Matters:

Incident: On October 22, Native Hongmeng Night and Huawei's full-scene new product launch conference were held in Shenzhen. Yu Chengdong, executive director of Huawei, chairman of the terminal business, and chairman of Smart Vehicle Solutions BU, said that up to now, there are more than 1 billion units of Hongmeng ecological equipment. At the conference, China's first domestically produced mobile operating system, HarmonyOS 5.0, or HarmonyOS NEXT (Pure Blood Harmony), was officially released, making it the third largest mobile operating system in the world after Apple and Android.

Guoxin Computer's opinion: 1) Pure Blood Hongmeng was officially released. Two main lines promote ecological expansion: HarmonyOS and OpenHarmony (open source Hongmeng) have the same roots and the same roots to jointly build the Hongmeng ecosystem, covering all C-side and B-side users. 2) With the beginning of the Internet of Everything era, Hongmeng created a new user experience: the number of IoT terminal connections around the world grew rapidly, and Hongmeng achieved enhanced user intelligence in various usage scenarios; 3) Huawei's mobile phone market share rebounded to accelerate the development of the Hongmeng system: Huawei terminal sales returned, and Hongmeng became the second-largest operating system in China, accelerating Hongmeng's ecological expansion; 4) Hongmeng's ecological core card, pure-blood+open source Hongmeng dual-wheel drive performance growth: a) Pure Blood Hongmeng: The market potential is huge. Chinasoft International is a native Hongmeng application developer and diamond service provider for Hongmeng Benefit from the development of Pureblood Hongmeng; b) Open source Hongmeng: The company is deeply tied to Shenzhen Kaihong to jointly promote Hongmeng industry solutions, and it is expected that performance will gradually be released. Taking into account factors such as fluctuations in overseas customers and the pace of Shengteng's business volume, 24-26 revenue was lowered to 18.028/20.199/22.286 billion yuan (24.002/27.64 billion yuan 24-25 years ago), with growth rates of 5.3%/12.0%/10.3%, respectively; net profit to mother was 0.721/0.866/1.092 billion yuan (value 1.151/1.28 billion yuan 24-25 years ago), corresponding to the previous PE was 20/17/13 times, maintaining the “better than the market” rating. 5) Risk warning: Hongmeng's ecological expansion falls short of expectations, downstream demand falls short of expectations, hardware technology implementation process falls short of expectations, macroeconomic fluctuations, etc.

Commentary:

Pure Blood Hongmeng was officially released, and two main lines promote ecological expansion

The first domestic mobile operating system was released, and Thoroughblood Hongmeng, iOS, and Android are all in three. In '12, Huawei began planning the HarmonyOS operating system internally, and launched in '19. After years of development, HarmonyOS NEXT (Pure Blood Hongmeng) was officially released in October '24. It passed the independent maturity level certification work of the China Academy of Information and Communication Technology, and the independent R&D ratio reached 100%, making it a completely localized operating system, enabling self-research. The HarmonyOS NEXT system abandoned the traditional Linux kernel and the Android open source code project AOSP. It is no longer compatible with Android applications. It only supports the Hongmeng kernel and the Hongmeng system applications. Currently, it is the third-largest operating system with Apple's iOS and Google's Android systems.

Ecological expansion: HarmonyOS and OpenHarmony (open source Hongmeng) have the same roots, and the dual main line promotes ecological expansion. Open source Hongmeng is a distributed operating system for all scenarios. It was launched by Huawei in 2020. The system uses a micro-core architecture and can meet the needs of various IoT applications.

Currently, Open Source Hongmeng is incubated and operated by the Open Atom Open Source Foundation to create an open, shared, and secure smart terminal operating system ecosystem. Hongmeng and open source Hongmeng have the same origin and ecosystem. Pure Blood Hongmeng apps can be used on open source Hongmeng, and vice versa. By the end of 2023, more than 250 ecosystem partners had joined the 0penHarmony open source community, 35 donors to the 0penHarmony project, 173 partners passed the OpenHarmony compatibility assessment, and more than 230 commercial devices had been implemented, covering various fields such as finance, education, smart home, transportation, digital government, industry, and medical care.

The era of the Internet of Everything begins, and Hongmeng creates a new user experience

Industry trends: The growth rate of mobile internet is slowing down, and the Internet of Everything is beginning an era. According to data disclosed by GSMA, the number of global mobile users is expected to rise to 6.3 billion in 2030, the penetration rate will increase by 5 pcts in 22-30, and the global mobile internet growth rate will slow down. With the trend of intelligent device development and consumers' demand for an intelligent life, the Internet of Everything era is beginning, and the base of application devices will expand from billions of mobile phones to tens of billions of IoT devices. According to GSMA forecasts, the number of global IoT terminal connections will reach 24.6 billion in 25, of which the number of consumer IoT terminal connections will reach 11 billion. IDC expects the total number of IoT connections in China to reach 10.27 billion by 2025. The full-scene device experience is changing consumers' usage habits, and application developers are also facing a shift from a single mobile phone device to a full-scene multi-device device. In line with the trend of mobile ecosystem development, the Hongmeng system proposed three major technical concepts: one-time development, multi-terminal deployment; separability, free circulation; unified ecology, and native intelligence.

The ecological foundation of the Hongmeng Internet of Everything: three major technical concepts. “Develop once, deploy on multiple terminals” refers to a project, developed and launched once, and deployed on multiple terminals as needed. The Hongmeng system provides several core capabilities, including multi-terminal development environments, multi-terminal development capabilities, and multi-terminal distribution mechanisms to support developers to efficiently develop applications on various terminal devices. “Separable and compatible, free circulation” means that developers can split different businesses into multiple modules through business decoupling, and freely combine one or more modules in the deployment state and package them independently into different App Packs; developers can easily develop applications that span multiple devices, and users can also easily use these functions. “Unified ecosystem, native intelligence” means that various full-scene terminal devices can be developed based on Hongmeng to meet the requirements of all-scenario use such as smart homes and smart offices.

Advantages of Hongmeng scenarios: Improve the user intelligence experience in various usage scenarios. In terms of smart travel, when users are traveling or traveling, they can easily transfer navigation information from the mobile phone to the car or to the watch, and users can view the desired information on other devices without operation; in terms of smart office, users only need to select the PC that needs to be transferred on the mobile phone page, and the mobile phone documents will be synchronized to the PC and automatically entered to the editing page; in terms of smart homes, terminal devices can be interconnected through the Hongmeng system, so that devices such as mobile phones and tablets can be connected to video games and other functions.

Huawei's mobile phone market share rebounded, promoting the accelerated development of the Hongmeng system

The return of sales of Huawei terminals has led Hongmeng to become the second-largest operating system in China. In May 2019, Huawei was added to the “Entity List” by the US Department of Commerce's Bureau of Industry and Security (BIS). Due to hardware supply, sales of some mobile phone products were suspended, and the market share declined. According to IDC data, Huawei smartphone shipments in 2020 decreased by 21.5% year-on-year. In September 2023, Huawei began pre-sale of the Mate 60 Pro, marking Huawei's return to the high-end mobile phone market. Driven by demand for Mate 60 series phones, Huawei's market share gradually recovered, and the market share of the Hongmeng operating system surpassed iOS, reaching 17% in the domestic market.

Driven by the sales volume of Huawei terminals, the Hongmeng ecosystem is expanding at an accelerated pace. Meta service (formerly known as atomization service) is a service method for future hyperterminals. It supports one-time development, multi-terminal deployment, scene sensing and one-touch interconnection, and supports free installation and operation on various terminal devices such as mobile phones, smart wearables, and smart screens. At present, the Hongmeng operating system has more than 15,000 native Hongmeng applications and meta-services on the market, covering 18 industries, and general office applications covering more than 38 million enterprises across the country. Native Hongmeng reduced the difficulty and cost of connecting to the new system, and increased fluency by 30%. At the same time, Native Hongmeng has enabled the interconnection of multiple devices and scenarios such as mobile phones, tablets, and car cockpits. Up to now, the number of devices supporting the Hongmeng system has exceeded 1 billion, and registered developers are 6.75 million. At the same time, Huawei has cooperated with more than 300 universities across the country to further accelerate technology research and development and iteration.

China Software International: Hongmeng Ecological Core Card, Pure Blood+ Open Source Hongmeng Dual Wheel Drive Performance Growth Pure Blood Hongmeng: First batch of HarmonyOS development service providers, Hongmeng's native application development and training diamond service provider. China Software International participated in the development of the Huawei Hongmeng operating system in 2012 and began entering the field of Hongmeng; in March '24, China Software International was awarded a license by Huawei and became the first batch of HarmonyOS development service providers. It has 50,000+ certified Hongmeng engineers, and launched 7,000+ native Hongmeng applications and meta-services to develop and train diamond service providers for Hongmeng's native applications. Growth logic: 1) Huge market potential: According to data disclosed by the Ministry of Industry and Information Technology, as of 23Q3, the number of apps in China was 2.74 million. According to information disclosed by Huawei, as of October '24, Hongmeng's native app and meta-service had 0.015 million models. The app Hongmeng conversion rate was less than 1%, and Hongmeng's native app development market potential was huge; 2) Medium- and long-tail customers are the core: According to data disclosed by QuestMobile, the number of apps with 10 million monthly active users was 319 (i.e. (Leading app customers), and there are many medium and long-tail app manufacturers, and considering factors such as cost, they prefer to choose a third party company to help complete the development of Hongmeng's native apps and contribute incremental performance to the company; 3) Pure Blood Hongmeng's release accelerates the pace of Hongmeng app migration: After the release, Pureblood Hongmeng is no longer compatible with Android and Apple iOS apps, and at the same time, the market share of Huawei's mobile phone market continues to increase. In order to ensure the normal use of customers, it is expected to accelerate the pace of migration of native Hongmeng apps.

Open source Hongmeng: Deeply bound with Shenzhen Kaihong to develop Hongmeng industry solutions.

Shenzhen Kaihong: Established in '21, it focuses on developing domestic operating systems based on open source Hongmeng, and has a leading edge in the Hongmeng ecosystem. 1) Shareholder level: China Soft International, Huawei Hubble, and Shenzhen State-owned Assets Administration Commission; 2) Number one code contribution: According to data disclosed by Shenzhen Kaihong, as of July 24, Shenzhen Kaihong contributed more than 4 million lines of code to the main OpenHarmony community repository code (ranking first among ecosystem vendors other than Huawei). In the past year, Shenzhen Kaihong's OpenHarmony main warehouse code contribution accounted for more than 10%, exceeding the total contribution of all vendors other than Huawei; 3) Operating system progress: already based on the progress of the operating system OpenHarmony released the industry-distributed operating system KaiHongOS, and based on it, launched KaiHongOS Meta, a super device management platform, and recently opened a preview version of KaiHongOS developers. 4) Strategic layout: Around the “(1+1) x N” strategy, it is planned to build a full-stack service system, that is, a KaiHongOS operating system and a KaiHongOS Meta superdevice management platform as the base, jointly build an “end-to-end edge-network-cloud-use-service” integrated full-stack service system, and build an end-to-end autonomous, secure, and controllable AIoT industry solution through localization, modularity, and systematization to break down information “silos” and build an intelligent network service system with comprehensive perception, ubiquitous interconnection, flexible collaboration, and intelligent management and control. Empower Construction of a domestic smart networking ecosystem. 5) The two sides are deeply bound and cooperated: in terms of equity, Chinasoft International took a stake in Shenzhen Kaihong; at the business level, Shenzhen Kaihong focused on operating system research and development, and related Hongmeng equipment and implementation were left to Chinasoft International.

Relying on open source, Hongmeng has entered a wide range of industries, driving innovation in thousands of scenarios. Based on the open source Hongmeng ecosystem, Kaihongos, the domestic operating system of Shenzhen Kaihong, uses distributed soft buses and atomized services as the technical core to break hardware boundaries. Through galaxy networking, Kaihong screen projectors, and KaiHongOS robots can quickly form superdevices to achieve distributed screens, distributed camera calls between devices, and end-side distribution and circulation of atomized services. It can be widely used in various scenarios such as teaching, meetings, and inspection. In terms of building domestic credit and innovation solutions, the company has achieved business innovation and product commercialization in water conservancy, transportation, urban lifeline and other industries based on innovative technologies such as “open source Hongmeng+AI”, and has launched various industries such as Chenghong, Fire Hong, and Jiaotong Hong for various industries. The company uses smart water conservancy as the starting point for development in the industrial IoT industry. It uses a soft bus to achieve linkage control between devices, uses an integrated controller+HMI+gateway design to simplify the equipment networking structure, and uses one-click self-inspection and remote diagnosis features, which can significantly reduce the deployment, operation and maintenance costs of water conservancy scenarios.

Investment advice: Hongmeng Ecological core card, pure blood+open source Hongmeng two-wheel drive performance growth, maintaining the “superior to the market” rating. 1) Pure Blood Hongmeng: The market potential is huge. Chinasoft International is a native Hongmeng application development and training diamond service provider, fully benefiting from the development of Pure Blood Hongmeng; 2) Open Source Hongmeng: The company is deeply tied to Shenzhen Kaihong to jointly promote Hongmeng industry solutions, and performance is expected to be gradually released. Taking into account factors such as fluctuations in overseas customers and the pace of Shengteng's business volume, the 24-26 operating income was lowered to 18.028/20.199/22.286 billion yuan (24.002/27.64 billion yuan 24-25 years ago), with growth rates of 5.3%/12.0%/10.3%, respectively; net profit to mother was 0.721/0.866/1.092 billion yuan (24-25 years ago was 1.151/1.28 billion yuan), corresponding to current PE It is 20/17/13 times, maintaining the “better than the market” rating.

Risk warning

Hongmeng's ecological expansion falls short of expectations, downstream demand falls short of expectations, hardware technology implementation process falls short of expectations, macroeconomic fluctuations, etc.