CITIC SEC Communication 2024Q4 Performance Outlook: Telecom Operator Steady, AI Computing Power and Network High Growth.

CITIC SEC released a research report stating that in 2024, the telecommunications industry showed clear structural prosperity. Operators and high-quality state-owned enterprises continued to see steady growth. The overseas AI computing power industry chain maintained a high level of prosperity, with the leading companies in the optical module sector experiencing rapid growth. At the same time, the domestic AI computing power chain is expected to gradually release its performance, with significant increases in orders for AIDC, switches, liquid cooling, and other leading companies in the field. Performance of leading companies in the Internet of Things sector also saw significant improvement. 5G and traditional fiber optics sectors still face certain pressures. Key recommendations include operators, optical modules, connectors, AIDC, liquid cooling, Internet of Things, switches, and other specific leading companies. Key points from CITIC SEC: Operator industry chain: Operators see steady growth. According to data from the Ministry of Industry and Information Technology, from January to November 2024, the cumulative telecommunications service revenue reached 1.5947 trillion yuan, an increase of 2.6% year-on-year. Mobile data traffic, fixed Internet broadband, and emerging business year-on-year growth rates were -1.3%, +5.0%, and +7.9% respectively. At the operator revenue level, the impact of macro demand has begun, with a decline in the growth rates of mobile and emerging businesses compared to 2023, but overall revenue still achieved steady growth, with enhanced cost and expense control. Optical modules: Overseas AI industry sees strong demand, domestic industry's prosperity rises significantly, and top optical module manufacturers are expected to continue growing their performance. Against the backdrop of rapid development of the AI industry overseas, the optical module industry continued strong demand for high-end products in the fourth quarter, since 2023. In addition to the volume production of 800G products, it is also expected that 1.6T products will begin to be shipped in batches in the fourth quarter. China's top manufacturers are core suppliers of overseas tech giants, leading in market share, so the sustainability of the growth in related companies' future revenue and profits is promising. Additionally, domestic CSP companies such as ByteDance, Alibaba, and Tencent are increasing their capital expenditures, as the domestic AI industry continues to catch up. Expectations are for the continuous increase in shipment of 400G and 800G products, with a positive outlook on the growth of the leading domestic optical module manufacturer's Q4 performance. Domestic computing power: Domestic AI computing power accelerates catching up, and industry chain performance gradually releases. Operators significantly increased their investment in AI computing power, with planned capital expenditures exceeding 100 billion yuan in 2024, and NETDRAGON anticipates further investment in computing power in 2025. Starting from Q2 2024, orders and demand for domestic AIDC, 400G switches, and liquid cooling significantly increased. 1) AIDC: Increased investment in AI computing by the internet industry and policy support will drive rapid growth in data center demand. 2) Connectors: The demand for high-speed line modules driven by new generation AI servers such as NVIDIA NVL72 and Huawei Ascend has significantly increased, accelerating the extensive application of high-speed line modules in AI at the industry technology level. 3) Liquid cooling: Several domestic server manufacturers have introduced liquid cooling server solutions. The leading company in domestic liquid cooling has a comprehensive reserve in technology and products, and is expected to gradually benefit. 4) High-speed switches: Leading companies' 400G switch revenue is rapidly growing, and the next generation 800G switches are also accelerating testing at major internet companies, with a positive outlook on the improvement of switch company performance. Internet of Things and energy networks: Overseas expansion and new energy business drive accelerated growth in performance. 1) Internet of Things: Accelerated promotion of AI applications drives demand for IoT modules in scenarios such as smart driving and edge AI, with overseas operators gradually clearing inventory and overseas 5G FWA demand starting to recover. Leading companies in the IoT industry saw significant improvement in 2024. 2) Energy networks: AI has also increased global data transmission, boosting demand for undersea fiber optic cables; various regions actively promote offshore wind power projects, such as the 7.65GW phase 2 project in Jiangsu and deep-sea projects entering the preliminary stage, benefiting leading companies in the submarine cable industry. Grid-connected new energy generation drives continuous upgrading of smart distribution networks. In addition, in the future, data centers will work with power grids to achieve comprehensive efficiency improvement, which is beneficial for smart grid enterprises. Risk analysis: AI development falls short of expectations; capital expenditures of cloud operators and telecom operators fall short of expectations; progress of new products such as 1.6T is slower than expected; risks of intensified competition among telecom operators; new emerging businesses of telecom operators and tower companies fall short of expectations; liquid cooling penetration rate falls short of expectations; and off-shore wind power installation volume is lower than expected.