are evolving rapidly, with virtual reality products likely to debunk traditional ideas and provide consumers with brand new experiential paradigms.

Going forward, continual updates and innovations in hardware technologies are predicted to enable upstream hardware companies to achieve breakthrough financial results

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AI hardware, especially in the form of AR glasses, is posited to evolve into the “next generation of computing terminals,” driving sales of key components upward.

The profitability growth rates are on a recovery pathBy the third quarter of 2024, the global True Wireless Stereo (TWS) headphones market maintained its growth momentum, achieving shipments of 92.3 million units—an increase of 15% year-on-yearThe top five brands in the shipment volume were Apple, Samsung, boAt, Xiaomi, and HuaweiFor wrist-worn devices, the leading brands were Huawei, Apple, Xiaomi Group, Samsung, and BBK ElectronicsIn recent years, breakthroughs in optical display technology, combined with the infusion of AI, have shown significant benefits for AR productsResearch agencies predict that between 2024 and 2027, the global AR hardware shipment volume will surge from 860,000 units to 6.41 million units, corresponding to an average annual compound growth rate of 95.3%.

China's wearable device manufacturers catering to both Apple and Android systems are reporting signs of recovery

For instance, Goertek (002241.SZ) posted a single-quarter revenue of 29.264 billion CNY in Q3 2024, a 1.7% year-on-year increase, with net profit excluding non-recurring gains soaring by 149.62%. The company began mass production of headphones and virtual reality products during the third quarter, which initially affected margins, but improvements in production yields are expected to enhance gross margins moving forward.

According to Debon Securities, cost contributions from ODM (Original Design Manufacturer) and OEM (Original Equipment Manufacturer) manufacturers in the TWS supply chain hover around 40%. Goertek’s deep involvement in TWS manufacturing, with intelligent hardware business revenues accounting for nearly half of its total, positions it well as it fosters close cooperation with various domestic brands like Huawei, OPPO, Vivo, and Xiaomi, significantly bolstering its TWS segments.

Since 2020, Luxshare Precision (002475.SZ), a leading Apple supplier, has taken on large-scale assembly orders for both smartphones and smartwatches

Currently, the Apple Watch is equipped with diverse health features such as mood tracking, medication logging, and menstrual cycle trackingWith improvements in customer health functionalities and deeper collaboration between Luxshare and its major clients, Guohai Securities forecasts substantial growth potential for the company’s smartwatch assembly business.

Aligning with the mid-tier price range, Android-based manufacturers pursue differentiated competition, as white-label products within the wearable sector gradually consolidate toward smartphone brandsHuaqin Technology (603296.SH) has engaged in partnerships with core Android clients for wearable products, capturing a notable market shareThey anticipate a greater than 50% year-on-year increase in smartwatch shipments for 2024, with TWS earphones expected to see a doubling in outputs, suggesting a sustained upward trajectory for their wearable product lines.

Longqi Technology (603341.SH) has successfully achieved mass production of AI PCs and AI smart glasses, maintaining growth in their second-generation smart glasses in collaboration with top-tier global internet companies.

Meanwhile, Jiahe Intelligence (300793.SZ) has made notable strides in its smart wearable device operations, reporting a 6.65% contribution from wearable products to its revenue by Q3 2024, showcasing significant growth trends, particularly within the smartwatch segment.

The rise of SoC chips has also become prominent, with Apple's AI assistant, Apple Intelligence, launching at the end of October 2024. This new feature can assist users with writing optimizations, generate summaries for information, emails, and messages, and provide enhanced interaction experiences, upgrading features in Siri and facilitating AI-based image editing.

Wearable devices have evolved into essential gateways for data collection and AI processing, with SoC chips enhancing product efficiency, minimizing energy consumption, and reducing sizes crucial from smartphones to interconnected devices

For instance, the Meta Quest 3 VR headset demonstrates a cost breakdown of $428, with chips accounting for $156, or approximately 36% of total assembly costs.

The XR hardware ecosystem centers on SoC main control chips, RAM, ROM, and specific functions such as power management and communicationSoC technology merges multiple processing functionalities into a singular chip, capable of handling digital, analog, combined signals, and RF signalsWith the arrival of AI, 5G connectivity, and edge computing, SoC continues its evolution to tackle increasingly complex processing demandsAI technologies are integral to SoC architectures, empowering edge devices with enhanced smart processing capabilitiesAs consumer spending and smartphone penetration increase, the SoC market anticipates sustained demand.

Research institutions project that the global SoC market will swell from $154.8 billion in 2022 to $327.8 billion by 2032, with an average annual growth rate of 8%. Zhongke Lanxun (688332.SH) leveraged cost-effective strategies to capture market share; in the first three quarters of 2024, the company achieved operational revenues of 1.248 billion CNY, up by 18.91% year-on-year

Their net profit, excluding non-recurring gains, rose by 26.45%, driven by growth in shipments of their wearable products within various major terminal brand supply chains, contributing positively to improved gross margins.

Zhongke Lanxun's third-generation Xinglong chip is now integrated into high-fidelity AI open-type headphones, marking it as the second headphone product in the market supporting a prominent AI modelThe company has also established strong collaborations with ByteDance for cloud service applications, enabling their BT895x chip to provide solutions that are compatible with prominent AI modelsAdditionally, their BLE chip has been utilized in Honor personal care and sports health products, with the AB569X chip employed in smartwatches from Indian brands.

In Focusing further on swift growth, Rockchip's operational revenue and net profits have exhibited rapid acceleration by Q3 2024, with a record-breaking revenue of 911 million CNY, achieving year-on-year growth of 51.36%, alongside a 29.12% sequential growth

Their net profit surged by 224.03%. By optimizing product structures and benefiting from supply chain supports, the company sees its gross margins stabilize and enter an ascendant phase.

The AIoT product lines of Rockchip have also shown collective growth, with flagship series fulfilling diverse customer needs and capitalizing on NPU advantages within AI algorithms to enhance market share across various AIoT product linesFurthermore, the company's new product lines are at critical stages, entering prominent client markets, with incremental value expected to persist into the future.

There is a burgeoning investment in visual intelligent hardware amid market demandsIn the VR/AR supply chain, original equipment manufacturing remains indispensable, contributing significantly to valueValue proportions in products like the Quest 3, PICO 4, and Sony PS VR2 are approximately 7%, 5%, and 6%, respectively

Goertek maintains substantial design and manufacturing capabilities for key VR/AR components, offering a comprehensive product matrix that encompasses optical and acoustic devices as well as assembly, serving major brands like Meta, PICO, and Sony.

Huaqin Technology anticipates a big client VR product line entering mass production by the close of 2024, with estimates projecting AIoT products to see bulk supply by 2025. They are also partaking in developing the next generation of VR/AR wearables alongside their customers.

In terms of practical applications, integrated AR glasses often focus on functions such as information prompts, translation, teleprompters, and navigation, whereas split AR glasses remain concentrated on conventional entertainment and gaming experiencesWith AI large models' emergence and their combined applications, new content and functional capabilities are being introduced to AR glasses