he communication industry is a typical midstream infrastructure industry, and the transformation and upgrading of networking, informatization, and intelligence in all fields of society cannot be achieved without the support of the communication industry. Currently, in the context of the rapid development of the digital economy and artificial intelligence industry, the main sub sectors of the communication industry are showing a good growth trend. According to statistics, the communication sector achieved a revenue of 1287.311 billion yuan in the first half of 2024, a year-on-year increase of 3.93%, and a net profit attributable to the parent company of 127.372 billion yuan, a year-on-year increase of 7.41%.
1、 Telecom operators have overall stable operations and good dividend returns. In the first half of 2024, the telecommunications operator sector saw a revenue growth rate of 2.9% and a net profit growth rate of 6.5%, maintaining a steady growth trend. We expect the operator's business performance to continue to grow steadily in the coming period. Firstly, the pressure to reduce fees on the policy side has decreased, competition among operators has become more rational, the reduction in traffic tariffs has slowed down, and the mobile ARPU value has remained stable; Secondly, operators are focusing on the "three gigabit" service, and the home broadband service is no longer limited to providing only internet broadband, but is building a smart home service system that includes whole house intelligence, high-definition video, and security. The comprehensive ARPU of home broadband will continue to grow, and home value-added services will contribute the majority of incremental income; Thirdly, in the wave of digital economy development, operators seize the opportunity to help enterprises complete digital transformation. With the sustained improvement of the macro economy and the growth of government and enterprise IT expenditures, the government and enterprise business of operators is expected to maintain a relatively fast growth rate. In addition, the three major telecommunications operators are actively guiding their dividend payouts, and China Mobile and China Telecom will increase their dividend payout ratios to over 75% within three years.
2、 The global computing power industry chain resonates, and the industry's business cycle continues to rise. The current global artificial intelligence industry is showing a rapid development trend, with AI big model capabilities advancing by leaps and bounds, industry applications poised to take off, and end-to-end AI also making remarkable progress. The demand for AI computing infrastructure construction at home and abroad continues to be strong. In the first half of 2024, the revenue growth rates of the optical module and IDC sectors were 71% and 23% respectively, and the net profit growth rates attributable to the parent sector were 132% and 13% respectively. As important components of computing infrastructure, the downstream demand for optical modules and IDC rapidly increased, and the performance of related companies was significantly released.
The evolution of large models towards multimodal and larger dataset training requires higher computing power. On the one hand, the latest overseas models such as GPT-4o, which supports multimodal input and output, Sora, Gemini, which adopts a native multimodal structure, and Claude 3, which supports visual capabilities, are all developing towards multimodal capabilities of text+sound+image+video, greatly increasing the computing resources required for training and inference; On the other hand, driven by Scaling Law, the parameter count of large models has significantly increased, and some companies have started using larger datasets to train their models. For example, Llama 3 is trained on over 15T tokens, which also requires higher training computing power.
The construction of overseas AI infrastructure is in full swing, and the demand for network hardware remains strong. Capex's proportion is expected to further increase. Overseas cloud vendors continue to increase their AI investments, with a total capital expenditure of $52.852 billion for the four North American cloud vendors in Q2 2024, a year-on-year increase of 57.76%, and providing positive guidance for future capital expenditures. Amazon expects higher capital expenditures in the second half of the year, with the majority of the spending going towards supporting AWS infrastructure construction. Microsoft expects higher capital expenditures in FY25 than in FY24 and will continue to expand infrastructure investments; Google expects to generate no less than $48 billion for the whole year, with a year-on-year growth rate of nearly 50% based on $48 billion; Meta has raised the lower limit of annual capital expenditures by $2 billion to $37 billion to $40 billion, and the company expects a significant increase in capital expenditures by 2025, mainly for investments in AI. We believe that domestic optical module companies are deeply involved in overseas AI computing power construction, and the demand for 800G optical modules will continue to increase next year. Top optical module companies are expected to fully benefit from this. At the same time, with the gradual release of Nvidia Blackwell GPU production capacity, the demand for supporting 1.6T optical modules and other network hardware is expected to rapidly increase. According to the pace of Nvidia upgrading its first generation GPU and network hardware in 1-2 years, it is expected that the shipment pace of 3.2T optical modules will also significantly accelerate. In addition, it is worth noting that the increasing penetration rate of silicon optical technology and Ethernet solutions will bring certain structural changes to the industry's competitive landscape.
Policies continue to promote the development of artificial intelligence. In July 2023, the Cyberspace Administration of China, the National Development and Reform Commission, the Ministry of Education, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the State Administration of Radio, Film and Television jointly issued the "Interim Measures for the Management of Generative Artificial Intelligence Services". In February 2024, the State owned Assets Supervision and Administration Commission of the State Council held a special promotion meeting on artificial intelligence for central enterprises. In June 2024, the Ministry of Industry and Information Technology, the Cyberspace Administration of China, the National Development and Reform Commission, and the National Standards Commission jointly issued the "Guidelines for the Construction of a Comprehensive Standardization System for the National Artificial Intelligence Industry (2024 Edition)", accelerating the construction of a standard system that meets the high-quality development of the artificial intelligence industry and the high-level empowerment needs of "AI+".
With the improvement of domestic chips, large model capabilities, and the development of artificial intelligence applications, the demand for domestic computing infrastructure is expected to continue to be driven. On the side of domestic Internet manufacturers, from the perspective of the capital expenditure of Tencent and Alibaba, in 2023Q1, the capital expenditure of Tencent and Alibaba began to rise quarter by quarter. In 2024Q2, the capital expenditure of Tencent and Alibaba was 8.729 billion yuan and 11.939 billion yuan respectively, with year-on-year growth of 121% and 99%; Domestic operators are also significantly increasing their capital expenditures on computing power networks. China Mobile plans to spend 47.5 billion yuan on computing power capital expenditures in 2024, a year-on-year increase of 21%. China Telecom plans to spend 37 billion yuan on industrial digitalization capital expenditure in 2024, a year-on-year increase of 4%, and invest 18 billion yuan in cloud/computing power. China Unicom's investment focus in 2024 will shift from stable infrastructure networking communication services to high growth computing, networking, and intelligent services. At present, the supply capacity of domestically developed AI chips is gradually improving, and the construction of domestic computing infrastructure is poised to take off. The domestic computing industry chain can basically achieve a closed loop, including domestic companies in various links such as AI chips, servers, switches, optical modules, liquid cooling, connectors/wiring harnesses, PCBs, etc., which will benefit centrally.
3、 The demand for the Internet of Things and intelligent controllers industry is recovering. In 2023, due to insufficient global economic momentum, inventory adjustments caused by supply chain disruptions, and inflationary pressures, industry demand is under pressure. Currently, with the end of inventory adjustments and the gradual recovery of global economic activity, the performance of companies related to IoT modules and intelligent controllers is showing a positive trend. In the first half of 2024, the operating revenue growth rate of the IoT and intelligent controller sectors was 27% and 24% respectively, and the net profit growth rate attributable to the parent sector was 84% and 28% respectively. The downstream demand directions of the two sectors include home appliances, power tools, electricity, and pan IoT. Driven by the current economic growth, the demand of various industries has increased, and the performance of related companies has achieved good growth.
Looking ahead to the future, the communication industry is expected to maintain a good growth trend, with telecommunications operators operating steadily and steadily. The development of the artificial intelligence industry is booming, and the demand for computing infrastructure construction will further increase. Economic transformation and growth will also bring more demand for networked, information-based, and intelligent upgrades in various industries, and related companies have good investment value.
Authors: Wu Chaoze (Administrative Head of Research and Development Department of CITIC Securities, Chief Analyst of TMT Industry), Liu Yongxu (Co Chief Analyst of Communication Industry of Research and Development Department of CITIC Securities)
Source: Securities Times website