Overview of the 2023 Annual Report and the 2024 Q1 Report of the Communication Industry

In 2023, the telecommunications industry overall showed a trend of first rising and then falling. In the first half of the year, the industry benefited from the recovery of economic activities, leading to a slight rebound in industry investment. However, in the second half of the year, with increasing macroeconomic uncertainties, the industry's growth rate slowed down. For the entire year, thanks to a low base and the boost from prosperous sectors such as AI hardware and operators, the telecommunications industry's revenue maintained a certain level of growth. In 2023, the telecommunications industry achieved revenue of 28,637 billion yuan, a year-on-year increase of 5.3%. However, due to significant impairments affecting some companies, industry profits were under pressure, achieving a net profit attributable to shareholders of 2,006 billion yuan, a year-on-year increase of 3.2%.

As we enter the first quarter of 2024, the performance of leading optical module companies is accelerating, while other segments of computing power such as PCB, cooling, and servers are also witnessing accelerated performance. AI is gradually transforming from the overseas innovation boom and capital expenditure into the performance of core listed companies in the A-share industrial chain. Looking ahead to the second half of the year, with the confirmation of the "AI positive cycle" by overseas cloud giants, and the quarterly performance of core A-share industrial chain companies being realized, "AI hardware" will continue to be the core allocation for aggressive positions in the communications industry.

Based on the financial report data and market trends, the current performance growth and capital focus of AI are mainly concentrated on a few core leading companies in optical modules, servers, and PCBs. We believe that as the demand for AI continues to be strong, performance releases are expected to transmit more to the relevant upstream and downstream sectors. Sectors such as cooling, optical devices, and optical chips are likely to welcome a window period for domestic replacement and performance release under the global AI wave in the second half of the year.

Under the "Nine National Guidelines", high-quality dividend assets represented by operators have become the preferred choice for investing in Chinese assets due to stable growth and high dividend yields. Looking ahead to 2024, AI brings new development opportunities for operators. Under the blockade of cutting-edge computing power overseas, operators, as the core strength of China's digital infrastructure, will contribute to building a self-controllable computing power base, and operators are also expected to explore new growth curves through massive computing power.

In terms of investment strategy, under an increasingly uncertain macro backdrop, industry investments need to be more focused and selective. We should pursue not only current certainty and performance but also future growth and potential. We propose an investment approach of "refocusing and being more selective" in the industry, mainly concentrating on an offensive view of "AI hardware" and a defensive allocation of "operators" in a barbell strategy.

Core asset recommendations:

Optical modules: Zhongji Xuchuang, NewEase, Tianfu Communication Optical Devices: Tachyon Optoelectronics, Tengjing Technology Optical Chip: SourceJet Technology PCB: Huadian Technology Co., Ltd., Shenzhen South Circuit Technology Co., Ltd. Cooling: Infinera, Vertiv Operators: China Mobile, China Telecom, China Unicom

Risk Warning: AI development not meeting expectations, computing power demand not meeting expectations, statistical data standards distorted.