CITIC SEC: The main focus of investment in the technology industry will continue to revolve around AI. Three investment opportunities recommended for attention.

CITIC SEC releases a research report stating that by looking ahead to 2025, the main focus of investment in the technology industry will continue to be on AI. With the continuous improvement in large model capabilities in areas such as multimodal and logic reasoning, AI is expected to deepen its integration with various industries and drive technological industry investments, from the computation infrastructure to the implementation of end applications. It is recommended to pay attention to investment opportunities in three directions: AI computation power, applications and data, and AI end terminals. With the warming of the macroeconomic environment and the gradual implementation of industrial policies, it is also recommended to focus on investment opportunities in specific technology sectors such as internet, Android consumer electronics, automotive supply chains, semiconductors, and telecommunications under the backdrop of demand recovery. The main points of CITIC SEC are as follows: Review and Outlook: Looking ahead to 2025 global technology investments, focusing on opportunities for Chinese technology assets. Reviewing the trends of global technology sectors in 2024, US technology stocks benefited from the AI wave driven by continuous improvement in large models, with leading hardware technology companies and cloud vendors experiencing faster revenue growth and increasing valuations. As of November 7, 2024, the Nasdaq and Philadelphia Semiconductor indices rose by 26% and 25% respectively, reflecting optimistic market expectations. Looking back at the domestic market, the technology sector showed significant valuation elasticity, rebounding strongly after September 24 and outperforming the overall market. By November 7, 2024, the A-share industries of telecommunications, electronics, automotive, computers, and media had risen by 30%, 21%, 21%, 18%, and 6% respectively. Looking ahead to technology industry investments in 2025, despite challenges such as insufficient computation power and external disruptions faced by the Chinese AI industry, domestic computation power has made rapid progress and large model capabilities are keeping pace with global advancements. The continued deployment of AI in software applications and end hardware is expected to open up larger market spaces for the technology industry. The sustained recovery of macroeconomic demand is also expected to boost sector performance expectations. In this context, CITIC SEC believes that Chinese technology assets have a comparative valuation advantage and are poised for a new round of investment opportunities. The firm also highlights valuation risks of US technology stocks. Investment Themes: Artificial intelligence as the global technology theme, while also focusing on the recovery of Chinese demand. Looking ahead to technology investments in 2025, CITIC SEC believes that the main focus will continue to revolve around AI and the implementation of AI applications. 1) Continuous improvement in large model capabilities and declining costs present new opportunities from computation power to end application deployment. In 2024, we saw continuous iteration and improvement in performance and cost of foundational large models, with Open AI releasing the O1 model, which significantly enhanced the logical reasoning capabilities of large models through reinforcement learning. On the other hand, the costs of large model inference have been rapidly decreasing. We believe that in 2025, we will witness advancements in industries based on AI and ecological innovations in computation, software, and end applications. 2) With the introduction of intensive policies and gradual recovery in demand, attention should be paid to structural opportunities in technology sub-sectors. At the macro-policy level, since September 2024, with the introduction of a series of macro policies, market expectations have been warming up overall, and we expect macroeconomic demand to continue to recover in 2025. At the same time, the importance of technological innovation in China's mode of modernization has become increasingly prominent. The Third Plenary Session of the Twentieth Central Committee of the CPC's "Decision of the Central Committee of the Communist Party of China on Further Deepening Comprehensive Reform and Advancing China's Modernization" substantially prioritizes technological development, proposing to accelerate the promotion of digital industrialization and industrial digitization policies, with a series of complementary industrial policies actively supporting technological innovation development, opening up market spaces for the development of China's technology industry. AI Industry: Continuous iteration of large models, computation power, data applications, and the shift of AI investment from infrastructure to application implementation. 1) In terms of computation power, overseas cloud vendors have high capital expenditures, with market expectations anticipating a growth rate of over 50% for the four major North American cloud vendors in 2024. The computation power industry remains highly prosperous overall, with the pace of technological iteration accelerating with high investments. Looking domestically, the progress of domestic computation power is continuous, and companies in the related industry chain will present long-term investment opportunities. We recommend focusing on domestic computation power chips, supporting equipment, AIDC, and other related links. 2) At the AI application level, domestic companies are continuously exploring AI application scenarios, with overall deployment accelerating. The governance and efficient utilization of professional data may become an important factor in driving further improvement in model performance and accelerating the application of large models in specific fields. We suggest focusing on AI applications and data industry-related targets. 3) At the AI end terminal level: End-side AI, autonomous driving, and the imminent landing of humanoid Siasun Robot & Automation. In terms of consumer hardware, we believe that personal AI assistants are clear directions. With the gradual penetration of AI smartphones and the gradual completion of adaptation to native AI at the operating system level, the development of AI end-side devices and application ecosystems is accelerating. At the same time, we have seen end-to-end technological pathways bringing about a surge in intelligent driving capabilities for the autonomous driving industry. With the maturity of self-driving chip computation power and further accumulation of related data, the experience and effectiveness of autonomous driving are improving with high certainty, approaching a closed-loop business model. The humanoid Siasun Robot & Automation industry is also nearing the mass production timeline, and its integration with AI is creating significant room for industry-scale. Recovery Expectations: Focus on investment opportunities in technology sub-sectors driven by macro demand recovery. Since September 2024, the introduction of a series of macro policies has significantly improved market expectations, and as policies are gradually implemented, the recovery of demand will provide broad space for the development of China's technology industry. From the perspective of sub-sectors, the revenue growth of the internet sector is highly correlated with social retail growth; the automotive sector continues to be supported by the old-for-new policy for vehicle sales growth momentum. The firm believes that sectors such as internet, Android consumer electronics, and the automotive supply chain will benefit from market increments brought about by demand and consumption recovery. At the industrial policy level, technological innovation is given a prominent position, with "advancing Chinese modernization, putting science and technology in the forefront." Support policies in technology sub-sectors like computation, digital creativity, and other areas are further implemented, providing broad market opportunities for domestic semiconductor companies, telecommunications carriers, and other fields. Investment Strategy: Looking ahead to 2025, CITIC SEC believes that the implementation of AI will continue to drive technology industry investments. At the same time, the macroeconomic situation will also drive the development of the industry.The revival of demand and technological innovation on the supply side will also bring structural investment opportunities in segmented fields. We recommend:1) AI industry chain: It is expected to maintain a high level of prosperity. In the field of computing power, attention is advised to domestic computing power chips, supporting equipment, and AIDC-oriented manufacturers; in the application field, attention is advised on software manufacturers that quickly implement AI in areas such as office and enterprise management, as well as companies related to the AI data industry chain; in the AI terminal aspect, attention is advised on AI smartphones, humanoid Siasun Robot & Automation, and companies related to the autonomous driving industry chain. 2) Demand recovery: Against the backdrop of macroeconomic recovery, improving demand, and gradual implementation of industrial policies, sectors such as the internet, consumer electronics, automotive industry chain, semiconductor, operators, and new technology creation are currently seeing continuous improvement in their fundamentals, with valuation expected to continue to recover, and significant investment value. Risk factors: We caution investors to pay attention to the risks brought about by changes in the external geopolitical environment and intensified trade frictions to the technology industry. The potential imposition of tariffs and trade policies by the United States may hinder the export of technology products such as optical modules, lithium batteries, complete vehicles, and components to North America, or weaken the competitiveness of these products; changes in geopolitical situations may prevent IC design companies in mainland China from using advanced process manufacturing capacity located overseas for wafer production. We also caution against risks such as slower-than-expected macroeconomic recovery progress; unforeseen industrial policies; slower-than-expected rate cuts by the Federal Reserve; slower-than-expected progress in core technology and product development by companies; slower-than-expected AI application implementation speed; and lower-than-expected capital expenditure by cloud service providers.