CITIC SEC: The development of innovation and creation is both urgent and certain, and the business outlook is expected to continue to improve.

CITIC SEC released a research report stating that the Biden administration plans to further restrict the export of computing power, driving demand for self-control and independence. Internal policies are leading to accelerated implementation of tenders, and the development of information technology has both urgency and certainty. On the demand side, both government-led information technology and industry-driven information technology are expected to drive growth, with government-led information technology receiving new rounds of funding support and potentially reaching a peak in substitution, while industry-led information technology is expected to continue to accelerate. On the supply side, three phases of security and reliability assessments provide evidence of substitutability. Core categories such as CPU, operating systems, databases, and industrial software are expected to benefit greatly, and the outlook for the information technology sector is expected to continue to improve. The investment opportunity in the information technology sector, represented by computing power, is promising for 2025. On January 13, 2025, according to official sources from the White House and the Bureau of Industry and Security (BIS), the Biden administration plans to further restrict the export of computing power chips, dividing the world into three levels of management. 1) Level one: Mainly the United States and its allies, who can freely deploy computing power. Companies headquartered in this region can apply for comprehensive permits from the U.S. government to ship chips to data centers in most other parts of the world, provided that their total computing power in any level two country/region does not exceed 7%, and the combined computing power in level two countries/regions does not exceed 25% of the company's total deployed computing power. Institutions based in the United States must retain at least 50% of controlled advanced chips in the U.S. 2) Level two: The vast majority of countries are at this level, with each country/region having an annual quota of about 50,000 advanced GPUs for government, medical, and local services. Individual companies or institutions in level two countries/regions can apply for National Verified End User (NVEU) status, trusted entities can purchase computing power equivalent to 320,000 advanced GPUs over the next two years without the limit of 50,000 GPUs. 3) Level three: Countries at this level (including China) are subject to stricter restrictions. BIS documents show strict limitations on their purchase of high-performance chips, limiting their use for advanced AI training and sensitive purposes, and allowing limited access to low-end chips for general purposes. Transfer and use of closed-source AI models (models with more than 10^26 calculations that are not stronger than open-source models are not subject to restrictions). CITIC SEC's main points are as follows: Increased external uncertainties enhance the urgency of self-control, and internal policies lead to accelerated tendering. From an external perspective, the Biden administration's tightening of export restrictions on computing power chips, combined with Trump's inauguration on January 20, 2025, may lead to continued disruptions in the external supply chain. During Trump's first term, the U.S. Department of Commerce imposed technology sanctions on over 300 Chinese companies, according to incomplete statistics from the BIS website. During Biden's term, various trade controls on Chinese technology companies have been implemented. On December 2, 2024, the U.S. Department of Commerce issued new export control measures on semiconductor exports to China, adding around 140 Chinese entities to the export control entity list. On January 13, 2025, the Biden administration imposed a new round of restrictions on GPU exports. Internally, policy support for self-control is further solidified, leading to accelerated implementation of information technology tenders. According to EO Intelligence, State-owned Assets Supervision and Administration Commission document No. 79 clearly outlines the direction of information technology development before 2027; the Third Plenum of the Twentieth Central Committee in 2023-2024 proposed the "urgent establishment of an independent and controllable industrial supply chain," and a party meeting noted the "development of new productive forces according to local conditions"; in 2025, entering the final sprint stage of the 14th Five-Year Plan, the Two Sessions held in March are expected to further accelerate the implementation of information technology tenders. Following Trump's election, the U.S.'s technological trade controls will continue, combined with domestic policies and financial support, the development of the information technology industry has both urgency and certainty. Both government-led information technology and industry-driven information technology are expected to usher in a new wave of peak replacement. For government-led information technology, in 2025, a new round of funding support is expected. On November 8, 2024, the Standing Committee of the National People's Congress approved a proposal to replace hidden debt with a limit of 6+4+2 billion yuan for local governments. At the National Finance Work Conference on December 24, 2024, Minister of Finance Lan Foan stated that in 2025, a more powerful fiscal policy will be implemented, including actively using available deficit space, expanding the scale of special bond issuance, broadening investment areas, continuing to issue ultra-long special government bonds, and enhancing support for key areas such as technological innovation. It is expected that from 2025, government-led information technology will receive a new round of funding support. For industry-led information technology, sectors such as finance and telecommunications are accelerating, while others are catching up. The 8 major industries are currently the core source of demand for information technology, with finance and telecommunications entering a phase of comprehensive promotion, transportation, education, and healthcare in a phase of accelerated promotion; and the "N" industries are in the initial stages and pilot phases. It is expected that the accounts of government-led information technology have been basically compiled, and with incremental funding support, they are expected to reach a peak in substitution; the industry-led information technology is approaching the 2027 point, and the overall industry promotion is expected to continue to accelerate. Core category capabilities are advancing rapidly, and good prospects are seen for comprehensive opportunities in domestic production represented by computing power. According to the China Information Security Assessment Center, three rounds of security and reliability results were released on December 2023, May 20, 2024, and September 30, 2024, covering core categories such as CPUs, operating systems, databases, etc. The results of the assessment indicate the continuous improvement of the comprehensive strength of information technology products towards standardization, normalization, and regularity, while also supporting the continuous improvement of the comprehensive strength of information technology products. In addition, domestic industrial software is also facing bottlenecks. Domestic industrial software continues to increase research and development investment, moving from "usable" to "user-friendly." Core categories in the information technology field with independent and controllable capabilities and industrial software areas facing bottlenecks are expected to benefit greatly. 1) Computing power chips (CPUs/GPUs): The demand for AI computing power is expanding, with applications such as AI Agents driving demand, combined with the accelerated construction of computing power resource pools in various locations, providing strong demand-side support for domestic chips. Among domestic manufacturers, its CPUs are leading in performance, and GPUs are gradually approaching overseas levels, with the ecosystem continuing to accelerate development and improvement, providing strong domestic substitution capabilities. 2) Databases (DBs): LocalThe market for municipal offices is the main direction of innovation and substitution, and currently overseas companies represented by Oracle still occupy a large market share. Domestic manufacturers have strong substitution capabilities, with strong advantages in product performance, self-control, and Oracle compatibility.3) Operating System (OS): In the future, various manufacturers will gradually form a unified technological route with OpenEuler as the core technology. 4) EDA: The complement of full-process capabilities is the core focus of domestic EDA companies at present, with mergers and acquisitions being an important means worth paying attention to. The leading domestic EDA companies already have full-process capabilities in analog and digital custom design EDA tools, and it is expected that by around 2025, they will be able to complete full-process coverage of design-class EDA tools, further enhancing their competitiveness. 5) CAD: The product capabilities of domestic enterprises are continuously improving. In the 2D CAD field, AutoCAD holds an absolute dominant position, with domestic representative companies having similar capabilities, making them highly substitutable. In the 3D field, overseas giants have strong positions in their respective areas of expertise, while domestic enterprises are accelerating the catching up of their products, with the prospects of domestic demand and cost-effectiveness driving rapid growth in demand. Risk factors: - Risk of significant fluctuations in government, enterprise IT budgets - Risks related to the delayed introduction and implementation of policies - Supply chain disruptions caused by trade frictions - Risk of intensified competition - Risks related to product research and development falling short of expectations.