Soochow: Benefiting from the significant increase in computing power capital expenditure, domestic diesel engine sets are facing the opportunity of rising both in quantity and price.

Soochow released a research report stating that, against the backdrop of accelerated domestic computing power catching up, major companies are increasing their asset spending on computing construction, and China's intelligent computing is expected to maintain high-speed growth. The bank predicts that diesel generator sets, as the core CAPEX of data center infrastructure, will benefit greatly from the significant increase in computing power capital expenditure. Foreign brand expansion intentions are low and difficult, supply and demand imbalances may bring opportunities for domestic brands to enter smoothly. Domestic server and OEM manufacturers are expected to see opportunities for both volume and price increases. It is recommended to pay attention to domestic OEM manufacturers Shanghai Cooltech Power (300153.SZ), Tellhow Sci-Tech (600590.SH), Sumec Corporation (600710.SH), server manufacturer Weichai Heavy Machinery (000880.SZ), and component manufacturer Allied Machinery (605060.SH). The main points of Soochow are as follows: Deepseek's performance rivals that of leading international AI models, accelerating the landing of AI applications and expanding the scale of data centers in China. The domestic AI model Deepseek has shown strength equivalent to OpenAI in inference tasks, mathematics, code, etc., but the price of DS is only one-thirtieth of the latter, showing a significant price advantage compared to OpenAI. The excellent performance and low cost of Deepseek continue to expand AI application scenarios, accelerating the landing of AI applications in China. In the context of accelerated domestic computing power catching up, major companies like Tencent, Alibaba, Baidu, and ByteDance are increasing their asset spending on computing construction, with Tencent's capital expenditure in 2024Q3 up by 113% year-on-year and Alibaba's capital expenditure in 2024Q3 up by 286% year-on-year, reaching a new high in a single quarter. Based on the explosive demand for computing power, China's intelligent computing is expected to maintain high-speed growth, with a compound annual growth rate of 40% expected from 2024 to 2027, driving the continuous expansion of data centers. Diesel generator sets are the core CAPEX of data center infrastructure and will benefit greatly from the significant increase in computing power capital expenditure. Data centers consist of IT hardware, supporting infrastructure, and civil construction, with costs accounting for 60%/30%/10% respectively. The supporting infrastructure includes power generation, power distribution, temperature control, etc., with power generation being the core, and diesel generator sets being the backup power source that a data center must have. Diesel generator sets account for 23% of the supporting infrastructure of data centers and 6%-7% of the overall construction cost of data centers. According to our calculations, the market space for diesel generator sets for data centers in 2023 is approximately 4.57 billion yuan, and with the explosive demand for intelligent computing, it is expected that the market space for diesel generator sets for data centers in China will reach 13.16 billion yuan by 2028, with a compound annual growth rate of 24%. Data centers require a large power demand for diesel generator sets (generally over 1000KW), with foreign brands like Caterpillar, Cummins, Shanghai Cooltech Power, Tellhow Sci-Tech, MTU, and domestic OEM manufacturers occupying the main market share, thus increasing market concentration, making the demand explosion for data centers even more favorable for leading players. Domestic supply chains benefit from the difficulty and high prosperity of overseas expansion, and domestic brands have the opportunity for price increases. The core components of diesel generator sets are diesel engines, and in 2024, the market share of Cummins, MTU, Caterpillar, and Mitsubishi in diesel engines for Chinese data centers is as high as 90%, showing the clear monopoly position of foreign brands. However, due to the long supply chain of the industry, the willingness and difficulty of foreign expansion are low, leading to imbalances in supply and demand, giving domestic brands the opportunity to enter smoothly. Taking the latest tender from China Mobile Limited as an example, in the tender for high-pressure diesel generator sets, the market share of Weichai Heavy Machinery has increased to 40% (previously almost 0% share), and the tender price has more than doubled compared to the previous year, bringing opportunities for domestic server and OEM manufacturers to increase both volume and price. Risk warning: Computing power growth does not meet expectations, capital expenditure does not meet expectations, intensified market competition.