According to the report from Tianfeng Securities obtained by智通财经APP, in terms of revenue, the overall revenue of communications equipment in Q3 2024 has grown by 11.1% year-on-year, recovering growth since Q4 2023, and showing a continuous acceleration in growth from Q1 2024 to Q3 2024, reflecting the completion of the industry's transition between old and new driving forces, with AI computing power becoming a new engine driving industry growth. From the perspective of net profit, the overall net profit of communications equipment in Q3 2024 has increased by 18% year-on-year, a significant reversal compared to -16% in Q3 2023, reflecting a rapid recovery of industry profitability under the transition of old and new driving forces. Tianfeng Securities remains bullish on the AI computing power supply chain (including optical modules, PCB, GPU module manufacturing, switches, AIDC, etc.), liquid cooling and new applications (AI robots/AIPC/AI mobile phones, etc.), as well as the low-valued submarine cables benefiting from the trend of going abroad and the domestic offshore wind turning point, the controller field controlled by the trend of going abroad & concentration of top players, and actively focuses on the progress of satellites/low altitude.

Financial summary and analysis outlook:

Key subsectors worth focusing on:

1) Optical devices had a revenue growth of 90% in Q3 2024, showing high growth and acceleration from Q1 to Q3 2024, with a net profit growth rate of +123% year-on-year, also presenting an acceleration. This may reflect the global AI demand driving significant growth in optical modules, mainly benefiting overseas markets currently, and is expected to benefit from the growth in domestic computing power demand in the future. The optical sector backed by AI is expected to maintain strong growth and the trend is likely to continue for several quarters.

2) The recovery trend of the internet of things continues, with accelerated revenue and profit growth. The revenue growth rate in Q3 2024 increased by 27.2%, achieving over 20% revenue growth for three consecutive quarters, reflecting industry warming and a continuation of robust overseas demand. Benefiting from market demand recovery, IoT industry companies demonstrate strong growth overseas, while cost control has shown effectiveness, leading to rapid profit growth, especially among leading companies in the controller sector like Shenzhen Topband and Shenzhen H&T Intelligent Control, which are both showing strong revenue and profit performance. This trend is expected to continue for several quarters.

3) Submarine cables and optical cables had a revenue growth of 13.9% in Q3 2024, mainly driven by leading manufacturers benefiting from ultra high pressure, smart grid, and marine business sectors. The net profit growth rate was 18.7% year-on-year, reversing the declining trend, with tight bidding schedules in various countries for 2024. Looking ahead to several quarters, domestic demand is expected to recover and accelerate, while overseas demand remains high. It is anticipated that the industry will continue to recover, with robust growth momentum in offshore wind installations expected in the coming quarters and years.

4) IDC & CDN revenue in Q3 2024 increased by 11.8% year-on-year, with range intelligent computing technology group showing outstanding performance. The demand for AIDC is expected to continue growing, benefiting leading companies in the industry. In the future, with the increase in domestic AI demand, the industry is expected to continue benefiting.

5) Revenue of operators in Q3 2024 increased by 1.4% year-on-year, showing steady growth over the past several quarters. The net income attributable to the parent company increased by 5.3% year-on-year, marking three consecutive quarters of steady profit growth. The overall telecommunications industry's operation is healthy, and looking forward to the next few years, steady growth is expected, thus performance is anticipated to maintain stable growth.

6) Main equipment revenue in Q3 2024 slightly declined by 0.3% year-on-year, as the industry is in a transition period between old and new drivers, with insufficient pulling from AI. Looking forward to the next few quarters, the expectation is bullish that as the proportion of AI pulling increases, the demand for ICT driven by AI will lead to continued revenue and profit growth.

7) In the satellite industry, revenue and net income attributable to the parent company in Q3 2024 decreased by 9.2% and 73.4% year-on-year; the main reason is that downstream customers of satellite internet projects are largely military units, which are significantly affected by adjustments in military industry and personnel changes. However, there is currently a trend of year-on-year recovery, with profit decline narrowing compared to the previous year. Starting from the year 2024, the first year of satellite internet, it is expected to drive a significant increase in industry demand.

Investment advice:

I. Growth segment: 1) Continuously optimistic about the AI computing power supply chain (optical modules, PCBs, GPU module manufacturing, switches, AIDC, etc.) as well as liquid cooling and new applications (AI robots/AIPC/AI smartphones, etc.); 2) Benefitting from the offshore trend and undervalued undersea cables at the inflection point of domestic offshore wind, with trends in offshore departures and concentration in the controller field; 3) Actively monitoring developments in satellites/low-altitude progress. II. Steady segment: Operators (steady growth with high dividends).

I. Artificial Intelligence and Digital Economy:

1. Optical modules & optical devices, key recommendations: zhongji innolight, eoptolink technology inc., suzhou tfc optical communication, yuanjie technology (covering electronics collectively); strongly recommend: accelink technologies, solstice; recommend attention to: dongguan dingtong precision metal co.,ltd., advanced fiber resources, broadex technologies, henan shijia photons technology, hebei sinopack electronic technology (covering new materials collectively), dongguan mentech optical & magnetic, cig shanghai, etc.;

2. Switch server PCB, key recommendations: wus printed circuit, zte, victory giant technology, unisplendour corporation (computer joint coverage), filin kosi; suggested attention: guangdong shenglu telecommunication tech, ruijie network, 3onedata co., ltd., beijing inhand networks technology, kyland technology, etc.;

3. Operators: china mobile, china telecom, china united network communications;

4. AIDC & heat dissipation: key recommendations: range intelligent computing technology group (machinery joint coverage), runjian co.,ltd., kehua data co.,ltd. (electric new joint coverage), guangdong aofei data technology (computer joint coverage). Suggested attention: shenzhen envicool technology (machinery joint coverage), beijing sinnet technology, guangzhou goaland energy conservation tech, shenzhen cotran new material, shenling environment (appliance coverage), shanghai athub, etc.;

5. AIGC applications, key attention: richinfo technology, montnets cloud technology group.

II. Communication going overseas & intelligent driving:

1. Submarine optical cables: key recommendations — hengtong optic-electric, jiangsu zhongtian technology, ningbo orient wires & cables (electric new coverage);

2. Recovery of going overseas & concentration of head companies, key recommendations: willfar information technology (machinery joint coverage), shenzhen topband, shenzhen h&t intelligent control, yealink network technology, queclink wireless solutions, fibocom wireless inc., quectel wireless solutions, etc.;

3. Intelligent driving: suggested attention: modules & terminals (fibocom wireless inc., meig smart technology, quectel wireless solutions, queclink wireless solutions, etc.); sensors (hanwei electronics group corporation & sifang photoelectric - machinery joint coverage); connectors (wenzhou yihua connector (electric new joint coverage), dongguan dingtong precision metal co.,ltd., etc.); structural components & air suspension (suzhou cheersson precision metal forming), etc.

3. Satellite Internet & Low-altitude Economy:

The acceleration of national defense information construction, the rapid development of low-orbit satellites, and the active promotion of low-altitude economy. Key recommendations: shanghai huace navigation technology (computer joint coverage), guangzhou haige communications group incorporated; suggested to pay attention to: chengchang technology, zhenlei technology, guangdong shenglu telecommunication tech., xink mobile, jushri technologies, inc., guobowei electronics, genew technologies, jiayuan technology, chengdu m&s electronics technology, china satellite communications, cetc cyberspace security technology, hytera communications corporation, etc.

Risk warning: unexpected decline in operators' capital expenditures, unexpected impact of global pandemics, intensifying industry competition, unexpected effects of raw material shortages and price increases, exchange rate fluctuation risks, and the possibility of statistical bias due to a small sample size.