Zhitong Finance Editor, Shanghai Securities released a research report saying that the overall rise and fall of the CITIC Tier 1 Communications Industry Index reached 25.42% in 2023. Among them, the sub-sectors Telecom Operations II, Communications Equipment, Value-added Services II, and Communications Engineering Services rose and fell 27.00%, 25.56%, 12.57%, and 34.59%, respectively. The overall communications industry market rose slightly from January to April 2024, with the communications equipment sector leading the way. The overall rise and fall of the CITIC Tier 1 Communications Industry Index reached 6.49%. Among them, the sub-sectors Telecom Operations II, Communications Equipment, Communications Value-added Services II, and Communications Engineering Services rose and fell 5.41%, 10.09%, -21.22%, and -6.26%, respectively. It is expected that in the future, as AI-related infrastructure construction accelerates, the segmented industry will break out of the market. The communication equipment sector is expected to lead the way, and leading racetrack companies such as servers, switches, and optical modules will still have some room for growth.

The main views of Shanghai Securities are as follows:

Performance review

Looking back at the communication industry's 23-year 24Q1 performance announcement, the company's performance showed a clear differentiation trend: the three major operators and large equipment companies such as ZTE had steady revenue growth and profitability; the computing power sector's performance volume was concentrated in the field of optical communications; optical module companies entered the performance implementation period and achieved significant year-on-year growth in Q1 in '24; cable companies generally had low growth rates and negative growth rates.

Analysis of each sub-sector

1) Computing power: In the AI era, computing power will experience the two-way effects of scale expansion and structural adjustment. At the scale level, the computational volume multiplication period from 1959 to 2012 was about 2 years, and the doubling time was shortened to 3 to 4 months starting in 2012; at the structural level, with the rapid iteration of AI models, the inference side computing power growth of large models will continue to increase, and commercialization and generalization of models will directly catalyze the construction of computing power infrastructure in terms of supply and demand.

2) Optical communication: In the short term, the increase in capital expenditure of North American manufacturers indicates that optical communications will reach its peak: the capital expenditure of the four major cloud vendors expanded from US$29.543 billion to US$144.888 billion, with a 6-year compound growth rate of 30.34%. In the long run, data center clustering will bring rapid expansion in data interconnection demand, and AI switching device rates will also evolve from 400G to 1.6T, 3.2T, etc., and may bring higher value.

3) Internet of Things: The Internet of Things is accelerating the process of collaborative development with the entire communications industry, and it is expected that new business formats and models will emerge. The number of terminal connections is growing rapidly, and the IoT industry is gradually migrating from the C-side to the B-side.

4) Operators: In a new round of technological revolution and industrial transformation, operators are actively seeking transformation and development to solve the “pipeline” problem. Build a new information infrastructure to consolidate the foundation of digital intelligence transformation; develop cloud business to provide a “product array” of data services; grasp the development direction of artificial intelligence and extend and expand to “AI+”. Shanghai Securities believes that while continuing to increase “cloud usage,” operators will further highlight the driving role of “intelligence”, accelerate the transformation from “+ AI” to “AI+”, and better support the formation of new types of productivity.

5) Communication terminals and accessories: In the new round of digital transformation scenarios facing higher levels of connectivity, stronger data transmission capabilities are an indispensable support. Changes in enterprise business models and operating methods may bring more demand for information transmission, bringing more structural investment opportunities to the entire communications industry, and related communication terminals and accessories will continue to benefit.

6) Equipment vendors: In terms of traditional communication equipment, the number of optical cable lines, Internet broadband access ports, and mobile communication base stations with 10 GPON ports is growing steadily. In terms of AI devices, the four major North American cloud giants (Microsoft, Google, Meta, and Amazon) have all stated that they will raise capital expenditure for the whole year, all pointing to AI.

7) Satellite Internet: Due to the scarcity of low-orbit satellite bands and orbital resources, countries have launched corresponding construction plans one after another, and space competition may heat up. As the construction process of low-orbit satellites and satellite internet continues to accelerate, manufacturers cooperating with Starlink are expected to be the first to benefit and gain an increase in performance.

Investment advice

Recommended attention: 1) Computing power: Zhongbei Communications (603220.SH), Philinkos (301191.SZ); 2) Optical module: Zhongji Xuchuang (300308.SZ), Xinyisheng (300502.SZ), Tianfu Communications (300394.SZ); 3) Internet of Things: Guanghetong (300638.SZ); 4) Operators: China Mobile (600941.SH), China Telecom (); 5) Communication terminals and accessories: Heertai, Topband Co., Ltd. 6 600050.SH 601728.SH ) Equipment vendors: ZTE (002402.SZ), Firefight Communications (600498.SH); 7) Satellite Internet: Xinwei Communications (300136.SZ).

Risk warning: downstream demand falls short of expectations; implementation and commercialization of new technology falls short of expectations; changes in industrial policies; macroeconomics falls short of expectations, etc.