China Securities Co., Ltd.: Domestic AI productivity tools widely cover end users and are expected to lead the way in explosion.

China Securities Co., Ltd. releases research report stating that in 2023, under the promotion of GPT, North American sectors such as AI advertising, AI education, and data services have seen significant growth. In 2024, the commercial value of the new generation of productivity tools in North America has become more prominent, with companies like AppLovin and Innodata exceeding performance expectations in the third quarter. Domestic AI productivity tools have a wide coverage among C-end users, with stronger willingness to pay among B-end users, poised for an early breakout. Recently, Bitcoin has reached historic highs due to the support of incoming U.S. President Trump for digital assets, as well as expectations of interest rate cuts, with RWA representing physical asset virtualization drawing market attention. Investment recommendations include: 1) AI industry development and blockchain direction; 2) localization direction; 3) expected reversal of IT companies (government IT, consumer IT, financial and tax IT, government procurement IT, network security, etc.); 4) internet finance and securities IT; 5) valuation recovery + pro-cyclical blue-chip targets. Key points from China Securities Co., Ltd. are as follows: ChatGPT has driven strong performance in North American new generation productivity tool-related companies in 2023, with AI advertising, AI education, and data services leading the growth. At the end of 2022, ChatGPT was introduced, leading to a strong performance in North American new generation productivity tool-related companies in the first three months of 2023. Among them, Blend Labs showed relative weakness, with the former being influenced by domestic macroeconomic conditions as a major Chinese concept stock under pressure; while the latter faced pressure in the loan business due to rising interest rates, coupled with continuous layoffs, and events like Silicon Valley bank collapses, intensifying market pessimism. After a brief adjustment in April, selected companies experienced a new round of rise in May driven by Nvidia's better-than-expected performance, with companies like Palantir, Blend Labs, AppLovin seeing even better performance. Additionally, overseas giants have been expanding into the AI business and driving growth in downstream application areas. Following this, the market returned to being bond-led after August, with concerns of inflation, employment, and wage data exceeding expectations leading to continuous adjustment in the market, causing more declines in the new generation productivity tool-related companies. After a dovish turn in the November FOMC meeting, the market considered the endpoint for rate hikes to be established, with anticipation of rate cuts already reflected in the bond market, resulting in market returning to an uptrend, with improved liquidity expectations, better resilience in technology companies, and better-than-expected Q3 performance leading to higher rises in companies like Blend Labs, Duolingo, Palantir. Throughout the year, the top-performing North American new generation productivity tool companies were AppLovin, Duolingo, Innodata, Palantir. AppLovin achieved nearly 3 times growth with its advantage in AI advertising commercialization, Duolingo was mainly driven by continued user growth; while Innodata and Palantir primarily provided data services and comprehensive solutions, positioned relatively upstream in the AI industry chain. The commercial value gradually becoming more prominent, the North American new generation productivity tool sector will see substantial growth as performance improves in 2024. In the first half of 2024, commercialization progress in AI applications other than AI advertising and marketing slowed down, with only AppLovin showing steady growth, while other North American new generation productivity tool companies showed overall weakness but some experienced performance or event-driven anomalies. In February, Nvidia announced collaborations with international hardware/software giants like Arm, Microsoft, Amazon, Samsung, driving AI and RAN technology development in the telecommunications industry. SoundHound, which provides voice AI solutions aimed at improving calling experiences, saw a significant 347% rise in February; Duolingo, Palantir, and Innodata saw high increases around their performance release dates in February and May. Additionally, in May, OpenAI released GPT-4o, contributing to strong performance in new generation productivity tool companies that month. As 2024 entered its second half, the seven major tech giants in the US experienced a sharp decline in July, with increased favoritism toward small and medium-sized enterprises, combined with gradually implemented AI application commercialization, resulting in rising stock prices for new generation productivity tool companies. Since August, the US stock market has returned to an uptrend, and in September, OpenAI released o1 model, while the Fed cut rates for the first time in four years, leading to a continuation of the rise in North American new generation productivity tool companies due to funds and industry resonance. In November, driven by performance, North American new generation productivity tool companies reached a peak, with AppLovin's Q3 revenue reaching $1.198 billion, exceeding market expectations of $1.131 billion by 5.9%; Innodata's Q3 revenue reached $52.224 million, exceeding market expectations of $36.113 million by 44.6%, with both companies seeing increases of 71.85% and 82.74% within half a month. Throughout the year, the top-performing North American new generation productivity tool companies were AppLovin, Innodata, Palantir, Soundhound, Wan Guo Data, Zeta, with AppLovin, Innodata, and Palantir continuing their strong performance from 2023; Soundhound achieving nearly double the growth due to event-driven factors; Wan Guo Data benefiting from industry trends and improved liquidity in China, achieving nearly 150% growth. Domestic AI productivity tools have a broad coverage among C-end users, with stronger willingness to pay among B-end users, likely to lead the way in breakout.BBARVR;CDIYBCAI Overall, the report suggests that the AI industry is expected to see significant growth and development, particularly in the areas of new generation productivity tools and blockchain technologies. Domestic AI tools are expected to have a strong presence among users, with a focus on both consumer and business applications. Additionally, the report highlights the potential for increased investment in IT companies related to government, consumer, financial, and security sectors, as well as opportunities in internet finance and securities. The report also emphasizes the importance of valuation recovery and investing in pro-cyclical blue-chip targets.Customers account for significantly more than 50% of B (business-side) applications. However, in terms of pricing models, 93% of B applications have already started charging, with membership subscription/paid on demand/one-time payment accounting for 50%/30%/13% respectively. In comparison, currently 43% of C (consumer-side) applications are still free for customer development, with membership subscription/paid on demand/one-time payment accounting for 29%/15%/12% respectively.In addition, at the Baidu World 2024 Conference on November 12th, Shen Doudou, Executive Vice President of Baidu Group and President of Baidu Intelligent Cloud Business Group, also stated that AI applications will first break out in the B-end. Currently, over sixty percent of central enterprises and a large number of private enterprises are jointly innovating with Baidu Intelligent Cloud. Baidu's Qianfan Large Model Platform has helped customers fine-tune 33,000 models, develop 770,000 enterprise applications, and the Wenzhen Large Model is called over 1.5 billion times per day. In recent months, the performance of North American next-generation productivity tools has generally exceeded expectations, prompting a rapid increase in stock prices, reflecting the commercial value of AI applications. With the continuous iteration of AI technology and more developers and users building product ecosystems, the next generation of productivity tools are expected to become the mainstream choice for users, ushering in a turning point of nonlinear growth. From the perspective of domestic customers, there are more products targeting consumers, while B-end product commercialization is progressing faster. It is expected that domestic B-end next-generation productivity companies will be the first to see performance growth. Bitcoin has repeatedly hit new highs, paying attention to the value of RWA applications. Since the beginning of this year, Bitcoin has risen by over 100%. Recently, with the support of the incoming U.S. President Trump for digital assets, as well as market expectations of the Federal Reserve continuing to cut interest rates, Bitcoin rose by nearly 6% on Wednesday, reaching an all-time high of $93,462. As digital currencies, represented by Bitcoin, continue to rise, RWA has also attracted attention. Specifically, RWA (real-world asset tokenization) refers to converting the relevant rights of traditional financial assets (stocks, bonds, etc.) and physical assets (real estate, art, etc.) into digital tokens on the blockchain, representing ownership or shares of assets through digital tokens. In the first batch of use cases announced by the Hong Kong Monetary Authority in August this year, Ant Group issued RWA worth 100 million yuan for Longshine Technology Group, setting a benchmark for mainland assets to issue RWAs in Hong Kong. The vice president of Ant Financial mentioned during the Hong Kong Fintech Week in October that more RWAs are expected to be issued in November and December. With active promotion of virtual asset development by the U.S. government, the Hong Kong market, etc., RWAs are expected to be further standardized and regulated, thereby enabling traditional tangible assets to achieve efficient circulation and transactions with blockchain technology. Summary: Driven by ChatGPT, North American next-generation productivity tool companies have performed well this year, with AI advertising, AI education, data services, and other fields leading in gains. The commercial value of North American next-generation productivity tools is gradually emerging, with AppLovin and Innodata's performance exceeding expectations in the third quarter and rising by over 50% in November. Domestic AI productivity tools cover a wide range of C-end users, with stronger willingness to pay for B-end products, expected to break out first. For example, over sixty percent of central enterprises and a large number of private enterprises are collaborating with Baidu Intelligent Cloud for AI innovation. Bitcoin has risen by over 100% this year, driven by Trump's support for digital assets and market expectations of continuous interest rate cuts by the Federal Reserve. RWA, as a representative of the virtualization of physical assets, has attracted market attention. Investment Recommendations: The synergy between Chinese and American technology sectors is now evident. Pay attention to the financial behavior of the AI industry and the virtual world. Risk Warnings: (1) Risks of macroeconomic downturn: The computer industry downstream involves various industries. Under pressure from macroeconomic downturns, lower-than-expected IT spending will directly affect the computer industry's demand; (2) Risks of bad debts of accounts receivable: Most computer companies' business is mainly project-based, and payment is only received after acceptance. Lengthening payment cycles by downstream customers may increase bad debts of accounts receivable and may further lead to impairment losses of assets; (3) Intensified industry competition: While the demand for the computer industry is relatively certain, intensified competition on the supply side may change the industry landscape; (4) Influence of international environmental changes (currently, the continuous increase in interest rates in the United States affects the valuation of the technology industry, and market expectations for overseas recession may have an impact on companies with a higher proportion of overseas income, in addition, the ongoing pressure from the United States on Chinese technology).