Tianfeng: AI new momentum driving industry growth to accelerate, positive about the continued high prosperity of the communication industry with accelerating growth each quarter.

Tianfeng released a research report stating that in terms of operating income, the overall revenue of communication equipment in 24Q3 grew by 11.1% year-on-year. Growth resumed from 23Q4, and showed a trend of continuous acceleration from 24Q1 to 24Q3, reflecting the completion of the industry's transition from old to new driving forces, with AI computing power becoming a new engine driving industry growth. In terms of net profit, the overall net profit of communication equipment in 24Q3 increased by 18% year-on-year, a significant reversal compared to -16% in 23Q3, reflecting rapid profit recovery under the transition from old to new driving forces. Tianfeng continues to be 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 (AISiasun Robot & Automation/AIPC/AI smartphones, etc.), as well as undervalued submarine cables benefiting from the trend of going abroad and the turning point of domestic sea breeze. The industry, areas where going abroad and the trend of concentration in the controller field are controlled, and actively monitor satellite/low-altitude progress. Financial summary and analysis outlook: Sub-industries worth special attention: 1) Optical devices saw a 90% year-on-year increase in revenue in 24Q3, showing a high and accelerating growth trend from 24Q1 to 24Q3, with a year-on-year growth rate of +123% in net profit attributable to shareholders in Q3, also showing an accelerating growth trend. This may reflect that global AI-driven demand for optical modules has entered a phase of high growth, currently mainly benefiting from overseas, and is expected to benefit from the growth of domestic computing power demand in the future. The "AI Light" is expected to continue to show impressive high growth, with the trend likely to continue for several quarters. 2) The Internet of Things continues its recovery trend, with revenue and profit accelerating. The revenue growth rate in 24Q3 was 27.2% year-on-year, with revenue growth of over 20% in three consecutive quarters, reflecting industry warming and the continued strong overseas demand trend. Benefiting from market demand recovery, companies in the Internet of Things industry have shown strong growth in going abroad, with effective cost control leading to rapid profit growth. Leading companies in the controller field, such as Shenzhen Topband and Shenzhen H&T Intelligent Control, have shown strong revenue and profit performance, with this trend expected to continue for several quarters. 3) Submarine cables and optical cables saw a 13.9% increase in revenue in 24Q3, mainly driven by leading manufacturers in the high-voltage, smart grid, and marine business sectors, with a year-on-year increase of 18.7% in net profit attributable to shareholders, reversing the downward trend, and tight bidding schedules in various countries in 2024. Looking ahead to the next several quarters, domestic demand is expected to recover and accelerate, with overseas demand remaining strong. We expect the industry to continue to recover and maintain steady growth in the next several quarters and years, with a stable trend in offshore wind power installation growth. 4) IDC & CDN saw an 11.8% year-on-year increase in revenue in 24Q3, with the leading smart computing center Range Intelligent Computing Technology Group performing well. The demand for AIDC is expected to continue to drive the continued benefits of industry leaders, with future growth expected to continue as domestic demand for AI increases. 5) Telecom operators saw a 1.4% year-on-year increase in revenue in 24Q3, showing steady growth in recent quarters, with a 5.3% year-on-year increase in net profit attributable to shareholders, steadily increasing profits in three consecutive quarters. The overall communication industry operations are stable, with prospects for steady growth over the next few years, so we expect performance to maintain steady growth. 6) Major equipment saw a slight 0.3% year-on-year decline in revenue in 24Q3, as the industry is in a period of transition from old to new driving forces, with AI driving not yet sufficient. Looking ahead to the next several quarters, we are optimistic about the return of revenue and profit growth as the share of AI-driven ICT demand continues to increase. 7) The satellite industry saw a 9.2% year-on-year decrease in operating income and a 73.4% year-on-year decrease in net profit attributable to shareholders in 24Q3; mainly due to the fact that downstream customers in the satellite internet sector are mostly military units, and are highly affected by changes in military deployments and personnel. However, there is already a trend of recovery, with profit decline narrowing year-on-year, and after 2024, with the beginning of the year of satellite internet, subsequent growth in industry demand is expected. Investment recommendations: Growth class: 1) Continued optimism on the AI computing power supply chain (optical modules, PCBs, GPU module manufacturing, switches, AIDC, etc.) and liquid cooling and new applications (AISiasun Robot & Automation/AIPC/AI smartphones, etc.); 2) Submarine cables benefiting from the trend of going abroad and the turning point of domestic sea breeze, and the controller field where the trend of going abroad and concentration of leaders in the industry are evident; 3) Active focus on satellite/low-altitude progress. Stable class: telecom operators (steady growth combined with high dividends). Artificial Intelligence and Digital Economy: 1) Optical modules & optical devices, key recommendations: Zhongji Innolight, Eoptolink Technology Inc., Suzhou TFC Optical Communication, Yuanjie Semiconductor Technology (covering joint electronics); recommended focus: Accelink Technologies, Solstice; recommended attention: Dongguan Dingtong Precision Metal Co.,Ltd., Advanced Fiber Resources, Broadex Technologies, Henan Shijia Photons Technology, Hebei Sinopack Electronic Technology (covering new materials jointly), Dongguan Mentech Optical & Magnetic, Cig Shanghai, etc.; 2) Switch servers PCB, key recommendations: Wus Printed Circuit, ZTE Corporation, Victory Giant Technology, UnisplendourCorporationComputer Joint Coverage, Shenzhen Phoenix Telecom Technology; Suggested companies to pay attention to: Shengke Communication, Ruijie Networks, 3onedata Co., Ltd., Beijing InHand Networks Technology, Kyland Technology, etc.3. Telecommunications operators: China Mobile Limited, China Telecom Corporation, China United Network Communications; 4. AIDC & Cooling: Key recommendations: Range Intelligent Computing Technology Group (mechanical joint coverage), RunJian Co., Ltd., Kehua Data Co., Ltd. (electric new joint coverage), Guangdong Aofei Data Technology (computer joint coverage). Recommended to pay attention to: Shenzhen Envicool Technology (mechanical joint coverage), Beijing Sinnet Technology, Guangzhou Goaland Energy Conservation Tech, Shenzhen Cotran New Material, Guangdong Shenling Environmental Systems (home appliance coverage), Shanghai AtHub, etc.; 5. AIGC applications, key focus: Richinfo Technology, Montnets Cloud Technology Group. Communication going global & Intelligent Driving: 1. Submarine cables & optical cables: Key recommendations - Hengtong Optic-Electric, Jiangsu Zhongtian Technology, Ningbo Orient Wires & Cables (electric new coverage); 2. Global recovery & concentration of leading companies going global, key recommendations: Willfar Information Technology (mechanical joint coverage), Shenzhen Topband, Shenzhen H&T Intelligent Control, Yealink, Queclink Wireless Solutions, Fibocom Wireless Inc., Quectel Wireless Solutions, etc.; 3. Intelligent driving: Suggested to pay attention to: Modules & terminals (Fibocom Wireless Inc., MeiG Smart Technology, Quectel Wireless Solutions, Queclink Wireless Solutions, etc.); sensors (Hanwei Electronics Group Corporation & Cubic Sensor And Instrument Co., Ltd- mechanical joint coverage); connectors (Wenzhou Yihua Connector (electric new joint coverage), Dongguan Dingtong Precision Metal Co., Ltd., etc.); structural components & air suspension (Suzhou Cheersson Precision Industry Group), etc. Satellite Internet & Low Altitude Economy: Defense informatization construction is accelerating, low-orbit satellites are developing rapidly, and the low altitude economy is actively promoted, key recommendations: Shanghai Huace Navigation Technology (computer joint coverage), Guangzhou Haige Communications Group Incorporated; recommended to pay attention to: Zhejiang Chengchang Technology, Great Microwave Technology, Guangdong Shenglu Telecommunication Tech., Xinsci Mobile, Jushri Technologies, Inc., Guobo Electronics, Genew Technologies, Jiayuan Science and Technology, Chengdu M&S Electronics Technology, China Satellite Communications, CETC Cyberspace Security Technology, Hytera Communications Corporation, etc. Risks: Operators' capital expenditures declining more than expected, global epidemic impact exceeding expectations, increased industry competition, impact of shortage and price increase of raw materials exceeding expectations, exchange rate fluctuation risks, selecting a small sample size may lead to statistical deviation, and other risks.