CICC's 2025 Telecommunications Service Outlook: 5G blossoms in spring and bears fruit in autumn, AIDC rising steadily.

CICC released a research report stating that looking ahead to 2025, the telecommunications services sector has attractive valuations in a low-interest-rate environment. The current phase of 5G entering the payback period is expected to lower capital expenditures and support free cash flow performance, with cost control supporting profit stability. In the tower business, free cash flow is significantly higher than the dividend amount, with great potential for dividend increases, and profits are expected to be released upon completion of tower depreciation. The data center sector has room for valuation improvement, with cloud vendors' capital expenditures rebounding and good prospects for the performance recovery of the data center business in 2025. Rapid delivery capability, power, and location matching may become core competitive elements. CICC's main points are as follows: 5G is entering the investment payback period, and in a low-interest-rate environment, the valuations of the telecommunications services sector are attractive. Telecom operators: Dividend returns stable, technology transformation provides medium- to long-term growth momentum. 1) China's 5G commercialization began in 2019. Referring to past developments and the operating practices of overseas operators, current operator capital expenditures are stabilizing with a downward trend, supporting free cash flow performance. 2) External factors and the mid-to-late stage of technological generations, the weakened momentum from 4G to 5G in ARPU enhancement, and operators' active quality control of B2B projects have led to a slowdown in revenue growth, which is normal. Strategies for cost control are expected to support steady net profit growth. 3) Technology transformation brings medium- to long-term revenue growth momentum. Operators are actively deploying cloud, AI, satellite communications, and quantum technologies. In recent years, the importance of accounts receivable for telecommunications companies has been increasing, and the risk of bad debts for B2B businesses is relatively controllable. Tower operators: Great potential for dividend increases, with valuations catalyzing gradually. Tower businesses have stable capital expenditures and abundant free cash flow, with great potential for dividend increases. By the 4th quarter of 2025, with the completion of tower depreciation reserves, profits are expected to increase significantly, opening up room for dividend increases and the potential for higher shareholder returns. Data centers: Valuations have room for improvement, with cloud vendor capital expenditures rebounding; optimistic about the continued recovery of data center performance in 2025. Rapid deployment capability, power, and location matching may become core competitive elements. 1) After years of adjustments, the valuation of the data center sector is attractive, with a slight recovery in 2024. With further strengthening of the industry recovery trend driven by AI, there is potential for further valuation uplift. 2) Optimistic about the performance recovery trend of third-party data center manufacturers in 2025. Domestic cloud vendors' stable or increasing investment in artificial intelligence is expected to further boost data center growth. 3) In this process, data center vendors with rapid delivery capabilities, actively exploring the power-computing cooperation model, and matching their own resources with the demand for AIDC in different scenarios, are expected to gain a higher market share. Profit forecasts and valuations: Maintain unchanged profit forecasts and ratings for companies already covered in the industry. Telecommunication services: Operators with stable dividend returns, China Mobile Limited (600941.SH,00941), China Telecom Corporation (601728.SH,00728); China Tower (00788) with great potential for dividend increases, with catalysts approaching; CHINACOMSERVICE (00552) rapidly expanding into new areas. IDC sector: Data center manufacturers GDS-SW (09698), VNET Group, Inc. Sponsored ADR (VNET.US) with order release potential and valuation elasticity. Other companies related to the data center sector include: Shanghai Baosight Software (600845.SH), Range Intelligent Computing Technology Group (300442.SZ), Guangdong Aofei Data Technology (300738.SZ). Risk warning: Operator capital expenditures exceed expectations; cloud vendor capital expenditures fall short of expectations.