As of November 25, 2021, the Yangtze River Telecom business index was basically flat, ranking 18th among the 32 Yangtze River first-level industries. As of November 26, 2021, the price-to-earnings ratio of the first-level industry classified telecommunications business in the Yan

As of November 25, 2021, the Yangtze Telecommunications business index was basically flat, ranking 18th among the 32 Yangtze River first-level industries. From 2021Q1 to 2021Q2, the communications sector continued to decline overall after the impact of the New York Stock Exchange on the delisting of the three major operators and the increase in the "entity list" name of the US Department of Commerce. The sector continued to decline overall; in 2021Q3, due to factors such as China Mobile's announcement of returning to the listing of for A-share , and the operator's centralized procurement prices exceeded expectations, coupled with factors such as factors such as the involvement of new energy business in the communications sector, as of November 25, 2021, the Yangtze Telecommunications business index was the same as the beginning of the year. The rise and fall of the

sub-sector has a large differentiation, with smart cars and the Internet of Things, etc. increasing, while optical modules, IDCh and other sub-sectors have a large decline. In terms of individual stocks, the stock price of companies with high performance in the growth track is good, and they need the dual attributes of the growth track + high performance. Meige Intelligent, Tuobang Co., Ltd. , and Huace Navigation have all been high-quality targets that have both β and α in the past year, with the highest increase since the beginning of 2021.

Institutional holdings , the communications industry continues to be in the low distribution stage, and the overall valuation of the sector is also at a low level. After the telecommunications business board's institutional holdings hit a historical low of 0.49% in 2021Q1, it has rebounded for two consecutive quarters, and rebounded to 0.72% in 2021Q3. Overall, the position in the communications sector is still at a historical low. As of November 26, 2021, the price-to-earnings ratio of of the first-level industry classified telecommunications business in the Yangtze River was 39.92 times, at the 21.20% historical quantile.

operator: embrace new opportunities

operating conditions continue to improve, 5G investment cycle long slope thick snow

2019 The industry is facing a policy turning point, the industry moves from competition to competition and cooperation, and the value of communication services returns. From March to June 2019, the Central Inspection Team put forward rectification requirements. In August 2019, the three major operators disclosed interim revenue declined simultaneously for the first time in history. In September 2019, the industry's competitive environment ushered in many major changes: 1) The three major operators have successively canceled the "unlimited" sets; 2) Cancel the market share assessment; 3) China Unicom and China Telecom announced the launch of 5G co-construction and sharing cooperation. The intensity of the "speed-up and fee reduction" policy in 2018-2021 has shown a trend from tight to loose. Since 2020, the government work report no longer emphasizes mobile traffic fee reduction, the industry has moved from competition to competition and cooperation, and the value of communication services has returned.

Since 2021, the industry DOU has maintained high growth, and the number of users has increased steadily. ARPU accelerates the improvement of year-on-year : Since 2020, with the three major operators moving from competition to competition and cooperation, the decline in traffic tariffs has gradually narrowed, but DOU still maintains a year-on-year growth rate of 20%-40%, and the number of users has increased steadily, driving ARPU to accelerate year-on-year improvement. 21Q1-Q3 China Mobile/China Telecom/China Unicom’s mobile business ARPU increased by 2.5%/2.3%/6.5% year-on-year, and China Mobile/China Telecom’s integrated business ARPU increased by 7.4%/4.5% year-on-year.

operating turning point has been continuously verified, and emerging businesses have driven strong revenue: the industry's overall telecommunications business increased by 8.4% year-on-year from January to September 2021, showing accelerated improvement after the V-shaped reversal in 2020; the revenue of fixed data and Internet business increased by 11.2% year-on-year; the revenue of mobile data and Internet business increased by 3.9% year-on-year, and the growth rate further increased; the industrial Internet drove the industry into a new growth period, and the revenue of emerging businesses (including IDC, big data, cloud computing, artificial intelligence and other directions) increased by 28.8% year-on-year, driving the revenue of telecommunications business by 3.7pct, of which the revenue of cloud computing and big data business reached 94.8% and 33.3% year-on-year respectively. The return on investment cycle of

5G may be longer, and the profitability of the final stage of benchmarking 2G is expected to improve: from the comparison of the return periods of different domestic networks' intergenerational investment, 2G is about 16 years long, 3G and 4G are shorter, only about 5 years, while the return on investment cycle of 5G is expected to be extended to a 10-year dimension. The net profit margin and ROE of the final stage of 2G have been significantly improved, and it is expected that operators' profitability will rebound during the 5G period.

review found that the proportion of depreciation and amortization and ARPU trend are the two major factors affecting operator profitability. The proportion of depreciation and amortization in the end of 2G declined significantly, and profitability increased significantly, while the profitability declined during the 4G period; changes in ARPU are also one of the main factors. During the entire 3G period, China Mobile's mobile service ARPU declined significantly. Although the proportion of depreciation and amortization did not change much during the period, profitability declined significantly. As capital expenditure growth stabilizes, we expect operators' depreciation and amortization to gradually decline in revenue during the 5G period, while ARPU will stabilize and return to the growth channel, driving the increase in net profit margin and ROE.

"Industrial Internet" & " Meta Universe " The leading leader of the new era

"Industrial Internet" and "Meta Universe" have increased the importance of development: Since the beginning of the year, Industrial Internet has been mentioned many times in important documents such as the 14th Five-Year Plan Outline and the 2021 Government Work Report, reflecting the high degree of attention. In the 14th Five-Year Plan, the industrial Internet replaces the consumer Internet as the main theme, and VR/AR, as the core terminal of the metaverse application, is listed as one of the seven key industries of the digital economy in the next five years. At the recent 2021 China 5G+Industrial Internet Conference, Liu He delivered a speech saying that "5G+Industrial Internet" is a historic opportunity for the leapfrog development of traditional industries. In November 2021, the first domestic meta-universe industry association led by the three major operators was officially established. The Zhejiang Provincial Department of Economic and Information Technology held a symposium on the development of the "Meta Universe" industry, mentioning that the "Meta Universe" is a new trend in future development and a new trend in industrial development.

From "mobile Internet" to "industrial Internet", operators have changed from "concessionists" to "vanguards": we believe that the 3G/4G era is the era of mobile Internet (2C), so operators have partially "concessions" to Internet companies. Entering the 5G era, Industrial Internet (2B) has become the focus of development, and operators have taken the lead in developing the government and enterprise market. The government-enterprise market has a high degree of discreteness and personalization. Operators have formed an integrated service of "network + cloud/IDC+ solutions". Through high synergy between various links of businesses, they build competitive barriers and deeply participate in the enterprise digital transformation value chain, which is expected to become a new growth momentum.

Internet giants are frequently regulated, and standardized operations have become a red line for data-related industries: in the past two years, domestic Internet giants have been subject to policy control, anti-monopoly investigations and fines from domestic regulatory authorities. In 2021, Alibaba and Meituan were fined 18.2 billion yuan and 3.4 billion yuan respectively. On the data security level, the Data Security Law was issued in June 2021. The " Personal Information Protection Law " was officially implemented on November 1, 2021. In the future, standardized operations will become a red line for data-related industries.

The era of the Yuan Universe is approaching, and operators are positioning infrastructure builders, ecology and platforms: On November 11, the first domestic metaverse industry association was officially established, with members including China Mobile, China Unicom, China Telecom, etc. On November 12, China Telecom announced that it will take the role of the builder of the new infrastructure of the metaverse and based on innovative application achievements, it will launch the 2022 "Pangu Plan 2.0" to fully position the metaverse track and accelerate the integrated development of 5G innovative applications.

is more standardized operation + computing power & network resources + sinking manpower advantages: 1) From a regulatory perspective, the concept of the metaverse contains a "decentralized" economic system; at present, countries around the world's supervision attitude towards the Internet is gradually becoming stricter, and it is necessary to coordinate the construction of supervision and decentralization. As a central enterprise, operators may be more suitable to serve as the leader than Internet manufacturers; 2) Operators have gradually become the main construction parties of computing power and network resources; 3) Operators have a large number of government and enterprise customer resources and entrances, and have a large number of technical personnel and offline operation and maintenance personnel, which can be used for offline scenario docking and technical service support.

industry dividend rate has increased, and cloud business has made efforts to raise valuation: since the beginning of the year, Hong Kong stock operators have been continuously increased by institutions. In June 2021, China Telecom announced a significant increase in dividend rate. Unicom also disclosed in its interim report that the dividend rate will be increased in 2021. The logic of improving industry dividend dividend intensity has been continuously verified, and the dividend rate has been further strengthened; from January to September, the year-on-year growth rate of industry cloud computing revenue reached 94.8%, which may far exceed the growth rate of cloud business of large Internet manufacturers in the same period, and is expected to further drive the upward trend of the valuation center. In September, China Telecom announced that the Group plans to spend no less than 4 billion yuan to increase its holdings in the company's A-share shares within 12 months, demonstrating its confidence in the company and industry development and recognition of the value of investment.

Wireless equipment provider: The "14th Five-Year Plan" was released, and ICT investment was precipitated. The communication development plan for "14th Five-Year Plan" was released: 5G base stations may reach 4 million stations by 2025: Recently, the Ministry of Industry and Information Technology issued the " "14th Five-Year Plan" Information and Communication Industry Development Plan ", and formulated the main indicators for the development of the information and communication industry during the "14th Five-Year Plan" period. It requires that by 2025, 26 5G base stations per 10,000 people will have 26 5G base stations per 10,000 people. By 2025, the number of domestic 5G base stations may reach 3.7 million. In the next four years, the average annual increase of 5G base stations may reach 600,000. According to the guidance of the three major operators in the 2021 interim report, it is estimated that the total number of new 5G base stations in China will be about 630,000, and as of 21Q3, about 388,000 5G base stations will be built in China. Therefore, it is estimated that the scale of building sites in 21Q4 will be 242,000, and construction will accelerate significantly in the second half of the year.

Huawei and ZTE fully enjoy the dividends of Chinese engineers (low cost, high efficiency), technology leadership is expected to be maintained, and the competitive landscape continues to optimize: Judging from the R&D expenditure of the four equipment manufacturers, Huawei and ZTE R&D expenditure exceeded Nokia + Ericsson in 2014. In 2020, ZTE and Huawei accounted for 71% of the total R&D expenditure. Huawei's R&D expenses and R&D personnel account for the highest proportion. Although ZTE's R&D absolute value is lower than that of its competitors, its proportion of R&D personnel is much higher than that of Ericsson, and its R&D conversion efficiency is high. In terms of 5G patents, as of February 2021, Huawei ranked first with 15.39% of the application volume, and ZTE Communications ranked third with 9.81%. In the first three quarters of 2021, ZTE significantly outperformed its overseas competitors.

The era of digital economy is coming, and the spring breeze of government and enterprise ICT market is coming: Information and Communications Institute is expected to account for the proportion of China's GDP from 2020 to 2025 from 2025. Digital industries such as cloud computing and big data are expected to drive more than 60 trillion yuan of GDP, with a CAGR of 8% in 5 years. ZTE is at the forefront of the industry in terms of chips, operating systems and algorithms. In 2020, it actively promotes organizational structure reform and set up a special team to increase empowerment of government and enterprise affairs, and will fully utilize its potential as an ICT giant.

’s three major business lines are working together, and the ICT giant is born towards the sun: ZTE sets three-stage development goals and enters a new stage of growth in 2021: operator business, the pattern is constantly optimized, and the 5G 700M bidding share is expected to be further enhanced; government business, the company is at the forefront of the industry in terms of chips, operating systems, and algorithms. In 2020, it actively promotes organizational structure reform and sets up a special team to increase empowerment of government business; consumer business, completes the integration of various sub-brands in 2020, and the world’s first under-screen 3D structured light technology in 2021, and the domestic market is expected to usher in a breakthrough.

20 Over the past year of ICT investment has been accumulated, waiting for new businesses to drive growth: In August 2021, ZTE and SAIC reached a strategic cooperation with , and the automotive electronics business has made another breakthrough. The R&D investment in the IT and CT fields in the past 20 years has made the company at the forefront of the industry in chips, operating systems, and algorithm accumulation: it has increased its R&D investment and personnel expansion in ZTE Microelectronics. As of 21H1 chip patent applications, nearly 4,400 operating system products are widely used in the communications, automobiles, power, rail transit and other industries, and has accumulated over 200 million sets of shipments worldwide.

IoT industry chain: strong growth, prosperity is upward

IoT high prosperity continues

post-epidemic era, and the global IoT market will accelerate its development. Despite the long-term impact of chip shortage and COVID-19 on the supply chain, IoT Analytics has lowered its forecast for the total number of IoT devices in 2025 (for 30.9 billion units in 2020), the global IoT market has still achieved rapid growth this year. Data shows that the number of global connected devices will grow by 9% to 12.3 billion by 2021. By 2025, more than 27 billion connected devices are expected to be connected, with a GAGR of 22% in 21-25.

cellular IoT connectivity market maintains growth. As of 2021H, according to IoT Analytics data, the number of connected devices using cellular technology worldwide increased by 18% year-on-year to 2 billion units, of which the three major domestic operators accounted for nearly three-quarters of the market share. China Telecom grew by 42% year-on-year, with market share increasing by more than 2 pcts. Vodafone continues to lead global markets outside China with a global market share of 6%.

Domestic cellular IoT connections return to a rapid growth trend. In 2020, the global cellular module market was severely hit by the COVID-19 epidemic, and global revenue fell 8% year-on-year to US$3.1 billion, China's cellular module shipments increased by 14% year-on-year. As China has taken effective epidemic control measures, enterprises have resumed work and production quickly, and are less affected by the epidemic. As of the end of September 2021, the number of cellular connections of the three major domestic operators reached 1.364 billion, an increase of 229 million from the end of 2020. Among them, the net increase in the whole year of 2020 was only 108 million. After experiencing the slowdown in 2020, the number of domestic cellular Internet of Things connections returned to a rapid growth trend in 2021. (Report source: Future Think Tank)

LPWAN maintains strong growth

Although the Internet of Things market is affected by the dual adverse effects of the new crown epidemic and chip shortage, LPWAN still maintains strong growth. As the simplest and lowest-cost wide-area IoT solution at present, LPWAN is bringing digital opportunities to a large number of industries. According to IoT Analytics data, in the second and third quarters of 2020, the number of equipment activations that support LPWAN in many countries still reached 450 million units throughout the year, with a year-on-year growth rate of 62%. It is expected that this number will be 660 million in 2021, a year-on-year increase of 47%. In 5 years, the number of LPWAN connections is expected to reach 2.7 billion.

NB-IoT occupies half of China's new market, and Cat1 has risen rapidly. We can see from the comparative data that affected by the differences in NB-IoT infrastructure and market strategies at home and abroad, in China's cellular module shipments in 2020, the NBIoT module accounted for 54% of the shares, and the overseas market share was only 6%. In addition, Cat 1 has become the best alternative for 2G/3G IoT applications, and its market share has increased rapidly at home and abroad. A reasonable Internet of Things connection structure is being formed. Regarding the connection structure of different cellular IoT standards, the industry has formed a consensus of "60%-30%-10%". At present, the shipment of cellular IoT modules is evolving towards this structure, promoting the rationalization of the Internet of Things connection structure.

Module manufacturer share improvement logic is constantly verified

"Everything and falling in the west", and domestic module manufacturers have the leading market share. The standardization degree of IoT modules is relatively high, and the technical advantages and disadvantages of the product mainly depend on the chips used, and the technical barriers are relatively low. In addition, the Internet of Things industry has huge space, with more participating manufacturers and fierce competition. Due to the high labor costs, R&D and operating costs overseas, overseas manufacturers are unable to compete with domestic manufacturers. According to Counterpoint statistics, 2017H overseas module manufacturers still dominate, with the market share of 21.2% and 7.9% of , , respectively, corresponding to the first and second positions. We believe that domestic leading module manufacturers have taken advantage of their comprehensive advantages to gradually open up market space through low prices and high-quality services, gradually developing economies of scale, and have come from behind.

China's supplier status is stable. From the perspective of the global market, the three Chinese manufacturers, Yiyuan, Guanghetong and Rihai, are among the top three in the world, and the total shipment volume of the three companies accounts for 55% of the world's share, establishing the global position of Chinese manufacturers.From the perspective of the domestic market, Yiyuan's shipments account for nearly 50% of the domestic market, followed by Guanghetong, Rihai, Youfang, Qijun, Meige, and , and the top 7 companies account for 75% of the national share.

upstream pattern is gradually dispersed, downstream applications are broad, and the bargaining power of the top modules is improved. Upstream chips account for more than 50% of the module composition cost. With the rise of domestic chip manufacturers, the upstream market structure may be more fragmented. From the downstream perspective, Counterpoint released the revenue structure of cellular IoT modules in different application fields in 2020Q3, the highest revenue to module manufacturers are automobiles, routers/CPE, enterprise markets and industry, and the application scope is relatively wide. The dispersion of the upstream structure and the diversified downstream application fields have made the upstream and downstream bargaining power of module manufacturers increasingly stronger, and the leading advantages of leading manufacturers continue to emerge.

New Opportunities for Car Communication Module

Automobile Wireless Communication Module is installed on the car for transmission and collection of data, and is the underlying hardware for cars to access the Internet of Vehicles and the Internet. Through wireless means, direct communication and information exchange between cars and cloud, cars and cars, cars and roads, cars and people (mobile terminals). The front-mounted installation is often used in vehicle-mounted T-Box, providing a remote communication interface. In addition, some products such as intelligent rearview mirror , recorder , central control screen, etc. will also be equipped with communication modules.

New energy vehicles growth explodes. In November 2020, the State Council issued the "New Energy Vehicle Industry Development Plan (2021-2035)", proposing that the penetration rate of new energy vehicles will reach about 20% by 2025. As of October 2021, the penetration rate of new energy vehicles in my country was 12.12%. Assuming that based on the annual sales of 25 million, the sales volume of new energy vehicles will reach 5 million units in 2025. For the sake of green development, all countries are promoting the increase in the penetration rate of new energy vehicles . Norway proposed to 100% electrify new car sales by 2025, and the UK also proposed that the sales of electric passenger cars will reach more than 50% by 2030.

policy is increased to promote the "intelligent and networked" process of the Internet of Vehicles. According to the "Smart Connected Vehicle Technology Roadmap 2.0" released on November 11, 2020, the new L2 and L3 cars in 2025 will reach 50%, and will exceed 70% by 2030. At the same time, in 2025, the assembly rate of new cars of C-V2X terminals will reach 50%, and will be basically popular in 2030. On November 16, 2021, the Ministry of Industry and Information Technology officially released the "14th Five-Year Plan" Information and Communication Industry Development Plan, clarifying the development goals of the information and communication industry, and clearly pointing out the key to the coordinated layout of green intelligent data and computing power facilities. The development trend of intelligent automobile network coordination is in line with the planning goals. The communication module will benefit deeply as a core component of the C-V2X industry chain.

Internet of Vehicles front-mounted vehicle riding rate has steadily increased. According to the monitoring data of the Gaogong Intelligent Automobile Research Institute, the 2021H domestic market has a front-load capacity of 5.5279 million vehicles, with a loading rate exceeding 50% for the first time, reaching 54.97%. At the same time, network-based application services have become the mainstream of the market. Starting from 2020, some new cars have begun to be equipped with 5G communication modules. It is expected that the 4G capacity will continue to gradually increase in the next three years, and 5G capacity will enter a period of rapid growth. It is expected that by 2025, the domestic new vehicle networking loading rate will exceed 90%. For vehicle communication module manufacturers, exploring the high added value behind the incremental market is the future reshuffle of the "moat".

intelligent controller: a huge market, domestic substitution acceleration

intelligent controller is a high-tech product formed by integrating many technical categories such as automatic control technology and computer technology, power electronic technology , information sensing technology, display and interface technology, communication technology, electromagnetic compatibility technology and other technical categories. The intelligent controller plays the role of "nerve center" and "brain", and has a simulated effect on human intelligence. It can control relevant actuators according to pre-set goals or real-time settings to achieve the desired control goals, thereby freeing humans from heavy and repetitive work.

All things are interconnected, and intelligent controllers have great potential.Looking ahead, we believe that the future downstream growth of the smart controller industry mainly comes from the following aspects: the improvement of the prosperity of smart home under the Internet of Things, the expansion of home appliance categories in the downstream application market, the improvement of automotive intelligence, and the improvement of "mechanical integration" of power tools has driven the growth of industry demand.

Under the trend of eastward movement of the industrial chain and specialized division of labor, domestic manufacturers are accelerating their rise. Compared with overseas manufacturers, Chinese companies have industrial cluster advantages and engineer dividends. The excellent delivery capabilities and response speed have enabled domestic controller manufacturers to obtain a large number of incremental orders for overseas transfers. The complexity of smart controllers is increased and the outsourcing ratio may be further improved, and professional smart controller manufacturers are expected to benefit. At first, the controller was mainly self-sufficiency by terminal manufacturers. With the subsequent development of the industry, terminal manufacturers gradually transitioned from self-production to outsourcing of some components, thereby improving the quality of the controller while reducing the operating production costs of the enterprise.

This year, affected by the price increase and shortage of upstream raw materials, the growth rate of the controller industry has slowed down. In the long run, the trend of transfer of industrial chains to China, specialized division of labor and increased industry concentration remains unchanged. The excellent customer response capabilities, supply chain management capabilities and large R&D investment of leading manufacturers will continue to increase their market share. Looking ahead to next year, we believe that the impact of rising prices and stocks of raw materials will alleviate the industry and maintain the high prosperity.

Smart cars: the next generation of smart terminals, the industry development is accelerated

The perception of external information by autonomous driving mainly relies on three reasons: body sensors, high-precision positioning + maps, and Internet of Vehicles V2X. Among them, the body sensor mainly perceives and recognizes the close-up view of the vehicle, such as vehicles, pedestrians, lane lines, etc., which is equivalent to giving the car a pair of eyes. High-precision positioning provides the vehicle with absolute position information of the vehicle, that is, telling the vehicle where it is. The high-precision map stores a large amount of lane lines, signboards, and other data that does not require high-frequency updates. The above data can be used as a priori information for decision planning, greatly reducing its dependence on sensor real-time data and calculation amount, which is equivalent to vehicle-to-road memory. With body sensors and high-precision positioning + maps, the car has the external conditions to realize intelligent driving of a bicycle.

In the stage of autonomous driving development from low-level to advanced, various routes can move forward faster. In the early stages of technological development, it is much easier to lose cost factors and increase the total performance by increasing the quantity than to improve the individual quality. We believe that the body sensors, high-precision positioning, and vehicle networking functions are complementary. In the process of developing from low to high, the three can accelerate the entire development process and strengthen the safety of autonomous driving. It is a necessary weapon for high-level autonomous driving.

Perception sensor: Multi-sensor combination direction determination

Perception sensor main function is to detect and identify the environment around the vehicle, which can be regarded as the eyes of the vehicle. Mainstream sensor sensor mainly includes four categories: lidar , camera, mm wave radar , and ultrasonic radar. The above four types of radar have their own expertise in performance. At present, the development of cameras, millimeter-wave radars and ultrasonic radars has been relatively complete, and are widely used in the front-loading market for passenger cars. Lidar is currently at a high price, so it is relatively slow to use.

multi-sensor combination will become the mainstream trend in the field of autonomous driving in the future. We believe that in the field of in-vehicles, safety is more important than everything else, so the configuration idea of sensor should be to control costs on the basis of ensuring safety. The above four sensors have advantages and disadvantages. It is difficult to achieve autonomous driving by relying on a single sensor and the safety is difficult to guarantee. Multi-sensor combination will become the mainstream trend in the field of autonomous driving in the future.

main radar and main visual route are both feasible solutions to realize autonomous driving. The main radar solution is mainly lidar, which has low dependence on algorithms and is more dependent on sensors rather than algorithms. When it comes to high costs and difficult markets, the improvement of perception algorithms has greatly improved the overall performance.The main visual solution is mainly cameras, and its total cost is low, so it can be commercialized quickly. Most manufacturers have corresponding technical accumulation in vision algorithms and have the first-mover advantage. The cost of the main visual solution is mainly reflected in two aspects: 1. The cost of the camera as the main sensor is low; 2. The main camera can reduce the requirements for lidar and reduce its cost.

High-precision positioning + map: The industry is strongly certain, and the beneficiary targets are clear

High-precision positioning service object is the car driving system, providing it with absolute position information, and is a necessary tool for autonomous driving at level L3 and above. When autonomous driving develops to level L3 and above, the main body of car driving is transferred from people to driving system. At present, its intelligence level is relatively low, so more detailed and accurate information is needed to provide a basis for it to make driving decisions. "Detailed" means that the amount of data is large enough, while "precision" means that the data can be directly used for decision-making without the complex preprocessing of the AI system. Detailed data can improve the reliability of driving systems’ decisions, while accurate information can help reduce the complexity and difficulty of their decision-making process.

We believe that no matter whether the driving subject is a person or a system, there are four most important information when making driving decisions: the absolute position of the vehicle, the absolute position of the destination, the specific driving route, and the obstacles around the vehicle. The body sensor can provide the fourth type of information, and the positioning function can directly provide the first three types of information. However, the accuracy of ordinary positioning is low (5-10m). The AI system needs to combine the above-mentioned "fuzzy absolute position" information with the relative position information provided by the sensor to obtain "accurate absolute position" information. The accuracy of high-precision positioning can be at the centimeter level, and the information provided is detailed and detailed enough, so it can be made directly by the automotive AI system, saving computing power, reducing algorithm difficulty, and improving decision-making reliability.

high-precision maps are born with high-precision positioning and are gradually maturing. High-precision maps are an indispensable part of automatic driving at L3 and above. Compared with general navigation maps, the service objects of high-precision maps are not human drivers, but autonomous driving systems. Its absolute accuracy is higher and contains richer road traffic elements, including static information of lane models, road components, road properties, as well as dynamic information including weather, road congestion, and construction conditions. Rich content covers the amount of data that makes high-precision maps 105 times or even more than ordinary maps. After recent years of development, high-precision maps have gradually matured, and can meet the needs of the use of autonomous driving L3 level, and have gradually begun to commercialize.

Measurement Hypothesis: 1) According to the "Intelligent Connected Vehicle Technology Roadmap 2.0" released by the 2020 World Intelligent Connected Vehicle Conference, the goal set by the roadmap is that the sales of intelligent connected vehicle of L2-L3 level from 2020 to 2025 account for more than 50% of the total car sales of that year. We assume that by 2025, the penetration rate of new cars' autonomous driving L3 and above will be 30%, and at the same time, the penetration rate of high-precision positioning will be 30%; 2) According to the historical statistics of China Association of Automobile Manufacturers, we assume that the sales volume of automobiles from 2021 to 2025 will be 26 million vehicles; 3) We estimate that the unit price of GNSS equipment in 2021 will be 2,500 yuan, and there will be a certain price reduction every year thereafter; without considering the possibility of existing cars assemble high-precision navigation and positioning equipment, we estimate that in 2025, the market space of domestic high-precision navigation and positioning equipment driven by autonomous driving will be about 8.6 billion yuan, and the cumulative market space from 2021 to 2025 will be about 16.1 billion yuan.

With the advancement of autonomous driving, many car manufacturers have tried to launch models with high-precision positioning. 2020 is the first year of concentrated mass production and launch of high-precision positioning. Incomplete statistics, a total of 6 models are equipped with centimeter-level and sub-meter-level high-precision positioning. Taking the Xiaopeng P7 launched in 2020 as an example, P7 is equipped with Qianxun Location FindAUTO high-precision positioning service and Gaode's high-precision map, with positioning accuracy up to centimeters, thereby improving the vehicle's safety index in severe weather and extreme environments. The Xiaopeng P5, launched in April 2021, also supports centimeter-level positioning accuracy.From the current perspective, there are still fewer models that support high-precision positioning. We believe that this is mainly because most of the autonomous driving of passenger cars is still below L3. We expect that with the continuous development of autonomous driving, high-precision positioning will become the mainstream in the future.

Internet of Vehicles: 5G is supported by policy support, and the application side is expected to benefit

Internet of Vehicles technology development is closely related to the basic network, and 5G empowerment has entered a new era. Since 2012, my country has proposed the concept and application of the Internet of Vehicles. The Internet of Vehicles at this stage is based on 4G (LTE), namely LTE-V2X. LTE-V2X mainly carries basic information, such as traffic conditions, vehicle conditions, etc. After the emergence of 5G (NR), the Internet of Vehicles entered the NR-V2X era. With the empowerment of large bandwidth and low latency network channels, the Internet of Vehicles can carry more abundant information, such as sensor sharing, vehicle information exchange, etc., which has taken another big step forward in autonomous driving.

Vehicle Network is an important reliance for bicycle intelligence to move towards multi-vehicle intelligence. After the vehicle is equipped with perception sensors and high-precision positioning, the vehicle masters two types of information: relative position and absolute position, which is equivalent to equip the car with "eyes", and bicycle intelligence can be realized. However, the limitation of bicycle intelligence is that the vehicle can only obtain the content it perceives, and if it encounters an obstruction situation, it cannot sense the obstructed content. The Internet of Vehicles can realize the information interaction between vehicles and vehicles, and between vehicles and roads, which is equivalent to equip the vehicle with a "mouth" and "ear". With the assistance of the Internet of Vehicles, the information obtained by the vehicle breaks through the boundaries of its own perception and has higher safety and reliability.

Vehicle networking can significantly improve the vehicle's perception range, reduce perception costs, and improve traffic efficiency. In the intelligent stage of bicycles, a vehicle can only obtain information within its own perception range. When it encounters occlusion, target objects are too far away, etc., it cannot obtain information. With the help of the Internet of Vehicles, information transmission can be achieved between vehicles, so that the perception of vehicles not only relies on their own sensors, which improves the perception range, and also reduces the requirements for the performance of bicycle sensors and chips, thereby reducing its costs. In addition, real-time information exchange between vehicles and other surrounding units will help improve traffic efficiency and alleviate congestion.

policy support, and the Internet of Vehicles is expected to accelerate its development. In September 2017, the National Manufacturing Power Construction Group held the first meeting of the Special Committee for the Development of the Internet of Vehicles Industry, proposed the development of LTE-V2X, and determined China's development route with LTE-V2X as the focus. On June 27, 2018, the Radio Administration Bureau of the Ministry of Industry and Information Technology studied and drafted the "Regulations on the Management of 5905~5925MHz Frequency Use of Direct Connected Communications for Two-Door (Intelligent Connected Vehicles) (Draft for Comments)" to issue special frequency bands for LTE-V2X. From October to November 2020, the State Council's "New Energy Vehicle Industry Development Plan (2021-2035)" proposed to accelerate the formulation of C-V2X standards and technology upgrades, and promote the intelligent connectedness of automobiles. With the promotion and support of national policies, relevant standards and construction of Internet of Vehicles are expected to be accelerated.

summary, intelligence and electrification are the two main development lines of the automotive industry. Compared with electrification, advanced intelligence is progressing relatively slowly. We believe that as a core sensor necessary for advanced autonomous driving, lidar is facing the problem of high cost and difficulty in commercial use. The absence of core sensors limits the pace of automotive intelligence toward higher-level.

Large traffic industry chain: 2C&2B applications are expected to explode, and the cloud chain's prosperity is recovering

judges the rhythm of traffic explosion from the three major characteristics of 5G: continue the 4G thinking in the short term, and breaks the situation in the new applications in vertical industries for a long time. The original R15 5G standard was mainly aimed at enhanced mobile broadband scenarios (eMBBs), so it can be predicted that the early traffic business model of 5G will continue the thinking of 4G and cultivate heavy applications of large traffic on the 2C side. The R16 5G standard was frozen in July 2020, and will strengthen low-latency and high-reliability services (uLLRC) and support various vertical industrial applications (industrial Internet, Internet of Vehicles, etc.). The R17 version is expected to be frozen in June 2022, with the goal of large-scale machine communications (eMTC) with low power consumption. In the long run, 5G will be a high degree of penetration and integration of customization, intelligence and scenarios. The continuous explosion will rely on the rise of new applications in vertical industries and break the deadlock with the momentum of "Internet of Everything".

optical module: The economy continues to recover, grasp the value depression

21Q3 The industry is in the inventory digestion stage, and the overall growth has slowed down: 21Q1-Q3 Optical module industry 1 achieved revenue of 14.132 billion yuan, a year-on-year increase of 13.11%; achieved net profit attributable to shareholders of 1.873 billion yuan, a year-on-year increase of 13.00%, and the growth rate of revenue and performance has slowed significantly compared with 2020. In 21Q3, the optical module industry achieved a total revenue of 4.934 billion yuan, a year-on-year increase of 0.81%, and a net profit attributable to shareholders of 663 million yuan, a year-on-year decrease of 5.24%. The slowdown in growth was mainly due to the significant slowdown in 5G and data center construction activities compared with the same period last year, while channel inventory is still in the process of digestion.

Xinhua's revenue improved month-on-month, and the global server turning point is coming: from the upstream of the server industry chain, Xinhua is the global leader in server BMC chips, and its market share has exceeded 60% in recent years. Therefore, Xinhua's revenue growth indicator can be used as a leading indicator of the server market's market. From a historical perspective, Xinhua's revenue trend has led the server market for about 1-2 quarters. Judging from the monthly trend, Xinhua's revenue has shown a significant month-on-month improvement trend since January 2021, with year-on-year growth rates in August, September and October reaching 49.5%, 59.5% and 88.6%. With the high correlation between Xinhua and the server market, we judge that the global server market is expected to enter a new round of upward cycle.

Intel Digital Communication’s business growth accelerates, and the telecom market may improve: Intel’s data center business achieved revenue of US$6.5 billion, a year-on-year increase of 10%. Benefiting from the introduction of Intel’s 10nm Ice Lake and AMD 7nm Milan’s dual platforms into the market, the 2021H2 industry may usher in a new round of machine switches and data center construction. In 2020, due to the impact of the epidemic, overseas 5G construction has been suspended. With the continuous implementation of overseas 5G spectrum auctions, 5G construction is expected to accelerate in 2021, driving high growth in the overseas telecom market. From June to July 2021, the construction of domestic 700M & 2.1G will be launched, driving the gradual recovery of domestic telecom market demand.

Cloud merchants are the main force in future IT facilities investment, and the growth of Shutong optical modules is still considerable: According to Omdia data, the CAGR of data center capital expenditure may reach 9.8% from 2019 to 2023. Structurally, Google, Microsoft, Amazon and Alibaba, the four major cloud merchants in 2019H1 accounted for 44% of capital expenditure. The four major cloud merchants in North America plan to add 450 super-large data centers within three years. Cloud merchants have become the main force in IT facilities investment. As the core element of cloud business network upgrade, the digital optical module is still quite good. Meta (formerly Facebook) has a 22-year expenditure outlook of US$29-34 billion, a median increase of 66% year-on-year. It is mainly to strengthen investment in AI and machine learning, and these two application directions have a large driving force on traffic.

400G The peak of the main upward wave has not reached, the scale of 200G has begun, and the new cycle of 800G is gradually progressing. 2021 is the second year of the explosion of the 400G module scale. From a historical perspective, we expect that the 400G shipment volume will still increase significantly next year, and the overall shipment cycle will be extended (the subsequent second-tier cloud merchants may drive the second cycle to rise); driven by domestic BAT and overseas second-tier cloud merchants, the 200G module scale explosion will begin within the year, and will see further increase in volume next year and the next year; the 800G upgrade cycle is gradual, and 2022 is expected to be the first year of 800G shipment, and the leading cloud merchants will take the lead in deployment. Judging from Lightcounting's forecast, Amazon, Google, Microsoft and Alibaba are still the main purchasers of Digital Optical Modules, and the industry market size will double in 2023 compared with 2020.

benefited from the 400G upgrade cycle, and the 100G DR1/FR1 product growth is strong: 100G DR1/FR1 is a single-channel 100G product, which is different from traditional 4-channel products such as CWDM4 and PSM4, and uses 56Gaud EML plus PAM4 modulation to achieve 100G rate. In the mid-equipment upgrade path mentioned above, the spinal leaf switch is upgraded to 400G, and the breakout solution is used to connect the existing 100G TOR switch. A single DR4 corresponds to the demand for 4 DR1 modules. It can be foreseen that Amazon and other 400G multi-channel module buyers will purchase single-channel 100G modules at the same time, so the growth of DR1/FR1 products will run through the entire 400G cycle.

Overseas 5G is accelerating, and the domestic 700M network is about to be built, and the telecom market may be improving: in 2020, due to the impact of the epidemic, overseas 5G construction has been suspended. With the continuous implementation of overseas 5G spectrum auctions, 5G construction is expected to accelerate in 2021, driving the high growth of the overseas telecom market. In the domestic market, starting from Q3 2020, the construction of domestic 5G base stations has entered a slowing stage, and the monthly revenue of China Starlight (mainly engaged in 10-25G optical chip products) may be reflected in the continued negative year-on-year growth in the previous year. The 700M plan for mobile radio and television has been officially implemented, and it is expected that the third phase of 5G bidding may be launched in the near future, which is expected to drive the gradual recovery of domestic telecom market demand. (Report source: Future Think Tank)

Network equipment: The government and enterprise market is gradually repairing, embracing the digital economy

21Q1-Q3 As the epidemic improves, the demand in the government and enterprise market continues to recover, and the demand for Internet customers continues to grow. 21Q1-Q3 Network Equipment Industry 2 achieved revenue of 56.815 billion yuan, a year-on-year increase of 18.56%; and achieved net profit attributable to shareholders of 2.084 billion yuan, a year-on-year increase of 28.22%. Entering 21Q3, due to insufficient supply due to the power supply restriction of upstream raw materials, the overall delivery of the industry declined, and the network equipment industry achieved revenue of 20.779 billion yuan, a year-on-year increase of 9.42%; in the context of slowing industry competition in 21Q3, the gross profit margin level was boosted, and the provision of income tax exemption of Unigroup shares was advanced. In 21Q3, the network equipment industry achieved net profit attributable to shareholders of 905 million yuan, a year-on-year increase of 33.90%, and the growth rate was faster than the revenue side.

switch: The global market continues to grow structurally, and the upgrade of cloud data center networks is the main driving force: the global switch market size was US$7.4 billion, a year-on-year increase of 10.8%; from a structural perspective, the proportion of 100G switches has exceeded 20%. 21Q2 The global market revenue of 200G/400G switches increased by 132.5% month-on-month, and port shipments increased by 206.0% month-on-month. Domestic data centers 25G and 100G account for more than 60%. In terms of year-on-year growth rate, the year-on-year growth rate of the 100G/25G/10G/1G switch market in 2021Q2 was 15.4%/25.6%/-8.4%/14.4% respectively, and the year-on-year growth rate of the 100G and 25G switch markets is higher than that of low-rate switches.

switch: The growth rate of the Chinese market remains strong, and the enterprise-level market is growing rapidly. According to IDC data, the 21H1 China switch market grew by 14.7% year-on-year, of which data center switches grew by 6.4% year-on-year. Against the backdrop of the widespread popularity of network videos, the Internet and finance have become key industries that drive data center switch investment. The 400G products have been deployed on a large scale starting from the second quarter of 2021. Park network switches increased by 22.5% year-on-year. The potential construction needs of industries that have been greatly affected by the epidemic, such as education and services, have been fully utilized.

router: The domestic market has declined, and IPv6 deployment has driven rapid growth in the enterprise-level market. According to IDC data, the global router market size in 2021Q2 was US$3.9 billion, a year-on-year decline of 0.5%. The domestic market fell by 9.6% year-on-year in the first half of the year, of which the operator router market fell by 14.9% year-on-year, mainly because the large-scale construction of 5G slowed down significantly compared with the first half of 2020, and the scale of procurement of 5G backhaul access equipment has been reduced. The enterprise network router market grew by 17.9% year-on-year, with the increase mainly concentrated in the government, finance and Internet industries. The outline of the 14th Five-Year Plan proposes that expanding the backbone network interconnection nodes and comprehensively promoting the commercial deployment of IPv6 will drive a large amount of investment in routers. At the same time, the IPv6 traffic improvement action plan will also drive the second transformation, and there is still a lot of room for construction in the future.

IDC: Under the background of carbon neutrality, the supply-side turning point will reach

industry's long-term high prosperity trend will not change. From the perspective of market size, according to data from the China Academy of Information and Communications Technology, the global IDC market size reached US$62.3 billion in 2020, an increase of 10% year-on-year. In 2019, the domestic IDC market size was approximately US$10.453 billion, an increase of 19.6% year-on-year. It is expected that the domestic IDC market size will reach US$27.241 billion by 2024, maintaining a high growth trend and having broad space.

First-tier core cities have a large demand gap.From the demand side, Internet & cloud service providers are the main demand force. Among them, emerging Internet companies such as Byte, Kuaishou, Meituan and other businesses have developed rapidly. In recent years, the demand for IDC has been in a stable and rapid growth state, and the demand for IDC by financial institutions has continued to be released. Affected by the wave of digital construction, the demand for cloud services and IDC of governments and enterprises and institutions has been stable. From the supply side, affected by "carbon neutrality" and dual energy consumption control, first-tier cities have begun to introduce contraction policies since this year. The demand gap between core first-tier cities is large, and the tight balance will continue.

In the context of insufficient effective supply and increased power density of single cabinets, the rental prices of cabinets in first-tier cities remain stable. Due to the limitations of energy consumption indicators, the supply of IDCs in core cities is limited, and the cabinet rental price is supportive. Judging from the public data disclosed by Wanguo Data, a leading domestic third-party IDC service manufacturer, and Century Internet, the company's quarterly IDC cabinet rental prices have remained relatively stable since its listing, and Century Internet's cabinet rental prices have increased steadily. We expect that in the future, resources will become more scarce in first-tier cities represented by Beijing and Shenzhen, and market prices will increase significantly.

pay attention to the investment opportunities of the IDC industry chain under the background of carbon neutrality. From the supply side, the IDC industry has entered the "investment overheating" stage since the second half of last year, and cabinet prices in second- and third-tier cities are under pressure. At present, in the context of the increasingly stricter policy on power resources and energy consumption control, as a high-energy consumption industry, data centers, as a high-energy consumption industry, have put forward stricter requirements for the construction and scale of IDCs, and the scarcity of energy consumption indicators has been further improved. IDC cabinets in core first-tier cities will become more scarce. With the supply-side structural reform, long-tail enterprises will be quickly cleared, accelerating the stability of leading manufacturers.

Enterprise Communications: The epidemic promotes digitalization

The lack of user habits is a major obstacle in the promotion of UC products. With its strong communication performance, enterprise communication products replace traditional offline meetings with online video conferencing, which can reduce corporate communications, travel and other expenses while simplifying corporate operation processes and improving corporate operation efficiency. The epidemic has hindered the traditional collaboration methods of enterprises, forcing employees to collaborate online, and forced the user habits of enterprise communication products to be forced to cultivate, successfully cross the promotion barriers, and is expected to comprehensively improve the prosperity of the enterprise communications sector. The UC industry is expected to enter an accelerated growth model.

UC The growth rate of the collaboration market has increased, while the growth rate of the Asia-Pacific and Latin America markets is relatively high. The epidemic has forced corporate employees to carry out online collaboration. According to IDC data disclosure, the global UC collaboration market grew by 24.9% year-on-year in 2020, a significant increase in the year-on-year growth rate in 2019. By region, the growth rate of Asia-Pacific and Latin America is significantly higher than the global average and is expected to become an important source of growth drivers for the UC collaborative market. Considering that the epidemic may exist for a long time, we believe that its role in promoting the UC industry will continue to exist, and it is expected that the UC market will continue to maintain rapid growth in 2022.

The epidemic control is effective, and the hardware market demand releases

The epidemic has suppressed UC products in the short term and is beneficial to the long term. In the short term, the epidemic has had an adverse impact on the development of business activities and has inhibited the release of UC product demand. In the long run, enterprise hybrid offices will form a new normal. Users' usage habits for UC products are expected to be retained after the epidemic, and the demand for cloud office terminals and cloud video services is expected to continue to increase. We believe that as the epidemic gradually fades, business activities will gradually return to normal, and demand for hard terminals will be released one after another.

soft terminals and hard terminals correspond to no application scenarios, and their complementary relationship is greater than competition. The key point of hard terminals is communication performance, which is more suitable for multiple people to use at the same time in fixed scenarios, but installation and debugging are required before use, so the demand has not been fully released during the epidemic. The key point of soft terminals is convenience, and can be downloaded and used directly on general electronic products such as mobile phones and computers, which is convenient and fast, and is more suitable for use in single or mobile scenarios. With its own convenience, the soft terminal product market has achieved rapid growth during the epidemic and demand has been released smoothly.

The soft terminal products based on the cloud platform are easy to deploy and low investment, and are expected to benefit first compared to the hard terminal products. Soft terminals have completed the cultivation of user habits, which is expected to reduce the difficulty of promoting hard terminals. Hard terminals need to be installed and debugged during deployment, and the investment is high, which leads to a high cost of new user experience and is more difficult during promotion. Since the application scenarios of soft terminals and hard terminals are complementary and user habits can be inherited from each other, the possibility of enterprise users further deploying hard terminals to improve the application scenario layout after the soft terminal has completed the cultivation of user habits.

Company level, taking Yilian Network, the leader in corporate communications, as an example: In the first three quarters of 2021, the company achieved operating income of 2.529 billion yuan, a year-on-year increase of 28.95%, and net profit attributable to shareholders of 1.218 billion yuan, a year-on-year increase of 20.88%, and the growth rate of revenue and net profit attributable to shareholders of 2.529 billion yuan, a year-on-year increase of 28.95%. We believe that as the impact of the global COVID-19 epidemic gradually eases, the company's market demand continues to recover and the general trend remains. In September 2021, the Xiamen epidemic mainly affected the company's production and shipment status, and had a small impact on its orders. With the effective control of the epidemic in Xiamen, the company's production capacity and shipment have gradually recovered, and it is still expected to achieve the 2021 performance target as scheduled.

Outlook In 2022, we believe that the role of the epidemic in promoting the enterprise communications sector will exist for a long time. The company's products continue to iterate, the moat continues to deepen, and has long-term alpha attributes. It is expected that the company's performance will continue to maintain rapid growth.

Investment Analysis

Current market voice believes that 5G lacks applications, only supply and no explosion of demand, and thus lacks investment confidence. We believe that with the transition from construction to application of 5G, operations and applications may enter a golden decade. In the long run, 5G will be a high degree of penetration and integration of customization, intelligence and scenarios. New applications in vertical industries will rise and break the deadlock with the momentum of "Internet of Everything". In terms of investment strategy, we recommend "downplaying β-looking for α" and paying attention to bottom-up high growth of individual stocks and track diffusion investment opportunities; as a 5G platform, operators have a 10-year dividend period, and sector benefits are determined to be strong.

(This article is for reference only and does not represent any of our investment advice. If you need to use relevant information, please refer to the original text of the report.)

selected report source: [Future Think Tank]. Future Think Tank - Official Website

optical module: The economy continues to recover, grasp the value depression

21Q3 The industry is in the inventory digestion stage, and the overall growth has slowed down: 21Q1-Q3 Optical module industry 1 achieved revenue of 14.132 billion yuan, a year-on-year increase of 13.11%; achieved net profit attributable to shareholders of 1.873 billion yuan, a year-on-year increase of 13.00%, and the growth rate of revenue and performance has slowed significantly compared with 2020. In 21Q3, the optical module industry achieved a total revenue of 4.934 billion yuan, a year-on-year increase of 0.81%, and a net profit attributable to shareholders of 663 million yuan, a year-on-year decrease of 5.24%. The slowdown in growth was mainly due to the significant slowdown in 5G and data center construction activities compared with the same period last year, while channel inventory is still in the process of digestion.

Xinhua's revenue improved month-on-month, and the global server turning point is coming: from the upstream of the server industry chain, Xinhua is the global leader in server BMC chips, and its market share has exceeded 60% in recent years. Therefore, Xinhua's revenue growth indicator can be used as a leading indicator of the server market's market. From a historical perspective, Xinhua's revenue trend has led the server market for about 1-2 quarters. Judging from the monthly trend, Xinhua's revenue has shown a significant month-on-month improvement trend since January 2021, with year-on-year growth rates in August, September and October reaching 49.5%, 59.5% and 88.6%. With the high correlation between Xinhua and the server market, we judge that the global server market is expected to enter a new round of upward cycle.

Intel Digital Communication’s business growth accelerates, and the telecom market may improve: Intel’s data center business achieved revenue of US$6.5 billion, a year-on-year increase of 10%. Benefiting from the introduction of Intel’s 10nm Ice Lake and AMD 7nm Milan’s dual platforms into the market, the 2021H2 industry may usher in a new round of machine switches and data center construction. In 2020, due to the impact of the epidemic, overseas 5G construction has been suspended. With the continuous implementation of overseas 5G spectrum auctions, 5G construction is expected to accelerate in 2021, driving high growth in the overseas telecom market. From June to July 2021, the construction of domestic 700M & 2.1G will be launched, driving the gradual recovery of domestic telecom market demand.

Cloud merchants are the main force in future IT facilities investment, and the growth of Shutong optical modules is still considerable: According to Omdia data, the CAGR of data center capital expenditure may reach 9.8% from 2019 to 2023. Structurally, Google, Microsoft, Amazon and Alibaba, the four major cloud merchants in 2019H1 accounted for 44% of capital expenditure. The four major cloud merchants in North America plan to add 450 super-large data centers within three years. Cloud merchants have become the main force in IT facilities investment. As the core element of cloud business network upgrade, the digital optical module is still quite good. Meta (formerly Facebook) has a 22-year expenditure outlook of US$29-34 billion, a median increase of 66% year-on-year. It is mainly to strengthen investment in AI and machine learning, and these two application directions have a large driving force on traffic.

400G The peak of the main upward wave has not reached, the scale of 200G has begun, and the new cycle of 800G is gradually progressing. 2021 is the second year of the explosion of the 400G module scale. From a historical perspective, we expect that the 400G shipment volume will still increase significantly next year, and the overall shipment cycle will be extended (the subsequent second-tier cloud merchants may drive the second cycle to rise); driven by domestic BAT and overseas second-tier cloud merchants, the 200G module scale explosion will begin within the year, and will see further increase in volume next year and the next year; the 800G upgrade cycle is gradual, and 2022 is expected to be the first year of 800G shipment, and the leading cloud merchants will take the lead in deployment. Judging from Lightcounting's forecast, Amazon, Google, Microsoft and Alibaba are still the main purchasers of Digital Optical Modules, and the industry market size will double in 2023 compared with 2020.

benefited from the 400G upgrade cycle, and the 100G DR1/FR1 product growth is strong: 100G DR1/FR1 is a single-channel 100G product, which is different from traditional 4-channel products such as CWDM4 and PSM4, and uses 56Gaud EML plus PAM4 modulation to achieve 100G rate. In the mid-equipment upgrade path mentioned above, the spinal leaf switch is upgraded to 400G, and the breakout solution is used to connect the existing 100G TOR switch. A single DR4 corresponds to the demand for 4 DR1 modules. It can be foreseen that Amazon and other 400G multi-channel module buyers will purchase single-channel 100G modules at the same time, so the growth of DR1/FR1 products will run through the entire 400G cycle.

Overseas 5G is accelerating, and the domestic 700M network is about to be built, and the telecom market may be improving: in 2020, due to the impact of the epidemic, overseas 5G construction has been suspended. With the continuous implementation of overseas 5G spectrum auctions, 5G construction is expected to accelerate in 2021, driving the high growth of the overseas telecom market. In the domestic market, starting from Q3 2020, the construction of domestic 5G base stations has entered a slowing stage, and the monthly revenue of China Starlight (mainly engaged in 10-25G optical chip products) may be reflected in the continued negative year-on-year growth in the previous year. The 700M plan for mobile radio and television has been officially implemented, and it is expected that the third phase of 5G bidding may be launched in the near future, which is expected to drive the gradual recovery of domestic telecom market demand. (Report source: Future Think Tank)

Network equipment: The government and enterprise market is gradually repairing, embracing the digital economy

21Q1-Q3 As the epidemic improves, the demand in the government and enterprise market continues to recover, and the demand for Internet customers continues to grow. 21Q1-Q3 Network Equipment Industry 2 achieved revenue of 56.815 billion yuan, a year-on-year increase of 18.56%; and achieved net profit attributable to shareholders of 2.084 billion yuan, a year-on-year increase of 28.22%. Entering 21Q3, due to insufficient supply due to the power supply restriction of upstream raw materials, the overall delivery of the industry declined, and the network equipment industry achieved revenue of 20.779 billion yuan, a year-on-year increase of 9.42%; in the context of slowing industry competition in 21Q3, the gross profit margin level was boosted, and the provision of income tax exemption of Unigroup shares was advanced. In 21Q3, the network equipment industry achieved net profit attributable to shareholders of 905 million yuan, a year-on-year increase of 33.90%, and the growth rate was faster than the revenue side.

switch: The global market continues to grow structurally, and the upgrade of cloud data center networks is the main driving force: the global switch market size was US$7.4 billion, a year-on-year increase of 10.8%; from a structural perspective, the proportion of 100G switches has exceeded 20%. 21Q2 The global market revenue of 200G/400G switches increased by 132.5% month-on-month, and port shipments increased by 206.0% month-on-month. Domestic data centers 25G and 100G account for more than 60%. In terms of year-on-year growth rate, the year-on-year growth rate of the 100G/25G/10G/1G switch market in 2021Q2 was 15.4%/25.6%/-8.4%/14.4% respectively, and the year-on-year growth rate of the 100G and 25G switch markets is higher than that of low-rate switches.

switch: The growth rate of the Chinese market remains strong, and the enterprise-level market is growing rapidly. According to IDC data, the 21H1 China switch market grew by 14.7% year-on-year, of which data center switches grew by 6.4% year-on-year. Against the backdrop of the widespread popularity of network videos, the Internet and finance have become key industries that drive data center switch investment. The 400G products have been deployed on a large scale starting from the second quarter of 2021. Park network switches increased by 22.5% year-on-year. The potential construction needs of industries that have been greatly affected by the epidemic, such as education and services, have been fully utilized.

router: The domestic market has declined, and IPv6 deployment has driven rapid growth in the enterprise-level market. According to IDC data, the global router market size in 2021Q2 was US$3.9 billion, a year-on-year decline of 0.5%. The domestic market fell by 9.6% year-on-year in the first half of the year, of which the operator router market fell by 14.9% year-on-year, mainly because the large-scale construction of 5G slowed down significantly compared with the first half of 2020, and the scale of procurement of 5G backhaul access equipment has been reduced. The enterprise network router market grew by 17.9% year-on-year, with the increase mainly concentrated in the government, finance and Internet industries. The outline of the 14th Five-Year Plan proposes that expanding the backbone network interconnection nodes and comprehensively promoting the commercial deployment of IPv6 will drive a large amount of investment in routers. At the same time, the IPv6 traffic improvement action plan will also drive the second transformation, and there is still a lot of room for construction in the future.

IDC: Under the background of carbon neutrality, the supply-side turning point will reach

industry's long-term high prosperity trend will not change. From the perspective of market size, according to data from the China Academy of Information and Communications Technology, the global IDC market size reached US$62.3 billion in 2020, an increase of 10% year-on-year. In 2019, the domestic IDC market size was approximately US$10.453 billion, an increase of 19.6% year-on-year. It is expected that the domestic IDC market size will reach US$27.241 billion by 2024, maintaining a high growth trend and having broad space.

First-tier core cities have a large demand gap.From the demand side, Internet & cloud service providers are the main demand force. Among them, emerging Internet companies such as Byte, Kuaishou, Meituan and other businesses have developed rapidly. In recent years, the demand for IDC has been in a stable and rapid growth state, and the demand for IDC by financial institutions has continued to be released. Affected by the wave of digital construction, the demand for cloud services and IDC of governments and enterprises and institutions has been stable. From the supply side, affected by "carbon neutrality" and dual energy consumption control, first-tier cities have begun to introduce contraction policies since this year. The demand gap between core first-tier cities is large, and the tight balance will continue.

In the context of insufficient effective supply and increased power density of single cabinets, the rental prices of cabinets in first-tier cities remain stable. Due to the limitations of energy consumption indicators, the supply of IDCs in core cities is limited, and the cabinet rental price is supportive. Judging from the public data disclosed by Wanguo Data, a leading domestic third-party IDC service manufacturer, and Century Internet, the company's quarterly IDC cabinet rental prices have remained relatively stable since its listing, and Century Internet's cabinet rental prices have increased steadily. We expect that in the future, resources will become more scarce in first-tier cities represented by Beijing and Shenzhen, and market prices will increase significantly.

pay attention to the investment opportunities of the IDC industry chain under the background of carbon neutrality. From the supply side, the IDC industry has entered the "investment overheating" stage since the second half of last year, and cabinet prices in second- and third-tier cities are under pressure. At present, in the context of the increasingly stricter policy on power resources and energy consumption control, as a high-energy consumption industry, data centers, as a high-energy consumption industry, have put forward stricter requirements for the construction and scale of IDCs, and the scarcity of energy consumption indicators has been further improved. IDC cabinets in core first-tier cities will become more scarce. With the supply-side structural reform, long-tail enterprises will be quickly cleared, accelerating the stability of leading manufacturers.

Enterprise Communications: The epidemic promotes digitalization

The lack of user habits is a major obstacle in the promotion of UC products. With its strong communication performance, enterprise communication products replace traditional offline meetings with online video conferencing, which can reduce corporate communications, travel and other expenses while simplifying corporate operation processes and improving corporate operation efficiency. The epidemic has hindered the traditional collaboration methods of enterprises, forcing employees to collaborate online, and forced the user habits of enterprise communication products to be forced to cultivate, successfully cross the promotion barriers, and is expected to comprehensively improve the prosperity of the enterprise communications sector. The UC industry is expected to enter an accelerated growth model.

UC The growth rate of the collaboration market has increased, while the growth rate of the Asia-Pacific and Latin America markets is relatively high. The epidemic has forced corporate employees to carry out online collaboration. According to IDC data disclosure, the global UC collaboration market grew by 24.9% year-on-year in 2020, a significant increase in the year-on-year growth rate in 2019. By region, the growth rate of Asia-Pacific and Latin America is significantly higher than the global average and is expected to become an important source of growth drivers for the UC collaborative market. Considering that the epidemic may exist for a long time, we believe that its role in promoting the UC industry will continue to exist, and it is expected that the UC market will continue to maintain rapid growth in 2022.

The epidemic control is effective, and the hardware market demand releases

The epidemic has suppressed UC products in the short term and is beneficial to the long term. In the short term, the epidemic has had an adverse impact on the development of business activities and has inhibited the release of UC product demand. In the long run, enterprise hybrid offices will form a new normal. Users' usage habits for UC products are expected to be retained after the epidemic, and the demand for cloud office terminals and cloud video services is expected to continue to increase. We believe that as the epidemic gradually fades, business activities will gradually return to normal, and demand for hard terminals will be released one after another.

soft terminals and hard terminals correspond to no application scenarios, and their complementary relationship is greater than competition. The key point of hard terminals is communication performance, which is more suitable for multiple people to use at the same time in fixed scenarios, but installation and debugging are required before use, so the demand has not been fully released during the epidemic. The key point of soft terminals is convenience, and can be downloaded and used directly on general electronic products such as mobile phones and computers, which is convenient and fast, and is more suitable for use in single or mobile scenarios. With its own convenience, the soft terminal product market has achieved rapid growth during the epidemic and demand has been released smoothly.

The soft terminal products based on the cloud platform are easy to deploy and low investment, and are expected to benefit first compared to the hard terminal products. Soft terminals have completed the cultivation of user habits, which is expected to reduce the difficulty of promoting hard terminals. Hard terminals need to be installed and debugged during deployment, and the investment is high, which leads to a high cost of new user experience and is more difficult during promotion. Since the application scenarios of soft terminals and hard terminals are complementary and user habits can be inherited from each other, the possibility of enterprise users further deploying hard terminals to improve the application scenario layout after the soft terminal has completed the cultivation of user habits.

Company level, taking Yilian Network, the leader in corporate communications, as an example: In the first three quarters of 2021, the company achieved operating income of 2.529 billion yuan, a year-on-year increase of 28.95%, and net profit attributable to shareholders of 1.218 billion yuan, a year-on-year increase of 20.88%, and the growth rate of revenue and net profit attributable to shareholders of 2.529 billion yuan, a year-on-year increase of 28.95%. We believe that as the impact of the global COVID-19 epidemic gradually eases, the company's market demand continues to recover and the general trend remains. In September 2021, the Xiamen epidemic mainly affected the company's production and shipment status, and had a small impact on its orders. With the effective control of the epidemic in Xiamen, the company's production capacity and shipment have gradually recovered, and it is still expected to achieve the 2021 performance target as scheduled.

Outlook In 2022, we believe that the role of the epidemic in promoting the enterprise communications sector will exist for a long time. The company's products continue to iterate, the moat continues to deepen, and has long-term alpha attributes. It is expected that the company's performance will continue to maintain rapid growth.

Investment Analysis

Current market voice believes that 5G lacks applications, only supply and no explosion of demand, and thus lacks investment confidence. We believe that with the transition from construction to application of 5G, operations and applications may enter a golden decade. In the long run, 5G will be a high degree of penetration and integration of customization, intelligence and scenarios. New applications in vertical industries will rise and break the deadlock with the momentum of "Internet of Everything". In terms of investment strategy, we recommend "downplaying β-looking for α" and paying attention to bottom-up high growth of individual stocks and track diffusion investment opportunities; as a 5G platform, operators have a 10-year dividend period, and sector benefits are determined to be strong.

(This article is for reference only and does not represent any of our investment advice. If you need to use relevant information, please refer to the original text of the report.)

selected report source: [Future Think Tank]. Future Think Tank - Official Website