China Galaxy Securities: The prosperous era of AI agents has begun, ushering in a new chapter of technological demand.

China Galaxy Securities released a research report stating that the rise of AI Agent is reshaping the AI industry chain and bringing new investment opportunities. The alleviation of local government debt risks is helping to provide ample funding support for digital infrastructure and other basic facilities, driving the marginal improvement of industry cash flow, and state-owned enterprises are expected to undergo value re-evaluation, with the trend of industry chain mergers and reorganizations accelerating. In addition, under the backdrop of the Federal Reserve's interest rate cuts, with both monetary and fiscal policies in place, there is a resonance between the "numerator end" and the "denominator end", potentially leading to a further increase in the industry's overall valuation level. Key points from China Galaxy Securities include: Review of the computer sector's performance of the whole year Since the beginning of the year, the computer index has outperformed the Shanghai and Shenzhen 300 index, showing a high level of resilience. Looking at the industry's overall performance, revenue growth in the first three quarters of the industry has improved compared to the same period last year, while net profit attributable to the mother has significantly increased, but the gross profit margin in the first three quarters has declined year-on-year. By the end of September, with the introduction of important policies, the sector saw a significant rebound, with the rebound greater than the Shanghai and Shenzhen 300 index, peaking in mid-November and maintaining volatility. Looking at the sub-sectors, financial IT has outperformed other sectors since the beginning of the year, with a growth rate of 75.11%, followed by cloud computing (33.43%), medical IT (27.20%), and national defense IT (23.73%). The sector is expected to undergo a "numerator + denominator end" upward trend by 2025, further pushing up the valuation level. With the Federal Reserve initiating an interest rate cut cycle and the introduction of a comprehensive policy package known as "924," ongoing monetary easing at the domestic level, and continuous strengthening of fiscal policies, the Central Economic Work Conference in December set out the target of leading the development of new productive forces with technological innovation and building a modern industrial system. Most companies in the computer industry have a high proportion of government (G-end) income, and this is the most extensive measure of debt support in recent years. The alleviation of local government debt risks is expected to provide ample funding support for digital infrastructure and other basic facilities, which is likely to increase orders in the industry, drive marginal improvement in the industry's cash flow, and, combined with the Federal Reserve interest rate cut cycle, resonate between the "numerator end" and the "denominator end", potentially further boosting the industry's overall valuation level. The rise of AI Agent is reshaping the AI industry chain and bringing new investment opportunities. It is expected that by 2028, the market size of China's AI Agent will surge to 852 billion yuan, with a compound annual growth rate of 72.7%. The rapid development of AI Agent technology signifies a shift from training-centric to reasoning-centric approaches, with enterprise capital expenditures transitioning from research and development-centric to operation-centric, leading to a prosperous period in the AI application ecosystem. AI Agent is seen as the gateway to the era of general artificial intelligence, with large models rapidly iterating and upgrading to enhance AI Agent capabilities. In the long term, the key to AI Agent lies in its reasoning ability. When AI Agent penetrates widely in the future, there will be an exponential growth in demand for reasoning compute power, making the operational nature of reasoning Capex more pronounced. State-owned enterprises are expected to undergo value re-evaluation, with the trend of industry chain mergers and reorganizations accelerating. On one hand, against the backdrop of global industrial chain restructuring, the countercyclical adjustment role of state-owned enterprises will effectively mitigate external shocks to the industrial chain, and their long-term stability in development makes predicting future cash flows more reliable, thereby increasing the free cash flow of the numerator end. Moreover, state-owned enterprises generally have lower financing costs, helping to reduce the discount rate of the denominator end, while improving the perpetuity growth rate can enhance the overall valuation of the enterprise. On the other hand, the innovative industry aims to tackle the bottleneck in core technological areas. In recent years, policies to promote innovation in the industry have had a catalytic effect, and the role played by state-owned enterprises in the industry chain has become more solid. The innovative industry emphasizes ecosystem building, from IT infrastructure to application software, and IT security. State-owned enterprises, through industrial synergy and ecosystem building, can achieve more efficient resource allocation and a more mature industry ecosystem. Furthermore, mergers and reorganizations by state-owned enterprises in the innovative industry also help fully utilize the national system to build an advanced information industry base in China and usher in a turning point in performance. Investment recommendations: It is recommended to pay close attention to Iflytek Co.,ltd.(002230.SZ), Nancal Technology(603859.SH), iSoftStone Information Technology(301236.SZ), Range Intelligent Computing Technology Group(300442.SZ), VanJee Technology(300552.SZ), among others. Risk warning: Risks related to macroeconomic growth falling below expectations, supply chain risks, policy implementation falling short of expectations, and technological development falling short of expectations.