CITIC SEC2024Q4 Communication Performance Outlook: Telecom operators steady, AI computing power and network high growth.

CITIC SEC released a research report stating that in 2024, the communication industry exhibited clear structural prosperity. Operators and high-quality state-owned enterprises continued to grow steadily. The overseas AI computing power industry chain maintained high prosperity, with the leading performance of optical module companies growing rapidly. 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 areas. Leading companies in the field of Internet of Things also saw significant improvements in their performance. 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 leading sub-sectors. The main points of CITIC SEC are as follows: Operator Industry Chain: Operators show steady growth According to data from the Ministry of Industry and Information Technology, from January to November 2024, the cumulative revenue from telecommunications services reached 1,594.7 billion yuan, a year-on-year increase of 2.6%. Mobile data traffic, fixed internet broadband, and emerging services grew by -1.3%, +5.0%, and +7.9% respectively. At the revenue level of operators, they are also beginning to be affected by macro demand, with growth rates in mobile and emerging services declining compared to 2023, but overall revenue still achieved steady growth, with enhanced cost and expense control. Optical Modules: Strong overseas demand for AI industry, domestic industry's prosperity rising significantly, expecting continuous growth in performance of top optical module manufacturers Against the backdrop of rapid development of the overseas AI industry, the optical module industry continued to see strong demand for high-end products in the fourth quarter, following the trend seen since 2023. With the ramp-up of 800G products, it is also expected that 1.6T products will begin to be shipped in bulk in the fourth quarter. China's top manufacturers are core suppliers to overseas tech giants, leading market share, and are expected to see sustained growth in revenue and profits. At the same time, as Chinese CSP companies such as ByteDance, Alibaba, Tencent, etc., increase their capital expenditures, and with the continued catch-up of the domestic AI industry, 400G and 800G products are expected to continue to ramp up, anticipating growth in the performance of domestic leading optical module manufacturers in Q4. Domestic Computing Power: Domestic AI computing power catching up, industry chain performance gradually releasing Operators have significantly increased their investment in AI computing power, with planned capital expenditures for 2024 exceeding 100 billion yuan, and NETDRAGON Group is expected to increase its computing power investment in 2025. Starting from Q2 2024, orders and demand for domestic AIDC, 400G switches, and liquid cooling have shown a significant increase. 1) AIDC: Increased investment in AI computing power and policy support driving rapid growth in demand for data centers. 2) Connectors: The demand for high-speed line modules, represented by NVIDIA's NVL72 and Huawei's Ascend, on the next-generation AI servers has significantly increased, accelerating the widespread application of high-speed line modules in AI at the industrial technology level. 3) Liquid Cooling: Several domestic server manufacturers have introduced liquid cooling server solutions, with the domestic liquid cooling leader having adequate technical and product reserves, and is expected to gradually benefit. 4) High-speed Switches: Revenue from leading companies' 400G switches has rapidly increased, and the next-generation 800G switches are also accelerating testing in major Internet companies, indicating a positive outlook for the improved performance of leading switch companies. Internet of Things and Energy Networks: Overseas expansion and new energy business drive faster performance growth 1) Internet of Things: Accelerated promotion of AI applications driving demand for IoT modules in scenarios such as smart driving, edge AI, etc., with overseas operator inventory clearance gradually completed, overseas 5G FWA demand beginning to recover, and leading IoT companies showing significant improvement in performance in 2024. 2) Energy networks: AI has also increased global data transmission, leading to an increase in demand for submarine optical cables; offshore wind power projects are actively progressing in various regions, such as the 7.65GW capacity of the second phase in Jiangsu and deep-sea projects entering the preliminary stage, benefiting the leading companies in the submarine cable industry. Integration of new energy power generation into the grid is driving continuous upgrading of smart distribution networks. In addition, future collaboration between data centers and power grids will achieve comprehensive efficiency improvements, benefiting companies in power grid intelligence. Risk Analysis: Development of AI falls short of expectations; Capital expenditures by cloud companies and operators fall short of expectations; Progress of new products such as 1.6T falls short of expectations; Risks from increased competition among operators; Development of new businesses by operators and tower companies falls short of expectations; Liquid cooling penetration rate falls short of expectations; Offshore wind power installation volume falls short of expectations.