Since the beginning of 2022, the Shenwan computer industry's growth rate ranks 30th among the 31 industries in the Shenwan first-level. Since the beginning of 2022, the Shanghai and Shenzhen 300 Index has fallen by 14.20%, and the computer has fallen by 26.93%, lagging behind the

(report producer/author: Wanlian Securities, Xia Qingying, Wang Jingyi)

Industry Review: profit is under short-term pressure, valuation and position are both bottom

1.1 Market Review: The sector has fully pulled back, valuation is at the bottom

2022 to the present Shenwan computer industry increase ranks 30th among the 31 industries in Shenwan first-level. Since the beginning of 2022, Shanghai and Shenzhen 300 Index has fallen by 14.20%, and computers have fallen by 26.93%, lagging behind the index by 12.73pct, ranking 30th in Shenwan first-level industries.

valuation has been adjusted to the historical bottom. From the beginning of 2022 to the present, in the context of the impact of the domestic epidemic, the overseas geopolitical conflicts and the Federal Reserve's interest in risk appetite has decreased, and the valuation of the computer industry has continued to decline. SW Computer Industry PE (TTM) has been adjusted to 34.71 times, lower than the historical average from 2016 to the present, and the industry valuation is lower than the historical mid-pivot level.

1.2 Performance Review: Revenue growth slowed down, profitability declined

2022 Q1 revenue growth slowed down, and profit declined significantly. In Q1 2022, the computer industry achieved operating income of 209.58 billion yuan, and the overall method of increased by 14.77% year-on-year, down 17.44pct from the growth rate in Q1 in 2021; the net profit attributable to shareholders was 2.502 billion yuan, down 58.50% year-on-year under the overall method. The overall gross profit margin and net profit margin of the industry fell by 1.39pct and 3.17pct respectively year-on-year. The overall expense rate increased slightly, with the R&D expense rate increasing by 1.66pct year-on-year. The net outflow of operating cash flow has increased.

We believe that the main reasons for the poor performance of the computer industry in the first quarter are: revenue side, 1) The epidemic broke out in many places in the first quarter, some business activities were blocked, and project implementation delivery progress slowed downwards; demand for downstream sub-industry with low IT payment capabilities has weakened due to the impact of the epidemic. 2) The low income in 20 years base effect caused the growth rate to be too high in the same period last year. On the profit side, the overall increase in industry compensation in 21 years has led to an increase in gross profit margin and expense ratio, and the cost and expense rigidity continued in Q1 in 22 years. We expect that as the impact of the epidemic weakens, the resumption of work and production continues to advance, while the industry's growth rate recovers, the high investment in labor costs in the early stage will gradually be digested, and profits are expected to usher in a turning point.

1.3 Position analysis: The fund's position allocation ratio has declined, and has reached a historical low

Computer industry's fund heavy holding ratio in Q1 2022 was 3.58%, with a low allocation of 0.37pct. In the computer industry, the proportion of funds holdings in Q1 in 2022 was 3.58%, down 1.88pct from Q1 in 2021 and 0.77pct from Q4 in 2021. Compared with the proportion of the circulating market value of the computer industry that accounts for all A shares circulation market value, the adaptation ratio of the computer industry's heavy holdings in Q1 2022 was 3.94%, with a low allocation of 0.37pct. Compared with the fund's heavy holdings in the past 10 years, the computer industry's holdings in Q1 in 22 years have been at a historical low.

2 Industry Outlook: Digital Economy main line is clear, focusing on digital industrialization & industrial digitalization

"The "14th Five-Year Plan" Digital Economy Development Plan" was issued to establish the digital economy development goals. In January 2022, the State Council issued the "14th Five-Year Plan for Digital Economy Development", emphasizing that data is the key factor, the deep integration of digital technology and the real economy is the main line, strengthen the construction of digital infrastructure, improve the digital economy governance system, coordinate the promotion of digital industrialization and industrial digitalization, empower the transformation and upgrading of traditional industries, give birth to new business forms and models, and continuously strengthen, improve and expand my country's digital economy. In terms of quantitative indicators, the "Plan" proposes that by 2025, the added value of the core industries of the digital economy will account for 10% of the GDP. It also proposed that the scale of the software and information technology service industry reached 14 trillion yuan, and the application penetration rate of industrial Internet platform reached 45%.

China's digital economy has flourished and has become an important engine of economic growth. The scale of my country's digital economy grew from 4.8 trillion yuan in 2008 to 39.2 trillion yuan in 2020, and the growth rate of the digital economy exceeded the overall growth rate of GDP. The proportion of digital economy in GDP has continued to increase. In 2020, the proportion of digital economy in GDP reached 38.6%, which has become an important driving force for economic growth.

policy continues to focus on the digital economy and its strategic position continues to be strengthened.Since the issuance of the "14th Five-Year Plan for Digital Economy Development", the "digital economy" has frequently appeared in various important government meetings and documents, and has continuously strengthened the strategic position of the digital economy. The policy content involves multiple aspects such as digital infrastructure, key core technologies, digital industrialization and industrial digitalization, and is a powerful continuation of the "14th Five-Year Plan" for the digital economy.

digital economy includes four major parts: one is digital industrialization, that is, information and communications industry, specifically including 5G, integrated circuits, software, artificial intelligence , big data, cloud computing , blockchain and other technologies, products and services; the second is industrial digitalization, that is, the increase in output and efficiency improvement brought by traditional industries application of digital technologies, including industrial Internet, industrial integration , intelligent manufacturing, Internet of vehicles, platform economy and other integrated new industries, new models and new business formats; the third is digital governance, including meta-governance, digital public services, etc.; the fourth is data value, including data collection, data standards, data rights confirmation, data annotation, data pricing, data transactions, data flow, data protection, etc. We believe that digital industrialization and industrial digitalization are the key points of the current development of the digital economy. The former emphasizes the use of technology to form industries and promote the technological industry to become bigger and stronger. The latter emphasizes that technology empowers thousands of industries and promotes the digital upgrade of traditional industries.

In terms of digital industrialization, security and control are the current focus. A new round of information technology represented by cloud computing and artificial intelligence has become mature, and industries such as the Internet of Things, artificial intelligence, and metaverse are developing rapidly. However, my country's basic hardware and software technology level is relatively backward, and IT infrastructure is still mainly based on the use of foreign products. Against the backdrop of frequent Sino-US trade frictions and overseas geopolitical conflicts, the demand for independent and controllable basic software and hardware is becoming increasingly prominent. At the same time, my country's network security investment level is far behind that of developed countries. The frequent cyber attacks this year have also posed great challenges to the security of my country's IT industry. Therefore, creating a safe and controllable domestic digital economy base is an important dimension of digital industrialization at present. Related subdivided areas include:

1) Information and Innovation: The Party and Government Information and Innovation Products started in 2019 to rapidly develop domestic basic software and hardware. With the verification of large-scale shipment, information and innovation products are in the stage of transformation from available to easy-to-use. At present, the Party and government information creation has been further deepened, from electronic documents information creation to electronic government information creation, and is expected to sink to county and township governments; the implementation cases of information creation in industries such as telecommunications and , finance, etc. have increased rapidly, opening up broad market space. The frequent occurrence of Sino-US trade frictions and overseas geopolitical conflicts may become a catalyst to accelerate the promotion of the information and innovation industry.

2) Cybersecurity: The 2021 cybersecurity legislation is implemented intensively, and the introduction of the "Data Security Law" and the "Personal Information Protection Law" continue to boost the industry's prosperity. The amount of social data is growing under the development of the digital economy, and data security is a necessary guarantee for the economic development of digital . In 2022, we are optimistic about the accelerated growth of the data security market, and new security fields such as cloud security, industrial control security, and Internet of Vehicles Security are also in a period of rapid growth. (Report source: Future Think Tank)

3) Server: The core infrastructure of the digital economy, upstream and downstream data of the industrial chain prompts the upward and upstream and downstream data of the server industry is rising, and the east and west count opens up incremental space. Since January 2022, Aspeed's monthly revenue growth rate has been above 30% year-on-year, and May's revenue increased by 52.71% year-on-year, and Intel DCG department revenue growth rate has returned to positive. Capital expenditure of downstream cloud manufacturers expanded, and the growth rate of capital expenditure of domestic and foreign cloud manufacturers in Q1 was above 20%. The " East Data and West Calculation " project has been fully launched, bringing server requirements to expand. With the development of the digital economy, demand for computing power has surged, and medium- and long-term demand growth is sustainable.

In terms of industry digitalization, the current downstream penetration rate is low, the degree of marketization is high, and the field is in a period of industrial change. The field is prosperous:

1) Intelligent driving: The industry is in a period of rapid change, and the L2-level ADAS loading rate is rapidly increasing. In 2022, large computing power chips such as Qualcomm and Nvidia will accelerate their entry into the car, which may become the first year of mass production of L3-level models.As the automotive E/E architecture develops towards a centralized domain, the demand for software such as automotive operating systems and middleware is highlighted, and automotive software manufacturers are expected to benefit. Recently, the automobile consumption promotion policy has formed a strong catalysis, and the recovery of downstream automobile sales is expected to be transmitted to the upstream, and the prosperity of the intelligent driving industry chain has improved marginally.

2) Industrial software: dual logic of intelligent manufacturing and domestic production, industrial development is expected to accelerate with policy support. Industrial software is the only way for my country to move from a "manufacturing power" to a "manufacturing power". At present, the degree of domestic production of high-end industrial software in my country is still relatively low, and core technologies need to be caught up and broken through. With the strong support of policies, domestic industrial software is expected to accelerate the technological upgrade on the supply side, and the penetration rate on the demand side is expected to increase rapidly.

3) Financial Technology: State-owned and joint-stock banks have increased their investment in financial technology, and the implementation of the pilot application of digital RMB exceeds expectations. With the continuous advancement of financial information innovation, a large cycle of replacement will be ushered in from basic software and hardware to upper-level system applications. We recommend continuing to pay attention to the implementation progress of the digital RMB and financial information innovation. At the current point in time, we recommend paying attention to marginal changes and laying out the tracks of information innovation, intelligent driving, server and industrial software, which have obvious marginal improvements in the second half of 2022.

3 Key track: Grasp the sub-sectors of upward prosperity and increased penetration rate

3.1 Information and Creation: Party and government information and Creation is in full swing, and the progress of industry information and Creation is accelerating

Under the background of geopolitical conflict, the importance of technological independence is becoming increasingly prominent. Against the backdrop of Sino-US trade frictions, the United States has repeatedly included my country's technology companies and scientific research organizations on the entity list and imposed bans on multiple technical fields. In the Russian-Ukrainian conflict, technological sanctions have once again become an important means for major powers to fight, and many technology giants have announced a cut off supply to Russia. Intel, NVIDIA, Apple , Google , Microsoft , Oracle and other companies have announced the suspension of all Russian businesses, involving basic software and hardware, cloud services, social media and other aspects. Technology giants have cut off supply to Russia, which is expected to cause a major blow to the IT systems in key industries such as Russia's finance and telecommunications. This also shows that the weak links of key technologies are a major hidden danger to national security, and fully confirms the necessity of my country's policies to vigorously promote the development of information and innovation and seek the localization of basic software and hardware.

Since 2020, China's information technology innovation has entered the stage of large-scale implementation and promotion, and the current depth and breadth continue to increase. my country has proposed the "2+8+N" information and innovation system, namely the comprehensive application of eight key industries + information and innovation products in the Party, government + finance, telecommunications, electricity, oil, transportation, education, medical care, aviation, and aerospace. The Party and Government Credit was founded in 2019 and has basically completed the replacement of the provincial and municipal electronic document system in the past three years. During this period, my country's information and innovation industry ecosystem has initially taken shape. Industry information innovation, represented by finance and telecommunications, will accelerate pilot projects from 2020. At present, the party and government electronic document information creation is expected to sink to districts and counties, and the electronic government information creation is about to begin; the industry information creation trend has been basically established, and the promotion pace is expected to accelerate.

Operators and banks have increased their procurement of domestic servers. Among the centralized procurement projects of servers by the three major operators, the scale of domestic servers continues to expand. In the first batch of PC server procurement projects in 2021-2022, the cumulative number of domestic chip servers based on domestic Huawei Kunpeng and Haiguang chips exceeded 49,000, accounting for 29.97% of the overall bidding volume of China Mobile in this batch. The supplementary procurement scale in March this year was about 41,004 units, all of which were servers using Kunpeng or Haiguang chips. In addition, domestic server bidding in the financial industry has also seen large orders. Among them, the bid for the Agricultural Bank of China Kunpeng PC server project was as much as 1.487 billion yuan; Shenzhou Digital also won the bid for the Bank of Communications Kunpeng server project on January 5, 2022, with the amount being approximately 87.5907 million yuan.

Financial information creation process is accelerating, and banks are the vanguard of financial information creation. Financial security is an important part of national security. The development of the financial information innovation industry started early and has been accelerating its pace since last year. Since the launch of the Inspur Tissot K1 small machine in 2013, my country's banking industry has begun to explore the application of independent controllable technologies.Under the leadership and policy guidance of superior institutions such as the China Banking Regulatory Commission and the Central Bank of , the financial field has been continuously successful in its independent and controllable practices, such as the implementation of "IOE" by Postal Savings Bank and Baixin Bank. At present, my country's financial industry information innovation and innovation have entered a stage of high-quality development and the market space is broad. As the pillar of the financial industry, the banking industry is also the "vanguard" of financial information innovation.

Large banks have taken financial technology as the focus of development, and have invested heavily in technology, and the distributed and domestic replacement of core systems are carried out simultaneously. Distributed core upgrades and transformation of peripheral systems are still key areas of investment by major banks. In the next five years, the market size of the Bank of China core business system will continue to maintain stable growth, and will show a rapid growth trend in the past two years. The current main driving factor comes from the downward construction of hosts in distributed transformation. In the process of host downward movement, we actively promote the adaptation of core applications and underlying domestic basic software and hardware. Through core transfer, domestic database adaptation, distributed technology middle platform construction and other work, we will create a cloud and digital base to meet the security requirements of independent and controllable while obtaining elastic cloud computing power support.

is based on the core system of domestic software and hardware to postal savings bank, marking a breakthrough in financial information innovation. On April 23, the new generation of distributed core system for personal business of Postal Savings Bank was put into production and launched. This system is the first among large banks to use enterprise-level business modeling and distributed microservice architecture, and is a new core personal business system based on domestic hardware, domestic operating systems and domestic databases. It is a major practice of independent and controllable key technologies in China's banking industry. After the system is launched, it can provide transaction processing capabilities of 2 billion transactions per day and 67,000 transactions per second for 637 million individual customers and 40,000 outlets in the bank. The core banking system has extremely high performance requirements for basic software and hardware. As one of the six state-owned banks, Postal Savings Bank has successfully launched a core system based on domestic software and hardware, marking that domestic software and hardware have passed the inspection of such complex business scenarios and is expected to be fully deployed in other industry applications.

The ecological construction of domestic operating systems is accelerating. According to the Kirin Software WeChat official account, as of May 2022, the total number of Kirin Software software and hardware compatibility adaptations is 428,385, of which the number of software compatible adaptations is 117,096, the number of hardware compatible adaptations is 311,289, and more than 5,200 cooperative manufacturers. The total number of registered users of the Kirin Software Eco-Adaptation Official Website has been 26,000+ registered users, and a total of 400,000+ compatible adaptations combinations have been launched for 5,200+ partners, setting a new height for the domestic operating system ecosystem. The market share of

domestic databases has increased significantly. Although overseas software giants represented by Oracle, Microsoft, and IBM still occupy a large share in my country's database market, the technical level of domestic databases is also improving rapidly, and they have the ability to replace foreign products in some fields. In 2021, the market share of domestic databases represented by , Huawei , Dameng, and Renmin University Jincang has significantly increased compared with 2019. The share of the four overseas manufacturers, Oracle, Microsoft, SAP and IBM, in my country's relationship database market has dropped from 66.8% to 48.5%. (Report source: Future Think Tank)

Benefiting from the continuous promotion of information and innovation, the revenue scale of information and innovation companies has rapidly expanded and their profitability has significantly improved. From 2019 to 2021, manufacturers in all links of the Information Technology Innovation Industry Chain achieved rapid growth in revenue. Except for middleware manufacturers, the revenue of Xinchuang companies in other fields doubled in 2021 compared with 2019. The profit scale of manufacturers such as Feiteng, Haiguang, and Dameng has expanded rapidly from 0 to 1. The high growth in Xinchuang's performance will also provide sufficient capital for its technological research and development and ecological construction, thereby further polishing its own products and accelerating the performance catching up.

Shenzhen has increased its efforts to promote information innovation products, and local information innovation promotion is expected to accelerate. On May 23, the Shenzhen Development and Reform Commission, the Shenzhen Municipal Bureau of Commerce, the Shenzhen Municipal Bureau of Industry and Information Technology and other departments jointly issued the "Several Measures of Shenzhen on Promoting the Continuous Recovery of Consumption" (hereinafter referred to as the "Measures").Among them, the Measures mentioned in the fifth part of "expanding the market size of information and innovation products", which specifically includes "increasing the promotion of information and innovation products" and "improving the proportion of information and innovation products application". Formulate a recommended catalog of information creation products, organize docking and exchange meetings, and provide subsidies to user units that purchase more than 500,000 yuan and meet the conditions at 3% of the purchase amount. Increase the application proportion of information technology products.

In principle, the procurement ratio of CITIC products for office systems and business systems will be added, and the procurement ratio of CITIC products will be no less than 20% in key areas such as finance, energy, education, medical care, telecommunications, and transportation will be added; the procurement ratio of CITIC products for key information infrastructure will be no less than 40% for party and government agencies, state-owned assets and state-owned enterprises. This time, Shenzhen regards Creation as one of the important measures to promote consumption recovery, and has clearly put forward the subsidy amount and the minimum Creation Procurement Ratio in key areas, which is the first time in the current policy documents. Shenzhen's measures may provide reference samples for other local governments, including information creation and innovation in measures to stabilize the economy and promote promotion fees. The policy for information creation product market dividend is expected to continue to be released, accelerating the pace of information creation and innovation promotion.

3.2 Intelligent driving: High-level autonomous driving ranges from 0 to 1, open the incremental market of automotive software

Autonomous driving vehicles quickly increase in volume, and China's growth rate is leading the world. According to IDC's forecast, the global shipment of L1-L5-level autonomous driving car is expected to reach about 54.25 million vehicles in 2024, with an average annual compound growth rate (CAGR) from 2020 to 2024; the market share of L1 and L2 autonomous driving in 2024 is expected to be 64.4% and 34.0% respectively. According to research by Morgan Chase, China's assisted driving and autonomous driving market size will achieve an average annual growth rate of 33% from now to 2025, and will reach about US$7.1 billion in 2025.

Autonomous driving is in a critical stage of leapfrog development from L2 to L3 level. Judging from the mass production planning of autonomous driving by major global automakers, 2020-2022 is a critical period for most automakers to break through the L3 level. At the L3 level, the system needs to completely take over the vehicle in specific scenarios, freeing the driver's hands, feet and eyes. This will greatly increase the complexity of system , which will correspondingly bring about a large demand for software and algorithms.

high-level assisted driving accelerates penetration, and L2 level becomes the standard configuration. As assisted driving functions are gradually mass-produced, passenger car assisted driving systems have become the industry standard, and single functions have gradually dropped to low-end models. In 2020, my country's passenger car assisted driving penetration rate is about 32%, and it is expected that the penetration rate may reach 65% in 2025. In 2020, the L1 class accounted for the highest proportion, about 20%; L2 class vehicles accounted for about 12%. However, the L1-level function has not played the maximum role of hardware. In addition, the rapid penetration of L2 and the reduction in cost, it is expected that passenger cars equipped with only L1-level functions will gradually decrease, and the L2-level function will gradually be replaced in the future. At the same time, with the continuous improvement of relevant road-mounted regulations on intelligent driving, L3-level conditional autonomous driving passenger cars are expected to be gradually implemented in 2023.

high computing power chip is a necessary support for the advancement of automotive intelligence. In the process of mass production and implementation of intelligent driving cars, there must be a hardware computing platform that can carry highly intelligent but huge computing power AI algorithms. Whether it is a hardware computing platform or a domain controller, it cannot be separated from the support of chips. From L1 to L5 levels, with the improvement of application functions and performance, higher demands are put forward for the computing power and performance of AI chips. At the same time, for each level of autonomous driving is increased, the computing power requirements are also increased by one level, and the L3 level is a watershed in the computing power requirements. According to data from Yiou Think Tank, the AI computing power required by L3 reaches 20TOPS, the AI computing power required by L4 is close to 400TOPS, and the AI computing power required by L5 is more stringent, reaching 4000+TOPS, which is ten times the magnitude of the L4 level.

High-level autonomous driving advances to advanced processes, and high-computing chips are accelerating their entry into the car. At present, chip manufacturers have started the "arms race" for computing power.Among the top players, Nvidia's Orin chip has a single computing power of 254TOPS, which has exceeded 10 times that of EyeQ5. Qualcomm, also a consumer electronic chip giant, has also launched the Snapdragon Ride platform. The computing power of a single chip is divided into four versions: 10, 20, 30, and 60TOPS. It can adopt a multi-chip combination solution and match it with a 300TOPS AI accelerator, the overall computing power can exceed 700TOPS. Both will be officially mass-produced in 2022. Nvidia Orin has successively won targeted major customers such as Ideal, NIO , Xiaopeng , and SAIC. The later Qualcomm Ride platform has also reached cooperation with large car manufacturers such as Great Wall, General Motors, and BMW . Domestic autonomous driving chip manufacturers Horizon and Hei Sesame will also achieve mass production of new products in 2022, with computing power exceeding 100TOPS.

Automotive electronic and electrical architecture is developing in a centralized manner, and both software and hardware architectures need to be upgraded. The industry generally recognizes the evolution direction of the distributed-domain centralized electronic and electrical architecture proposed by Bosch . In the next stage, with the further enhancement of the performance of the domain master processor, multiple different functional domains with similar requirements for the master processor can be further integrated into one functional domain. The E/E architecture is built around a computing platform in a larger area, based on one or several core computing platforms, that is, it is integrated into a "cross-domain centralized EE architecture".

With the popularization of high-level autonomous driving, higher signal transmission efficiency is required. The powerful central controller will play a greater role, concentrating the functional logic into 1 central controller, and the car becomes a supercomputing terminal. Electronic and electrical architecture upgrades will be the main direction in the next 2-3 years, which will also accelerate the introduction of domain controllers. The upgrade of automotive electronic and electrical architecture is mainly reflected in the three aspects of software architecture, hardware architecture, and communication architecture. The software architecture gradually realizes layered decoupling , and the hardware develops from distributed to domain control/central centralized development, and the backbone of the vehicle network develops from LIN/CAN bus to Ethernet .

At present, it is expected that most OEMs will still use the hybrid domain EEA architecture, that is, the centralization of some functional domains, forming a transition plan of "distributed ECU + domain controller", and finally forming a central supercomputer + architecture. This EEA evolution process may last 5-10 years. From the perspective of OEM planning, the smart cockpit domain, the autonomous driving domain, and the central control domain may become the three major incremental domains.

Under the trend of "software-defined cars", the cooperation model and value distribution between the original OEM and suppliers are also gradually changing, and the core value chain of the industry is in the process of reconstruction. As the E/E architecture is gradually upgraded to a centralized architecture, the decoupling of software and hardware is from the separation of the software application layer to the opening of the entire software architecture, and software has become a breakthrough for vehicle manufacturers to achieve innovation. At this time, vehicle manufacturers are no longer satisfied with the traditional "black box model", hoping to use this to transform the control function to realize the required software parts. Therefore, the vehicle manufacturers with independent research and development capabilities directly cooperate with Tier2 with software strength across Tier1, driving the transfer of Tier2 status to Tier1, breaking the original traditional vertical supply chain pattern, and developing into a flat mesh model. Software companies that were originally in the Tier2 position may jump to Tier1, or even Tier0.5, and may become strong competitors in the smart car industry chain.

With the increase in the degree of intelligent automobile networking, the proportion of software in the content structure of automobiles has gradually increased. According to McKinsey's forecast, the proportion of software-driven in the global automotive vehicle content structure will reach 30% by 2030. From the perspective of market size, the global automotive software market size will reach US$84 billion by 2030, of which the market size of operating systems and intermediate layers will reach US$8 billion, and the scale of related software functions such as infotainment and communications will reach US$18 billion.

China's total smart car software industry in 2022 is about 26.4 billion yuan, and it is expected to grow with the increase in the level of autonomous driving. At present, China's smart car software industry growth is mainly applied software, supplemented by system software growth.The main increase in application-based software is the autonomous driving of smart cars (assisted driving represented by automatic cruise ACC). The existing smart cockpit software has grown relatively steadily, and the growth of Internet of Vehicles software is also in a relatively infancy. The current development stage of autonomous driving in my country is L2-L3. The important difference from L2 to L3 is whether the road-end resources can be actively allocated. Therefore, the growth of the Internet of Vehicles Software and the autonomous driving software industry will grow together with the future construction of vehicle-road collaboration systems.

The rich application ecosystem of automotive software has great value space. The business model of smart car software is the "IP + solution + service" model. The charging model of Tier1 software supplier includes: (1) one-time R&D expense investment, purchase of software packages, such as ADAS/AD algorithm package; (2) bicycle software license fee (license), Royalty charges (divided by a certain proportion of the car shipment volume and unit price); (3) one-time R&D expenses and bicycle license package. Taking the software IP licensing fee as an example, according to Zosi Automotive estimates, if the extremely complex AD software is not considered, the current IP licensing fee for single-car software is at least 2,000-3,000 yuan. With the continuous increase in the complexity of smart cars' functions, the value of bicycle software license fees will continue to rise.

All regions have introduced stimulus policies for automobile consumption, and the intelligent driving industry chain is about to recover. In the first quarter of 2022, due to the suspension of work in Shanghai, Changchun and other places, automobile production and sales continued to be sluggish. Since April, policies to promote consumption have been intensively released. The central government has introduced policies such as "a new round of new energy vehicles going to the countryside" and "a phased reduction of some passenger car purchase tax of 60 billion yuan". Local governments have also issued specific implementation rules for promoting automobile consumption. At present, the pace of resumption of work and production of automobiles has accelerated, and the supply side has gradually returned to normal. The large reductions and subsidies provided by the automobile consumption promotion policy are expected to stimulate the growth of automobile sales, thus spreading to upstream intelligent driving solution providers. (Report source: Future Think Tank)

3.3 Server: Upstream and downstream data verify that the prosperity is recovering, "East and West Calculation" opens incremental space

Under the development of the digital economy, the scale of computing power continues to expand, and the server track is vast. In 2020, the total computing power scale in my country reached 135EFlops, accounting for about 31% of the world, maintaining a high growth of 55%, about 16 percentage points higher than the global growth rate. Among them, the basic computing power scale (FP32) reaches 77 EFlops, accounting for about 26% of the global share; the intelligent computing power scale (converted to FP32) reaches 56 EFlops, accounting for about 52% of the global share; the supercomputing computing power scale (converted to FP32) is about 2 EFlops, accounting for about 20% of the global share. With the continuous penetration of digital technology into all areas of the economy and society, the demand for computing power in the whole society is expected to continue to grow rapidly at a rate of more than 20% each year. The core bearing equipment of computing power is mainly composed of various terminals such as general servers and AI servers. The rapid growth of computing power will inevitably lead to the growth of server demand.

Aspeed monthly revenue growth rate returns to high. Aspeed (Taiwan Xinhua Technology) is the global leader in BMC chips, and its BMC chip shipments account for more than 70% of the world. Its BMC multimedia integrated circuit products have maintained revenue of more than 90% all year round, and the revenue structure is pure. Therefore, Aspeed's monthly revenue can be used as a forward-looking indicator for observing global server demand. Since August 2021, Aspeed's monthly revenue growth rate has rebounded year-on-year, and the previous recovery cycle occurred between mid-2019 and mid-2020. Since January 2022, Aspeed's monthly revenue growth rate has been above 30% year-on-year, and May's revenue has increased by 52.71% year-on-year. Aspeed revenue can usually reflect changes in the server market's prosperity 2-3 months in advance. The recent revenue maintains a high growth rate that indicates that a new round of server shipment peak may be coming.

Intel DCG department revenue growth also rebounded significantly. Intel's Data Center Business Unit (DCG) mainly provides x86 server CPUs, and its quarterly revenue can also be used as a leading indicator of server market demand. Since Q3 2021, Intel DCG department's revenue growth rate has returned to positive, and maintained steady growth in Q1 22, supporting the recovery of Aspeed's growth rate. reflects the upward trend of the server market.

Overseas cloud manufacturers' capital expenditures have grown rapidly and entered an expansion cycle in 2022. Server requirements are directly linked to the capital expenditure of cloud vendors.Judging from the changes in capital expenditure of cloud manufacturers in a single quarter, overseas cloud manufacturers' capital expenditure has remained above 20% since 2021, and the growth rate in Q1 in 22 years reached 29.52%, setting the tone of steady growth for the whole year. According to the Dell'Oro Group's forecast, data center spending for hyperscale cloud service providers is expected to surge by 30% in 2022; major cloud service providers will enter an expansion cycle in 2022. Top 10 cloud service providers plan to launch new data centers in more than 30 regions next year and will increase their investment in new server architectures and network upgrades, with data center capital expenditures expected by Top 4 cloud service providers (Amazon, Google, Meta and Microsoft) to exceed $20 billion in 2022.

Domestic Internet companies' capital expenditures stabilized and rebounded. The capital expenditure of domestic Internet giants Baidu, Alibaba and Tencent has also resumed high growth since Q4 21. In Q1 22, the total capital expenditure of the three companies of BAT reached 20.4 billion yuan, an increase of 21% year-on-year. Recently, policies have repeatedly emphasized "supporting the healthy development of the platform economy", and the platform economy policies have recovered, and it is expected that the capital expenditure of domestic Internet companies will return to high growth.

The public cloud market continues to grow rapidly, providing long-term driving force for the server market. According to IDC data, in the second half of 2021, the overall market size of China's public cloud services (IaaS/PaaS/SaaS) reached US$15.13 billion, of which the IaaS market increased by 40.1% year-on-year, and the PaaS market grew by 55.7%. In the next five years, China's public cloud market will continue to grow rapidly with a compound growth rate of 30.9%. It is expected that by 2026, the market size will reach US$105.76 billion, and the global share of China's public cloud service market will increase from 6.7% in 2021 to 9.9%.

Edge computing and AI inject new impetus into the development of the industry. According to IDC data, in the first half of 2021, the overall market size of China's edge computing servers reached US$1.33 billion, and is expected to reach US$3.31 billion by the end of 2021, an increase of 23.9% from 2020. From 2020 to 2025, the annual compound growth rate of China's edge computing server market size will reach 22.2%, higher than the global 20.2%. In the medium and long term, application scenarios such as the Internet of Things, artificial intelligence, Internet of Vehicles, and metaverse have strong demand for edge computing, which will drive the large-scale growth of edge server demand.

AI server is an important growth point in the server market. In the past few years, machine learning and artificial intelligence applications have become increasingly strict with computing power requirements, which has also led to the rapid growth of server markets for artificial intelligence scenarios such as GPUs and FPGAs, becoming an important growth point to drive the overall server market. IDC data shows that the global artificial intelligence server market size reached US$11.2 billion in 2020, and it is expected to resume strong growth before the epidemic from 2021 to 2022, with a growth rate of more than 20%. In the next five years, the AI server market will continue to grow rapidly, and the global AI server market is expected to reach US$26.6 billion in 2025.

"East and West Calculation" project has been fully launched, and eight computing power hubs and ten data center clusters are built. In May 2021, the National Development and Reform Commission, the Central Cyberspace Affairs Office, the Ministry of Industry and Information Technology, and the National Energy Administration jointly issued the "Implementation Plan for the Computing Power Hub of the National Integrated Large Data Center Collaborative Innovation System", which clearly proposed to lay out the national computing power network national hub nodes, launch and implement the "East Digital and West Computing" project, and build a national computing power network system. In February 2022, the National Development and Reform Commission approved the launch of the construction of national computing power hub nodes in eight places including Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu-Chongqing, Inner Mongolia, Guizhou, Gansu, and Ningxia, and planned 10 national data center clusters.

At this point, the national integrated big data center system has completed the overall layout design, marking the official launch of the "East Digital and West Calculation" project. According to the East Digital West Calculation Project Planning, businesses with high requirements for time delay such as industrial Internet, finance, telemedicine, and artificial intelligence reasoning can be deployed in eastern hubs such as the Beijing-Tianjin-Hebei, the Yangtze River Delta, and the Guangdong-Hong Kong-Macao Greater Bay Area. Western Data Center mainly deals with services such as background processing, offline analysis, storage and backup that do not require high latency.

"East and West Calculation" drives the expansion of the IDC industry and is expected to drive the growth of server demand. Servers account for about 70% of the data center hardware cost and are an important part of the data center infrastructure.With the planning and construction of data center clusters, the demand for servers is strongly supported, and the average shelf-up rate of data centers in the planned cluster must reach at least 65%, and server manufacturers are expected to benefit. In addition, the domestic production rate of the server market is still at a low level, and the increase in the domestic substitution ratio is a double benefit to domestic server manufacturers. Judging from the long-term progress of the policy, the calculation of the east and west will be a national long-term engineering plan, and its impact on the industry will be sustainable in the long run.

3.4 Industrial software: Long slope and thick snow track, welcoming the dual catalysis of intelligent manufacturing and domestic production

Under the background of intelligent manufacturing, my country's industrial software is accelerating its penetration. Industrial software is a technical means to ensure the refined and advanced development of the industrial foundation of manufacturing. It significantly improves industrial productivity and production efficiency through the realization of enterprise automation and digital R&D, management and control. It is the core element and important support for promoting the high-quality development of intelligent manufacturing and industrial Internet. Its advancedness determines the efficiency level of the industry. (Report source: Future Think Tank)

At present, my country is in the stage of transformation and upgrading from a manufacturing power to a manufacturing power. A series of industrial policies for "adjusting structure and promoting transformation" in the manufacturing industry are being implemented at a faster pace. At the same time, under the background of the gradual normalization of the new crown epidemic, manufacturing companies' willingness to build smart factories has increased significantly, and the domestic manufacturing industry's demand for industrial software has grown rapidly. According to IDC data, China's manufacturing IT expenditure will reach US$115.65 billion in 2021, and the CAGR will remain at 16.6% in the next five years, among which the industrial Internet and digital factories will become important driving forces for growth. As the core of digital and intelligent factories, industrial software is expected to accelerate penetration.

China's industrial software market size exceeds 200 billion, and the market space in the future is broad. According to statistics from the white paper on China's industrial software industry, my country's industrial software products achieved revenue of 197.4 billion yuan in 2020, an increase of 14.8%. According to Gartner data, the global industrial software market size in 2020 was approximately US$433.2 billion, equivalent to approximately RMB2989.1 billion. In 2020, the scale of my country's industrial software market accounted for about 6.6% of the global market. According to the share of my country's manufacturing added value accounting for more than 28% of the world, China's industrial software market still has about 5 times the growth space.

my country's industrial software penetration rate and domestic production rate are both low, and R&D and design software are the most boring. Most industrial software in my country is still in a critical stage of transition from introduced applications to independent research and development and the establishment of technological iteration capabilities. The penetration rate of industrial software is relatively low. In 2018, only ERP and CAX software are popular among enterprises exceed 50%. From the perspective of domestic production rate, the degree of domestic production of business management industrial software is relatively high, but R&D and design software is almost monopolized by foreign giants. In 2019, domestic industrial software had a market share of only 5% in R&D and design products, and production control products was only 50%. 3D high-end industrial software such as CAD, CAE, EDA, MES, PLC needs to be made urgently.

my country's production control industrial software technology level is small and foreign, and some fields have a replaceable foundation. In the DCS field, my country's central control technology accounts for 33.8% of the DCS market in 2021, and has a strong competitive advantage in process industries such as chemicals and petroleum. From 2011 to 2021, Zhongkong Technology ranked first in the domestic DCS market for nine consecutive years and its overall share. In the MES field, domestic mainstream manufacturers include Baoxin Software, Baichu Electronics, Dingjie Software, Nengke Co., Ltd., and Saiyi Information, which have established competitive advantages in specific vertical industries. For example, Baoxin Software ranks second in my country's MES market with a share of 7.6% in 2020 with its deep cultivation in the steel and metallurgy industries and its expansion in the pharmaceutical industry; Saiyi Information is unique in the fields of consumer electronics, home appliances, etc. The core of

production control software is to have an in-depth understanding of the industry's production process and to have a competitive advantage for the industry's knowledge-how. Referring to the competitive landscape of foreign production control software, we believe that domestic manufacturers will work hard in the advantageous sub-fields, and their respective leading companies will appear in different vertical industries.In the field of large-scale PLC, Baoxin Software has released large-scale PLC products for high-end metallurgy equipment process needs, striving to enter the first camp of PLC in the domestic metallurgical industry in 3-5 years, and gradually accelerate its promotion in other industries such as electricity.

R&D and design software technology gap is large, and the process of domesticization is still a long way to go. In the field of CAD, domestic 2D CAD products have basically been replaced by AutoCAD in the fields of construction, basic machinery manufacturing, etc., and have occupied a certain market share in China and overseas with their high cost-effectiveness advantages. In terms of 3D CAD, Zhongwang Software's 3D CAD products have certain market competitiveness in general machinery, 3C electronics, molds and other industries.

company's products are being upgraded and iterated. Recently, the company released the 2023 version of Zhongwang 3D, which has achieved technological breakthroughs and functional improvements in parameterized design, basic modeling, large assembly, etc., and has broken through G3 high-continuous surface modeling for the first time. In the future, it is expected to gradually expand the application scope of 3D CAD in-rail transportation, ships, intelligent construction, automobiles, aviation, aerospace and other large scenarios, high-precision and high-complexity fields. In the EDA field, Chinese enterprises are mainly in the second and third echelons. The global EDA industry is mainly monopolized by Kaideng Electronics, Xinsilicon and Siemens EDA. The above three companies belong to the first echelon with significant leading advantages, accounting for about 78% of the global market. Chinese companies such as Huada Jiutian are ranked second in the global EDA industry with their full-process tools in some fields or leading advantages in local fields. We believe that R&D and design software with a high degree of "bottleneck" is expected to become a key area for this round of domestic substitution, and subsequent capital and talent inflows are expected to accelerate. In the next 3-5 years, related companies are expected to achieve technological breakthroughs through independent R&D + industrial chain mergers and acquisitions.

"bottleneck" incidents occur frequently, and domestic substitution is imminent. Since the Sino-US trade frictions, ZTE, Huawei and Harbin Institute of Technology have successively encountered supply cuts. DJI Innovation Technology Co., Ltd., a top Chinese drone company, was banned from its account by American design software company Figma. As an important support for industrial manufacturing, industrial software will cause a major blow to the production of industrial enterprises once it is suspended. Against the backdrop of international political conflicts, the demand for independent control of industrial software is becoming increasingly prominent. To this end, my country has continued to increase its policy support for domestic industrial software in recent years. The Ministry of Industry and Information Technology's "14th Five-Year Plan for Software and Information Technology Service Industry Development" pointed out that software is the soul of a new generation of information technology, the foundation of the development of the digital economy, and the key support for the construction of a strong manufacturing country, a strong cyber country, and a digital China. The main tasks proposed by the plan include focusing on breakthroughs in industrial software.

software legalization policy is becoming stricter, creating effective market demand. In December 2021, the State Copyright Administration issued the "14th Five-Year Plan for Copyright Work", which put forward clear requirements for the legalization of industrial software and clearly included industrial design software in the scope of software authentication. With the increase in the awareness of intellectual property protection in the whole society, the intellectual property legal protection system is gradually improving. Copyright protection departments at all levels are actively promoting the genuine software work. Companies that use large amounts of unlegal authorized software will gradually turn to using genuine software, creating huge effective market demand for industrial software suppliers.

The major official media spoke out about industrial software, and subsequent policies are expected to continue to increase. On May 25, 2022, People's Daily published two important articles: "In the past ten years, the software industry has accelerated innovation and resilience" and "Let more domestic software show their skills." Industrial software is the key content of the article, mentioning: "The performance of domestic three-dimensional CAD (computer-aided design) products has reached the international medium level", "China Wang Longteng, Zhejiang Zhongkong and other industrial software have been listed on the Science and Technology Innovation Board one after another." The official media once again highlighted the strategic position of industrial software, and subsequent favorable policies are expected to continue to be implemented.

This round of epidemic is coming to an end, and the resumption of work and production has brought about marginal improvement in demand. In the first half of 2022, the epidemic occurred in many first- and second-tier cities such as Shenzhen and Shanghai, which had a certain impact on the on-site implementation of some intelligent manufacturing projects, and at the same time, the demand side of small and medium-sized enterprises was damaged. From June 1, Shanghai will resume work, production and market in an orderly manner, cancel the white list of resumption of work and production, and issue an action plan to accelerate economic recovery and revitalization, and "50" new policies to protect enterprises, employment, promote consumption, and stabilize the economy.Beijing issued the "Implementation Plan for Coordinating Epidemic Prevention and Control and Stabilizing Economic Growth" on June 2, and the epidemic is currently under basically control. As this round of epidemic is coming to an end, policies ensure the resumption of work and production, and it is expected that the manufacturing industry will recover at an accelerated pace, and the implementation and delivery of industrial software will return to normal, and downstream demand is also expected to improve marginally. (Report source: Future Think Tank)

4 Investment Analysis

"The 14th Five-Year Plan for Digital Economy Development" proposes clear development goals, and the implementation policies in various sub-sectors are worth looking forward to. It is currently recommended to grasp the dual main lines of digital industrialization and industrial digitalization, and pay attention to sub-sectors with high downstream prosperity and greater penetration and room for improvement.

Innovation: With the verification of large-scale shipment, the Innovation products are in the stage of transformation from available to easy-to-use. At present, the Party and government information creation has been further deepened, from electronic document information creation to electronic government information creation, and is expected to sink to county and township governments; the implementation cases of information creation in industries such as telecommunications and finance have increased rapidly, opening up broad market space. The frequent occurrence of Sino-US trade frictions and overseas geopolitical conflicts may become catalysts, accelerating the promotion of the information and innovation industry.

Intelligent driving: The industry is in a period of rapid change, and the L2-level ADAS loading rate is rapidly increasing. In 2022, large computing power chips such as Qualcomm and NVIDIA are accelerating their launch, which may become the first year of mass production of L3-level models. As the automotive E/E architecture develops to a centralized domain, the demand for software such as automotive operating systems and middleware is highlighted, and automotive software manufacturers are expected to benefit. Recently, the automobile consumption promotion policies have formed a strong catalysis, and the recovery of downstream automobile sales is expected to be transmitted to the upstream, and the prosperity of the intelligent driving industry chain has improved marginally.

Server: core infrastructure of the digital economy, upstream and downstream data of the industrial chain prompts the upward and upstream and downstream data of the server industry to rise, and the east and west calculations open up incremental space. Since January 2022, Aspeed's monthly revenue growth rate has been above 30% year-on-year, and May's revenue increased by 52.71% year-on-year, and Intel's DCG department revenue growth rate has returned to positive. The capital expenditure of downstream cloud manufacturers has expanded, while the capital expenditure growth rate of domestic and foreign cloud manufacturers in Q1 is above 20%. The "East Digital and West Calculation" project has been fully launched, bringing server demand and expansion. With the development of the digital economy, demand for computing power has surged, and medium- and long-term demand growth is sustainable.

Industrial software: dual logic of intelligent manufacturing and domestic production, industrial development is expected to accelerate with policy support. Industrial software is the only way for my country to move from a "manufacturing power" to a "manufacturing power". At present, the degree of localization of high-end industrial software in my country is still relatively low, and core technologies need to be caught up and broken through. With the strong support of policies, domestic industrial software is expected to accelerate the technological upgrade on the supply side, and the penetration rate on the demand side is expected to increase rapidly.

(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