China Galaxy Securities: The acceleration of domestic substitution for switching chips is noteworthy. Focus on leading companies in the domestic switch and switching chip sectors.

China Galaxy Securities released a research report stating that the demand for switches is significantly driven by both front-end and back-end network deployment in the AI era's computing clusters. The 1.6T port switches are expected to see substantial production starting in 2027, with the WAIC 2026 super nodes becoming the absolute focus. The internal interconnection bandwidth is rapidly evolving; with every iteration of port speed, the value of a single switch increases, supporting profitability. Moreover, the Scale-Up switches are reducing latency requirements from the microsecond level to the hundred-nanosecond level, resulting in design complexity and verification cycles far exceeding those of traditional products, which gives existing players ongoing bargaining power and forces the industry chain to accelerate domestic replacement of core componentsspecifically, switch chips. This is compounded by the performance realization catalyzed by leading overseas switch manufacturers, leading to a recommendation to focus on domestic leaders in the switch and switch chip sectors. The main points from China Galaxy Securities are as follows: Switches: The industry is highly concentrated, and AIDC non-blocking direct connections facilitate port upgrades. A switch is a network device responsible for multi-level data forwarding at the data link layer. Based on its position and role in the network, it can be divided into core switches, aggregation switches, and access switches. According to different terminal application environments, it can be categorized into data center switches, campus and metropolitan area network switches, and SMB switches. Based on whether hardware and software are decoupled and whether the operating system is open and controllable, they can be classified into black box switches and white box switches. The switching performance of a switch primarily depends on the backplane bandwidth capacity, switching capacity, port speed, and port density. In Q1 2026, the global Ethernet switch market size was $15.4 billion, up 39.8%, with the data center switch market size at $10 billion, up 61%. The contribution of 800G high-speed switches was 35.8%, surpassing the 34.1% of 200G/400G switches for the first time. Given that switches are core components of network devices, customers have strict requirements for safety, stability, and reliability, making it challenging for new entrants to join the downstream large supply chain, thereby increasing industry concentration. The CR5 of the global Ethernet switch market in Q1 2026 was 69.7%, with Cisco and Arista holding firm positions in the top two, while the domestic switch market has shown a pattern of "domestic dominance supplemented by foreign capital." Traditional IDC businesses mainly involve general operations like computing and storage, where the traffic primarily flows in a north-south manner across data centers, and packet loss is permissible. The switch to server ratio is approximately 1:16-1:20, with limited procurement scale for single cluster switches. However, the parameters of AI large models have reached trillions, requiring coordination and scheduling of tens of thousands of GPUs for single training and inference, with traffic primarily flowing in an east-west manner between internal GPUs in data centers. The upstream and downstream interconnection bandwidth of switches follows a 1:1 non-convergent design, with the switch to GPU ratio around 1:3-1:4, and certain high-density super nodes from Nvidia achieving a ratio of 1:2. In the medium to long term, the switch-to-GPU ratio in the AI Agent era is expected to further increase to 1:1. Switch Chips: Expected to grow rapidly in the next five years, the urgency for domestic replacement is imminent. The logical pathways in switch chips encompass hundreds of characteristics, making architectural implementation complex and requiring consideration of both diversity and peak port speed. Nvidia accelerated the product iteration rate of its AI computing chips after 2022, increasing from a generational enhancement every two years to one year, with AMD, Google, Amazon, and others also intensively developing their technologies. However, the iteration cycle for switch chips remains at two years for "25.6T51.2T102.4T204.8T." Additionally, considering that the non-local supply cycle for Broadcom switch chips has extended beyond a year, switch chips have become a core bottleneck in AI infrastructure. It is expected that from 2025 to 2030, the global Ethernet switch chip market size will grow at a CAGR of 43%, and the data center switch chip market is anticipated to see an 86% year-on-year increase in 2026, with Broadcom remaining the undisputed leader. In June 2025, Broadcom will release the world's first 102.4T switch chip, Tomahawk 6, while at that time, domestic company Shengke Communication will have mass-produced 25.6T switch chips, indicating a two-generation gap. Tomahawk 6 will employ a 3nm process and CPO packaging, while domestic switch chips are still at the 7nm node. Simultaneously, Broadcom's SDK and reference design will form a complete ecosystem, with hardware replacement potentially accelerated by increased CAPEX, whereas ecosystem replacement will require a longer time to solidify. Investment Recommendation: Focus on domestic leaders in the switch and switch chip sectors. The demand for switches is significantly driven by both front-end and back-end network deployment in the AI era's computing clusters. The 1.6T port switches are expected to see substantial production starting in 2027, with the WAIC 2026 super nodes becoming the absolute focus. The rapid evolution of internal interconnection bandwidth allows the value of a single switch to increase with every iteration of port speed, supporting profitability. Moreover, the Scale-Up switches are reducing latency requirements from the microsecond level to the hundred-nanosecond level, resulting in design complexity and verification cycles far exceeding those of traditional products. This situation grants existing players ongoing bargaining power and compels the industry chain to accelerate domestic replacement of core componentsspecifically, switch chips. Coupled with the realization of performance from leading overseas switch manufacturers, it is advised to focus on domestic leaders in the switch and switch chip sectors. Risk Warning: Risks related to the development of AI applications falling short of expectations; risks of major CSP manufacturers' CAPEX decreasing; risks associated with slow progress in super node solutions; risks of deviations in switch chip design and performance, among others.