Research by Shenwan Hongyuan Group: Cloud Mode Shows Resilient Growth, Continued Push for AI Commercialization

Shenwan Hongyuan Group's research report stated that in the first half of 2024, the overall revenue growth of the cloud software industry was 5% with profits shrinking; the overall revenue growth of the cloud hardware industry was 17% with a profit growth of 7%, although the profit margin slightly declined. The "birth pains" of cloud computing transformation have entered the later stage, with cloud revenue growth generally faster than overall revenue growth, and major companies' cloud business revenues maintaining high year-on-year growth, indicating a turning point towards profitability. Under the driving force of AI, cloud computing serves as the foundation and preferred scenario for AI implementation. By utilizing cloud services, the contradiction between the high computational power demands of AI and the limitations of edge devices can be addressed, making cloud computing the platform for AI application deployment. Additionally, the initial application areas for AI are likely to be those where cloud development is more mature. Performance Review: Cloud software revenue growth was mediocre, while cloud hardware profit margins declined slightly. In the first half of 2024, the overall revenue growth of the cloud software industry was 5%, with profits shrinking; the cloud hardware industry saw overall revenue growth of 17% with profit growth of 7%. The focus will be on industry growth driven by AI in the future. In the first half of 2024, the computer industry saw a year-on-year change of 7% in revenue and -21% in net profit. Cloud software revenue growth was comparable to the industry average, with noticeable quarterly profit differences in the pure software model. Hardware revenue growth was higher, but downstream concentration resulted in pressure on gross profit margins. Turning Point to Profitability: With cloud computing transition pains entering the later stage, cloud revenue growth is generally faster than overall revenue growth. Major companies' cloud business revenues maintain high year-on-year growth, marking a turning point towards profitability. Various companies' cloud revenue growth rates are generally higher than overall business growth rates, with cloud revenue accounting for over 80% for many companies. Cloud transformation has entered the phase of effectiveness, and after an expected recovery in the business environment, profits are likely to be unlocked. AI Drive: Cloud computing is the foundation and preferred scenario for AI implementation. By utilizing cloud services, the contradiction of AI's high computational power requirements and the limitations of edge devices can be addressed, making cloud computing the platform for AI application deployment. From a different perspective, the initial application areas for AI are likely to be those where cloud development is more mature. Key Companies: Valuations are at historically low levels, with business models showing a certain level of growth resilience. Cloud Software: Beijing Kingsoft Office Software, Inc (688111.SH), KINGDEE INT'L (00268), Fujian Foxit Software Development Joint Stock (688095.SH), Beijing Shiji Information Technology (002153.SZ), Glodon (002410.SZ), Hundsun Technologies Inc. (600570.SH), Yonyou Network Technology (600588.SH), MING YUAN CLOUD (00909) Cloud Hardware: Inspur Electronic Information Industry (000977.SZ), Dawning Information Industry (603019.SH) Risk Warning: Delayed company promotion of cloud computing business; AI technology development falling short of expectations; under-performance in integration of technology by cloud software vendors; external environment changes leading to supply chain risks for some hardware manufacturers; AI's pace of driving computational power demand being slower than expected.