A leading domestic computing network infrastructure leader, targeting a new generation of smart service providers. China Communications Services has more than 70 years of experience in the communications and information industry. It was listed in 2006, and the final actual controller was the State Assets Administration Commission. Currently, the company's main business is divided into three parts, namely TIS (Telecom Infrastructure Service), BPO (Business Process Outsourcing), and ACO (Application, Content and Other Services). Among them, TIS is the main revenue-generating business, accounting for more than half of total revenue; ACO is the main growth-driving business; and BPO revenue is relatively stable. Telecom operators, non-operator group customers, and overseas customers are the company's three major customer groups, and in 2019, non-operator group customers became the company's largest customer group for the first time. In recent years, the company's net revenue and profit have shown a steady growth trend. In 2021-2023, the CAGR of the company's revenue/net profit to mother was 5.3 0%/6.5 5%, respectively. In addition, the company's gross margin/net margin increased steadily. In 2021/2022/2023, the company's gross margin was 11.03%/11.35%/11.61%, respectively, and the net margin was 2.38%/2.47%/2.51%, respectively. In 2021, the company launched a 10-year stock appreciation incentive plan and established performance indicators for the initial grant. Based on 2022/2024, ROE was not less than 8.25%/8.40%/8.65%, respectively; revenue growth rate was not less than 15.0%/25.4%/37.9%, respectively; total asset turnover was not less than 1.15/1.15/1.15 times. The formulation of the company's stock appreciation incentive plan shows confidence in long-term development.

Computing power infrastructure brings new flexibility, and TIS is expected to usher in a period of steady growth. In the past, industry analysis mainly judged the rise and fall of the industry based on the construction pace of 3G/4G/5G base stations and operator CAPEX. In fact, 5G macro site construction is slowing down, and operators are also compressing wireless CAPEX. However, we think there is no need to be too pessimistic. It is mainly based on the following factors: 1) The future of 5G base station construction will move from broad coverage to deep coverage/thick coverage. According to relevant data from the Academy of Information and Communications Technology, the scale of 5G small base station construction in China will reach 6 million in 2022. 2) Demand for enterprise-grade 5G base stations is increasing, and will surpass operator investment for the first time after 2025 to become the main force. 3) In 2024, China's 5G-A commercial year will be launched. With the development of application scenarios such as the low-altitude economy, demand for 5G-A website construction is expected to be released. Therefore, we need to focus on the major changes taking place in the industry today and judging future trends. As the construction of computing power infrastructure begins, we should pay more attention to the new flexibility that computing power facilities bring to the company. The main influencing factors are: 1) Operators' capital expenditure is skewed towards computing power, and demand for AI-related data center construction is strong. 2) Intelligent Computing Center has large market space. Based on IDC data, in 2021-2026, China's intelligent computing scale will grow at a CAGR of 52.3% to 1,271.4EFLOPS. 3) The company has moved from traditional communication network construction and operation to computing power infrastructure construction and maintenance. Its main customer group has not changed, and previous project/technical experience is still applicable. Currently, the company's digital infrastructure business is also developing rapidly, with cloud business 40% + and data center business 35% +. At the same time, the company obtained examples of various industry benchmark projects, including an artificial intelligence computing power center (EPC) project in Qianhai, a big data center of a state-owned bank, and an intelligent computing center construction project of a group. With the rapid expansion of computing power infrastructure in the future, the company's TIS business is expected to continue to grow.

Carrier OPEX is relatively stable, and supply chain reforms continue to advance. In terms of macro-level OPEX spending, according to Analy's ys Mason data, global operators' and network-related OPEX is around 5,200 trillion US dollars, and their OPEX ratio will increase from 49% in 2020 to 51% in 2027; it is also expected that the total number of network and IT-related OPEX will also increase. On the OPEX side of domestic operators, the three major operators' expenses related to network operation have increased in the past 5 years, and we believe that until operators start large-scale 5G-A/6G construction, operators may focus on operating current network/computing power equipment, and OPEX is expected to remain relatively stable. In terms of industry transformation, with the growth in the scale of intelligent computing centers in China, the demand for intelligent operation and maintenance is rapidly increasing; since the company has been engaged in operator data center operation and maintenance management for a long time and has rich data center operation and maintenance data, it is expected that it will give full play to its advantages in the process of transforming to intelligent operation and maintenance in the future. In addition, the company is also a major logistics company in the communications industry, and mainly undertakes third-party logistics from operators. In June 2021, the company introduced strategic investors to implement mixed supply chain company reforms. Strategic investors invested a total of RMB 0.9 billion into the supply chain company and held 26.02% of the shares. The company is still the parent company of the supply chain company and has a controlling interest in it, accounting for 73.99% of the shares. As mixed reform continues to advance further, supply chain companies are expected to improve operational efficiency and expand their influence in the industry.

The future of digital China has arrived, and ACO is the main driver of growth. In February 2023, the Party Central Committee and the State Council released the digital China top-level design plan, clarifying the overall framework layout of “2522.” Furthermore, according to the “Digital China Development Report (2023)” issued by the China Academy of Information and Communication Technology, China's digital economy will exceed 55 trillion yuan in 2023, and there is a large market space. In recent years, the company has continued to develop strategic emerging businesses, developing digital government/dual carbon/ cybersecurity fields. The future is expected to bring new growth priorities. Digital government: The share of various business segments in China's digital government IT investment in 2024 will be 47%/23%/20%/6%/4%, respectively; the company has integrated service capabilities from consulting, construction to operation, and is expected to fully benefit in the future. Dual carbon aspect: In 2020, the total output value of China's energy saving service industry was 591.6 billion yuan, an increase of 13 over the previous year.

3%, which is expected to reach 1 trillion yuan by 2025, and the CAGR will reach 11.07%; the company is also committed to focusing on the “4+1” field and building “5 dual carbon capabilities”. In terms of industry cybersecurity: In 2026, China's cybersecurity IT expenditure will reach 31.86 billion US dollars, an increase of more than 2.5 times within 5 years, and a 5-year CAGR of about 21.2%. The company has established the “Communications Network Security” sub-brand and can provide overall security solutions and comprehensive security services to the market. In 2020, the company's ACO business revenue increased 16.8% year on year; among them, software development and system support maintained rapid growth, with a year-on-year increase of 25.1%. Furthermore, in the past 10 years, the company's ACO share of revenue has increased from 10.8% to 19.5%, and AC has become the main driving force for the company's business growth.

Investment advice: The company is a leading provider of new infrastructure in domestic computing networks. Its business includes TIS, BPO and ACO. With the rapid development of AI GC, traditional communication networks will be completely transformed into computing network construction, and the company is expected to continue to benefit. From 2022 to 2023, the company's dividend rate increased from 40% to 42%; the dividend per share increased from 0.19 yuan/share to 0.22 yuan/share, an increase of 12.1% over the previous year. We expect net profit for 2024-2026 to be 3.809 billion/4.06 billion/43.3 0.5 billion yuan, EPS 0.55 yuan/0.59 yuan/0.63 yuan, respectively, corresponding to 2024-2026 PE 7.4/6.9/6.5 times, respectively, covered for the first time, giving a “buy” rating.

Risk warning: risk of further decline in operators' capital expenses/operating expenses; risk of small and micro base stations and 5G-A falling short of expectations; risk of digital economy and industry digital development falling short of expectations; risk of supply chain reforms falling short of expectations; risk of increased market competition; risk of technology development and supply chain instability; risk of untimely research information updates.