As of June 2, 2022, the telecommunications business segment PE-TTM was 38.03x, lower than the historical valuation median 43.65x, and at the 29.61% historical quantile.

(report producer/analyst: Changjiang Securities Yu Haining Huang Tianyou Zu Shengteng Li Ye)

Review of the communications industry in the first half of the year

As of June 2, 2022, the Yangtze Telecommunications business index fell by 17.28%, slightly underperforming market , and ranked 19th among the 32 first-level industries in the Yangtze River.

Since the beginning of 2022, due to the outbreak of epidemics in many places, global geopolitical conflicts, and Federal Reserve balance sheet reduction, the market has shown a comprehensive decline, and the communications sector has continued to weaken; after the market bottomed out on April 26, thanks to the gradual strengthening of expectations of resumption of work and production, the sector has entered the oversold rebound stage.

From the perspective of the sub-sectors, operators, submarine cable new energy, and integrated communication sub-sectors outperformed the market, with the three gains being 5.78%, 1.57%, and -4.72% respectively. Operators have overall sectoral rise. On the one hand, China Mobile returns to A to drive sector upwards, and on the other hand, it is the defensiveness of operators to stabilize dividends, making them a high-quality asset with prominent allocation value in the market downward period; the prosperity of the submarine cable new energy sector is highly certain, and relevant policies are released to catalyze, driving sector rise; the rise of the integrated communications sector is mainly due to the epidemic driving the online office trend, and individual stocks such as 1 network have fully benefited.

in stages, during the market downturn, the sub-sectors with the highest declines were smart cars, Internet of Things, and optical device ; after entering the oversold rebound stage, except for the IDC sector, all sub-sectors with the original decline higher than the market achieved double-digit gains, and the sub-sectors with the most obvious rebound were smart cars, sub-sectors, and Internet of Things. We believe that the difference in rebound strength may reflect the market's judgment on subsequent prosperity, that is, the rebound with higher prosperity is greater. In terms of valuation, since the market weakened at the beginning of 2022, the valuation of the telecommunications business sector has continued to decline.

As of June 2, 2022, the PE-TTM of the telecommunications business segment (except ZTE and the three major operators) was 38.03x, which was lower than the historical valuation median 43.65x, and was at the 29.61% historical quantile. By sector, the sectors that are still in a larger range of valuation than at the beginning of 2022 are optical devices and Beidou . The current two are still in a larger range of valuation than at the beginning of the year.

operator: The old and new kinetic energy are put into force, and profitability is expected to improve

policy is further loosened, and the industry environment continues to improve.

2019 The industry ushered in a number of major changes such as the cancellation of "unlimited" packages, the transformation of market assessment mechanisms, and the co-construction and sharing. The three major operators have moved from competition to competition and cooperation. This year's government work report has also not provided guidance on "speeding up and fee reduction" for the first time in six years. In 2017, my country mentioned "speeding up and fee reduction" in its government work report for the first time, and has made arrangements for five consecutive years. However, since 2020, the government work report no longer emphasizes mobile traffic fee reduction, and this year's government work report has not made any arrangements for "speeding up and fee reduction", and the industry environment continues to improve.

Traditional businesses continue to improve, and emerging businesses have become the main force in growth.

As the three major operators move towards competition and cooperation, the decline in traffic tariffs has gradually narrowed, but DOU still maintains a considerable growth rate of year-on-year . The decline in growth rate from January to April 2022 may be caused by the repeated epidemic, resulting in a decrease in consumer travel activities. The number of users has increased steadily, and the penetration rate of 5G users has steadily increased, driving ARPU to accelerate year-on-year improvement. From January to April 2022, the emerging business revenue of the three major operators increased by by 35% year-on-year, and the growth continued to accelerate.

Judging from the development of cloud business in 2021, China Telecom and China Mobile cloud businesses achieved year-on-year growth of 102% and 114% respectively, which was far higher than Alibaba Cloud 's year-on-year growth rate of 30%. Operators have taken advantage of their unique channels and qualification advantages to lead other cloud players in Zhengwu Cloud 's market share.

G Long investment cycle , the profitability of benchmarking 2G is expected to improve.

From the comparison of return on investment period in different network generations in China, 2G is about 16 years long, 3G and 4G are shorter, only about 5 years, while 5G return on investment cycle is expected to be extended to a 10-year dimension. By reviewing the operator's past operation data, we found that the proportion of depreciation and amortization and the ARPU trend are the two major factors affecting operators' profitability. The proportion of depreciation and amortization in the end of

2G declined significantly, and its profitability increased significantly, while the profitability declined during the G period; the ARPU of China Mobile's mobile business declined significantly during the entire 3G period. Although the proportion of depreciation and amortization did not change much during the period, its 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, which will drive the increase in net profit margin and ROE.

dividend improvement guidelines are clear, and the configuration value is further highlighted.

In recent years, operators' dividend rate has shown a steady increase. China Mobile and China Telecom have made a clear commitment to "the dividend rate will increase to more than 70% within three years from 2021", demonstrating management's confidence in the company's future operating performance.

In addition, looking at the total shareholder returns (TSRs) of 23 operators worldwide in the past 10 years, more than half of the operators' trademarks' dividend returns exceed their share price appreciation returns, indicating that the determined dividend returns are the core income items of investment operators. (Report source: Yuanzhan Think Tank)

Beidou: The civilian product market is blooming everywhere, and the military product market cycle is upward

China attaches great importance to the construction and development of Beidou system . Since the 1980s, it has explored the development path of satellite navigation system that suits the national conditions, forming a "three-step" development strategy: by the end of 2000, the Beidou-1 system was built to provide services to China; by the end of 2012, the Beidou-2 system was built to provide services to Asia-Pacific region ; in 2020, the Beidou-3 system was built to provide services to the world. By 2035, the Beidou system will be used as the core to build a more ubiquitous, more integrated and smarter national comprehensive positioning navigation and timing (PNT) system.

According to customer group, the Beidou industry can be divided into two major markets: military products and civilian products. military products market is mainly aimed at special institutions, mainly including individual handheld positioning navigation terminals, vehicle-mounted, carrier-based, air-based, and ship-based positioning navigation components; in addition, positioning navigation equipment of fire protection, public security, judicial and other agencies are also included in this list. The civil market is mainly divided into mass markets with low precision (above 1m) and industry markets with high precision (above 1m).

As the degree of intelligence in various industries continues to improve, its demand for high-precision position information is becoming increasingly strong. The accurate absolute position information provided by high-precision satellite positioning is an indispensable part.

High-precision positioning: a high-quality growth track with long slopes and thick snow

Minpian high-precision market is showing a trend of ubiquitousness and scale, and is a high-quality growth track with long slopes and thick snow. The civilian product market has lower requirements for autonomy and safety than military products, so its cyclical attributes are weaker.

Overall, the high-precision market boomed from 2013 to 2021, with a CAGR of 27%. At present, Beidou is widely combined with intelligent information technology, and in the form of "Beidou + Intelligence", it has gradually penetrated into emerging markets such as transportation, logistics, agriculture, and robots, forming many application fields such as intelligent transportation, smart agriculture, smart pipelines, intelligent driving, and intelligent control.

As the trend of intelligence in various industries continues to improve, its demand for high-precision position information is becoming stronger and stronger. Minpin's high-precision market continues to expand new application scenarios, and its industry has the growth characteristics of "long slopes and thick snow".

is located at the mid-2022 time point: three high-precision positioning application scenarios: passenger car autonomous driving, precise agriculture, and deformation monitoring. The leader in integrating high-precision positioning: Huace Navigation.

Autonomous driving is about to break out, and the battle for fixed-points is in full swing. intelligence is expected to take on new energy and become another major opportunity for passenger car transformation.Many car companies have launched intelligent driving models with high-precision positioning functions at the end of 2021, and the above models are expected to be delivered in large quantities in 2022. With the continuous improvement of technology and laws and regulations, we expect more models with intelligent driving functions to be implemented from 2022 to 2023, and the intelligent driving level is expected to steadily increase. With its powerful performance and controllable cost, high-precision positioning is expected to become the standard feature of intelligent driving vehicles for L3 and above.

calculation 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 in 2020-2025 account for more than 50% of the total car sales of that year.

We assume that by 2025, the penetration rate of new passenger cars' self-driving L3 and above will be 26%, and the penetration rate of high-precision positioning will be 26%; 2) We expect that the value of passenger cars' high-precision positioning unit bicycles will be 2,000 yuan in 2021, and there will be a certain price drop every year after that; without considering the possibility of existing passenger cars assemble high-precision navigation and positioning equipment, we expect that in 2025, the market space for domestic passenger cars' high-precision navigation and positioning equipment driven by autonomous driving will be approximately 6.3 billion yuan, and the cumulative market space from 2021 to 2025 will be approximately 14.5 billion yuan.

Agricultural machinery Beidou terminal price is expected to stabilize, and the industry scale is expected to return to the high growth track . In 2020, the sales growth rate of agricultural machinery Beidou terminal is relatively high, and many manufacturers are pouring in. In 2021, some manufacturers adjusted their sales strategies and significantly reduced the price of terminal products, resulting in negative growth in the industry scale.

We believe that after experiencing the price war cleaning in 2021, the competitive landscape of the terminal market of the agricultural machinery Beidou has been greatly optimized, which coincides with some key enterprises having financing needs. Therefore, the possibility of a large-scale price war again in 2022 is relatively low. The terminal prices of the agricultural machinery Beidou are expected to stabilize, and the industry scale is expected to return to high growth.

According to the data disclosed in China's Agricultural Machinery Industry Yearbook, the stock of medium and large agricultural tractors in my country in 2019 was 4.44 million; according to the data released by CSNC 2021 Annual Meeting, the sales of my country's automatic agricultural machinery navigation systems from 2018 to 2020 were 8345, 16984 and 40824 sets respectively. As of the end of 2020, the stock of automatic agricultural machinery navigation systems in my country was 73,000 sets.

Based on the above known information and data, we make the following assumptions: (1) Since 2019, the annual growth rate of large and medium-sized agricultural tractor stocks will be 3% from 2020 to 2025; (2) The penetration rate of the agricultural machinery automatic navigation system in the stock market for large and medium-sized agricultural tractor stocks will be 13,000 yuan; (3) The average price of the agricultural machinery automatic navigation and driving system in 2021 will be 13,000 yuan, and the annual price will be reduced by 10% from 22 to 23, and the subsequent annual price will be reduced by 5%. Based on this, we calculate that the annual sales of agricultural machinery automatic navigation systems in 2025 will be about 2.21,000 sets, and the market size will be about 2.12 billion yuan.

reservoir dam monitoring is expected to be implemented in 2022, becoming another important application scenario in the deformation monitoring market. According to data from the National Bureau of Statistics, as of 2020, there were 774 large reservoirs in my country, 4,098 medium-sized reservoirs, and 93,694 small reservoirs.

Referring to the construction case of Huace Navigation, we assume that the average base station + monitoring points required for large reservoirs is 30, medium-sized ones and small ones, then the number of main monitoring stations required is close to 350,000, which is estimated at a single point price of 12,500 yuan. The corresponding market size for the application scenario of reservoir dams is close to 4.3 billion yuan. Considering that the technologies used in various application scenarios for deformation monitoring are similar, we assume that Huace has a share of 40% in the water conservancy dam monitoring market, the company's potential total revenue in the dam monitoring market is about 1.7 billion yuan.

Military Beidou: Beidou’s ten-year cycle is coming again

By reviewing the Beidou construction cycle and the performance of Beidou-related companies, we found that the two are related to each other. On the eve of the Beidou system update and iteration, the Beidou navigation business segment was under significant pressure. The revenue CAGR of Beidou navigation related business in 2008-2010 was 20% and 11% respectively.

After the completion of the Beidou network in 2012, the growth rate of Beidou business of Haige Communications and Zhenxin Technology has significantly accelerated. The revenue CAGR of Beidou navigation related businesses in 2011-2015 was 97% and 41% respectively, and the Beidou navigation business has a significant correlation with the Beidou system construction cycle.

There are historical limitations in the North Second Period, and orders for special institutions in the North Third Period are expected to increase significantly. Beiyi is an experimental system. Special institutional customers have not purchased large-scale projects. Their demand will begin to be released after the Beiyi network is completed, resulting in the rapid growth of Beidou navigation business in the industry. We believe that the above logic may be repeated during the period when the Beidou second generation switches to the third generation, and the cumulative demand of special institutions in the later stage of the North Second stage may be released in the early stage of the North Third stage. In addition, 2015 was the time when special institutions reform and Beisan began networking, which may lead to special institutions suspending the procurement of Beidou navigation products from 2015.

We believe that the above historical reasons may lead to explosive pressure on Beidou navigation equipment. The penetration rate of Beidou navigation equipment may still be at a low level, and the demand for Beidou navigation products has not been fully released. Orders for special institutions in the North Third Period are expected to increase significantly.

The growth rate of related businesses has been significantly accelerated in the second year after the Beidou system iteration. Order acquisition in the special institutional customer market can be mainly divided into two stages: pre-research and type research. Fighting for pre-research qualification is the first step in striving for a type of research qualification, and striving for a type of research qualification is the first step in striving for an order. Considering the large differences between products, and strong opacity, from the perspective of the historical growth rate of Beidou related businesses of Haige Communications and Zhenxin Technology, we believe that the second year after the Beidou system networking may be a year that the number of related new equipment products will increase significantly.

With the completion of the Beisan Network in 2020, the 2021-2022 special institutions are tested to end, and the Beidou business of related companies is expected to usher in high growth in the second half of 2022. The leader in military Beidou: Haig Communications.

optical module : Shutong's high prosperity is determined, the industry upgrade trend continues

Shutong's upstream outlook is optimistic, and the introduction of new platforms is worth looking forward to

Xinhua's revenue continues to hit a new high, and the prosperity of Shutong's industry chain continues to improve: 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 prosperity. From a historical perspective, Xinhua's revenue trend has led the server market for about 1-2 quarters. From the perspective of monthly trends, since 2022, Xinhua's revenue has continued to improve month-on-month , with a new revenue scale in April reaching a new high, with a year-on-year growth rate of 61%, and a year-on-year growth rate of 55% from January to April, reflecting the continued improvement of the prosperity of the industrial chain.

Marvell Digital Communication business is mainly driven by Inphi, which can reflect the prosperity of Dutong's high-end modules for a forward-looking reflection of Dutong's high-end modules: In October 2020, Marvell announced that it would invest US$10 billion to acquire Inphi, the leader in optical module chips at a high premium. Inphi, as the main supplier of upstream electric chips in the optical module industry chain, the electric chip products basically cover all application scenarios of optical modules, with a market share of 60%+. It is expected that its chip market share of high-speed digital communication modules such as 200G/400G may reach 80%, and its DSP PAM The chip market is leading, and optical module manufacturers usually prepare stocks in advance, so their revenue situation and outlook have strong forward-looking guidance on the demand for downstream high-speed optical modules. Judging from the quarterly revenue trend, Inphi is ahead of Zhongji Xuchuang, the leading optical module manufacturer, about 2 quarters.

Marvell's latest financial quarter digital communication business is optimistic, and Inphi-related product business is the main driving force: Recently, Marvell announced its 23Q1 fiscal quarter (February-April) results, of which the data center business achieved revenue of US$640 million, and increased by 12% month-on-month and 131% year-on-year. After considering the impact of the acquisition of Inphi, the year-on-year growth rate under comparable caliber is expected to be at a higher level.When the Inphi business was consolidated from May to July 21, we estimated that its revenue accounted for about one-third of the revenue of Marvell Digital Communication business (the rest of the Digital Communication business includes embedded processors, switches ASIC chips, storage, etc.). Considering that Marvell's original Digital Communication business is relatively slow to grow, we expect that the year-on-year growth rate of the Inphi business in the latest fiscal quarter (February to April) may be within the range of 50-100%, fully reflecting the high prosperity of the Digital Communication optical module market. Marvell's latest financial quarter data center business orders continue to grow at a high rate.

Marvell Guide May-July (Q2 fiscal quarter) Digital Communication business will maintain month-on-month growth, with a year-on-year growth rate of about 50%, among which cloud business customers are the main driving force and the growth rate is faster. At the same time, the pressure on the supply chain side may lead to a backlog of Q2 Digital Communication orders, and the subsequent Q3/Q4 financial quarter Digital Communication business is expected to accelerate again.

22Q1 Intel data center business performed strongly, and the new digital communication CPU is expected to ship in scale: Intel also recently disclosed 22Q1 performance, and the revenue of data center and artificial intelligence business increased by 22% year-on-year. The company guided the business to continue strong growth in Q2.

In addition, at the recent Intel On Industry Innovation Summit, the company announced that more shipments of the fourth generation Xeon processor Sapphire Rapids may be available this year. Sapphire Rapids is based on Intel 7 process technology and is equipped with new technologies such as PCIe5.0, CXL1.1, DDR5 and HBM, which is expected to drive industrial upgrading and expansion. The upgrade trend of

module continues, and the product is expected to be high-end.

's pursuit of cost and power consumption efficiency is the core factor driving module iteration: cost and power consumption have always been the core pain points of optical interconnection within the data center. The average optical module evolves every 4 years or so, with a cost per bit dropping by half and a power consumption per bit dropping by half. This law is also called the "optical Moore's Law" in the field of optoelectronics. Entering the 400G era, the cost per bit will gradually drop to US$1/G, and the power consumption per bit dropping by about 0.03W/G. We judge that with the continuous evolution of "Optical Moore's Law", the optical module will continue to maintain a short upgrade iteration cycle.

switching chip technology evolution is the main driving force for the upgrade of digital optical modules. commercial switch chip field, Broadcom has always dominated the market share of 70%+.

Since 2010, Broadcom's commercial switching chip capacity has been around 2 years (the 25.6T switching capacity chip was launched in December 2019), and larger-capacity switches have brought about an upgrade in switch port rate, which in turn drives the iteration of optical module solutions with higher transmission rates.

upgrade trend analysis: 400G main upward wave vertex has not reached, 200G scale explosion is started, and the new cycle of 800G is gradually progressing.

21 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 considerably in 22 years, the application customer base will expand, and the overall shipment cycle will be lengthened (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 22 years, 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 small-scale 800G shipments, and leading cloud merchants will take the lead in deployment.

According to our model, the market size of 100G and above in 20/21/22 is 37%/3%/32%, with a significant increase in 22 years. Referring to the prediction of LC, structural upgrades are still the main theme of the optical module industry, and by 25 years, the market size of 800G modules will account for 20%. (Report source: Yuanzhan Think Tank)

IoT industry chain: The industry is booming, and sectors are growing rapidly

From the industry perspective, the Internet of Things industry is still in a period of industry development dividends, and the industry growth rate is strong. With the continuous enrichment of IoT connection technology, it fully meets the different demands for speed and power consumption in downstream scenarios, and the continuous increase in IoT support policies, the number of IoT connections is showing an explosive trend.

According to IoT Analytics' forecast, more than 27 billion connected devices are expected to be connected by 2025, and the number of global IoT device connections will continue to grow rapidly at a compound growth rate of 22% from 2021 to 2025. Despite the long-term impact of chip shortage and COVID-19 on the supply chain in 2020, IoT Analytics lowered its forecast for the total number of IoT devices in 2025 (the forecast for 30.9 billion units in 2020), the global IoT market has still shown rapid growth this year.

IoT sector maintains a high prosperity. From the domestic situation, under the support of national policies and the active layout of the three major operators, my country's Internet of Things industry has grown rapidly. From 2017 to 2021, the number of cellular connections of the three major operators increased from 271 million to 1.399 billion, with a CAGR of up to 50.74% during the period. Although demand slowed down due to the impact of the epidemic and the withdrawal of 2G and 3G in 2020, the growth rate of the number of Internet of Things’ existing connections slowed down. In 2021, the number of Internet of Things’ existing connections accelerated significantly compared with 2020. As of the end of March 2022, the number of cellular connections of the three major operators reached 1.518 billion, an increase of 119 million from the end of 2021.

According to iResearch Consulting data, China's IoT device connection volume is expected to grow from 900 million in 2016 to 7.4 billion in 2020, with a CAGR of 69.1%. The GAGR of IoT device connection volume will reach 15.5% from 2021 to 2025, and the long-term growth trend of the IoT industry remains unchanged.

communication module: Internet of Things sector certainty, high prosperity track

According to the cellular IoT module model, technologies such as NB-IoT, LTE-M and 4G Cat.1 have promoted the large-scale application of cellular IoT in the past few years; looking forward to the future, the global cellular IoT market will transition from 4G to 5G in the remaining time of this decade. This transition will be faster than the transition from 2G/3G to LPWA/4G in the IoT field. According to the Counterpoint forecast report, 5G will become the absolute main force in 2030, especially since 2023, the shipment of 5G modules will grow the fastest among all standards, with an annual compound growth rate of 60%.

"Every east and fall in the west", domestic module manufacturers have dominated. IoT modules have a high degree of standardization, and the product technology is mainly determined by the chips used, and the technical barriers are relatively low.

plus 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, the market share of Yiyuan Communications, Meige Intelligent and Rihai Intelligent in 2021Q4 was 26.6%, 6.6%, and 6.2%, respectively, corresponding to the first, third and fifth positions. We believe that just as the 5G industry chain moves eastward, foreign manufacturers will gradually withdraw from the communication module market in the future, and domestic manufacturers are expected to benefit from global expansion.

upstream pattern is gradually dispersed, downstream applications are broad, and the bargaining power of the head modules is improved. upstream chips account for more than 50% of the module composition cost. With the rise of domestic chip manufacturers Unigroup Zhanrui , Aojie Technology, etc., 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 2021Q4 released by Counterpoint, the fields that bring the highest revenue to module manufacturers are smart meter, router/CPE, POS machines and industrial fields, with a wide range of applications. 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 top advantages of leading manufacturers are constantly emerging.

from the downstream scenario dimension. Since the industry development, large-scale application scenarios such as smart meters and wireless payment have appeared. Currently, several tens of million-level connected scenarios such as the Internet of Vehicles, smart meters, and smart retail account for a large proportion of the market and maintain continuous growth.

We are following several high-prosperity application scenarios as examples:

Vehicle market: The vehicle front-mounted vehicle loading rate has steadily increased. According to the monitoring data of the Gaogong Intelligent Automobile Research Institute, the domestic market's new cars (independent + joint venture brands) have a pre-installed standard vehicle module of 12.6516 million yuan from January to December 2021, of which the pre-installed loading rate of 57.74% from January to November 2021. In the next two years, 4G vehicle networking will still be in the mainstream position, but 5G will usher in a period of rapid growth. It is estimated that by 2025, the domestic new vehicle networking capacity will exceed 90%.

With the rapid development of new technologies such as 5G and C-V2X, in-vehicle communication modules have also ushered in an important opportunity for a new round of market growth and product prices to increase. Module manufacturers change from providing a single 4G module to providing integrated modules such as 4G+V2X, 5G+C-V2X, 5G+C-V2X+GNSS, smart modules, etc., or increase their own software capabilities, thereby increasing the unit price and gross profit space of the product.

Currently, the integrated in-vehicle communication module (including 5G, V2X, GNSS, WIFI functions) has a bicycle value of more than 1,200 yuan.

CPE market: According to the 5G Internet of Things Alliance data, the global shipment of 5G CPE in 2021 will reach 15 million units. It is expected that the compound growth rate of 5G CPE shipments by 2025 will be 68%, reaching 120 million units in 2025, with a market size of 60 billion yuan. As an important market for 5G CPE, China's 5G CPE shipments reached 6.75 million units in 2021 and are expected to reach 80 million units in 2025, with a market size of 27 billion yuan, with a rapid growth.

Intelligent controller: a huge market, domestic substitution acceleration

Intelligent controller industry application fields are vast and the market capacity is huge.

According to Sullivan data, the market size of China's smart controllers reached 1.90 trillion yuan in 2018, and is expected to reach 3.36 trillion yuan in 2023. The average annual compound growth rate is expected to remain above 10% during the period from 2021 to 2023. According to the downstream industry classification of

, in 2018, among the China Electronics Intelligent Controller Industry Classified Products, the largest share of automotive electronics intelligent controller products, at 23.6%; followed by household appliance controllers, accounting for 13.2%; the market size of power tools and equipment intelligent controllers, smart building and home smart controllers, and health and care intelligent controllers accounted for 11.8%, 10.3%, and 3.5% respectively.

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 engineers bonus . The excellent delivery capability and response speed have enabled domestic controller manufacturers to obtain a large number of incremental orders for overseas transfers.

intelligent controller complexity is increased, and the outsourcing ratio may be further improved, and professional intelligent controller manufacturers are expected to benefit. At first, the controller was mainly self-sufficient by terminal manufacturers. With the subsequent development of the industry, terminal manufacturers gradually transitioned from self-producing to outsourcing of some components, thereby improving the quality of the controller while reducing the operating production costs of the enterprise.

Due to the overall impact of upstream raw materials prices and shortages last year, the growth rate of the controller industry has slowed down. In the long run, the trend of transferring the industrial chain to China, specialized division of labor and increasing 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. The impact of the industry on the rise and shortage of raw materials this year has eased. In the first half of the year, due to the impact of the external environment such as the epidemic and war, the growth of downstream demand for home appliances and tools has slowed down. As the epidemic situation slows down and the impact on supply chain and demand is eased, we expect the industry prosperity to rebound significantly in the second half of the year.

New energy: Offshore wind power Prosperity is determined, grasp the high-quality benefit links

Offshore wind power space is huge, the 14th Five-Year Plan clearly states that my country's offshore wind power has huge potential for development, and sea wind resources are close to provinces with large electricity use: offshore wind power has large capacity, can be developed continuously, is not subject to land resources, and does not need to consider the construction of West-to-East Power Transmission transmission lines, so there is huge potential for future development. From the demand side, my country's offshore wind energy resources are mainly located in eastern coastal provinces, such as Jiangsu, Fujian, Zhejiang, Guangdong, etc. The above provinces have high electricity loads, which provides sufficient market space for my country's large-scale development of offshore wind power.

my country's potential development space for offshore wind power may reach 3500GW, and the large offshore wind power base is planned to be nearly 300GW: From the perspective of resources, my country's coastline length reaches 18,000 kilometers, and it is rich in offshore resources.

According to the analysis of offshore wind power resource development volume with a water depth of 0-50 meters in the "China Wind Power Development Roadmap 2050", in the offshore water depth of 0-20 meters and 20-50 meters, the 100-meter-high wind energy resource development volume is 496GW and 1127GW, respectively, and the annual operating hours can reach more than 4,000 hours. And with the gradual maturity and promotion of floating basic technology, the China Wind Energy Association evaluates that my country's offshore wind resource technology development potential is expected to exceed 3500GW in the medium and long term.

In November 2021, the China Water Planning Institute will plan to focus on five offshore wind power bases of tens of millions of kilowatts in Shandong Peninsula, the Yangtze River Delta, southern Fujian, eastern Guangdong and Beibu Gulf, with a total capacity of up to 290GW.

Sea Breeze TCO has a clear path to reduce costs, and the era of sea breeze parity is coming: after the national subsidy is withdrawn in 21, the yield rate of offshore wind power projects will face downward pressure, forcing the supply chain to continue to reduce costs, helping offshore wind power to achieve a smooth transition through the Internet parity. According to Shanghai Electric's forecast, offshore wind power cost reduction space may be more than 30% in the next two years, among which wind turbines are the core of cost reduction.

whole machine factory is expected to reduce the cost of wind turbines by developing high-power units, optimizing the design of existing units, upgrading the supply chain, transportation, manufacturing and other links, and the cost reduction space is expected to reach about 35%. Other links include foundations, hoisting, electrical equipment, and operation and maintenance.

my country's sea breeze is developing rapidly, and the 14th Five-Year Plans of each province have made it clear: Affected by the subsidy reduction in slope in 2021, my country's offshore wind power has experienced a "rush to install". According to data from the National Energy Administration, my country's new installed capacity of offshore wind power in 2021 reached 16.9GW, with a cumulative installed capacity of nearly 26.38GW. Global offshore wind power achieved a new grid connection of 21.1 GW in 2021 (more than triple that of 2020), the highest installed capacity in history, with China's offshore wind power increment accounting for 80% of the world. Under the guidance of the "dual carbon" goal, coastal provinces have increased their investment in offshore wind power. According to statistics from the Polaris Wind Power Grid, the near-range offshore wind power plan of coastal provinces and cities has exceeded 150GW, of which the 14th Five-Year Plan may exceed 60GW. Under the catalysis of provincial supplementary catalysis, the construction of sea breeze in Shandong has accelerated: In April 2022, the deputy director of the Shandong Provincial Energy Bureau stated that the provincial finance will provide subsidies for the "14th Five-Year Plan" offshore wind power projects that will be completed and connected to the grid from 2022 to 2024, respectively, at the standards of 800 yuan, 500 yuan and 300 yuan per kilowatt. As May begins, the progress of projects in Shandong has accelerated, and projects of a certain size may be installed and connected to the grid within the year to obtain more preferential subsidies.

submarine cable is a high-quality track with high barriers + good growth

submarine cable has significant growth attributes and relatively stable pattern, which is a high-quality link in the sea breeze track:

We judge that with the development of large-capacity and deep sea projects in the future, the value of submarine cables in a single offshore wind farm is expected to increase:

1) With the expansion of the wind farm scale, the proportion of high-voltage output cables increases;

2) The popularization of deep sea projects, the output cable length increases;

3) After the fan specifications are improved, the specifications of array submarine cables for power transmission between the fans are improved.

In addition, the complex production process of submarine cables, high technical requirements and strict location requirements have built high barriers to the submarine cable link. At present, the domestic submarine cable pattern is relatively stable, mainly including Zhongtian Technology, Oriental Cable, and Hengtong Optoelectronics. From the data disclosed by Oriental Cable and Zhongtian Submarine Cable, it can be seen that the gross profit margin of submarine cable business usually reaches 30%-50%, several times that of land cables.

IDC Industry chain: Supply-side reform under the background of "East and West Calculation"

industry has not changed for the long-term high prosperity trend.

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 2021, the overall scale of China's overall IDC business market exceeded 300 billion yuan, reaching 301.27 billion yuan, a year-on-year increase of 34.6%, which slowed down compared with 43.3% in 2020; the scale of my country's IDC market continues to expand and gradually develops to a mature stage, with year-on-year growth slowing down, but it will still maintain a growth of more than 20% in the future.

The demand for innovation in the cloud and consumer Internet is an important driving force for the development of the IDC industry in the near future. In the past few years, the development and innovation of consumer Internet, including e-commerce, games, short videos, etc., have brought massive data storage and processing demands, and the IDC market has grown accordingly. However, the growth of users in e-commerce, games, etc. has slowed down, and public cloud has become the main driving force for the development of data centers. In recent years, although China's public cloud market has maintained a rapid growth of more than 50%, the proportion of public cloud investment in enterprise IT deployment is still less than 30%, far lower than that of developed countries.

Therefore, in the future, China's public cloud market will continue to grow rapidly, with an average annual growth rate of more than 35%, becoming the main driving force for the growth of the IDC industry in the next 2-3 years.

"East and West Calculation" project has been launched, and policies have promoted the development of the IDC industry.

On February 17, 2022, 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 a document agreeing to start 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, Ningxia, and 10 national data center clusters have been planned. At this point, the overall layout design of the national integrated big data center system has been completed, and the "East Digital and West Calculation" project has been officially launched. The "East Digital and West Calculation" project is expected to guide funds to invest in hub nodes and directly drive data center investment and construction. According to our review, the clusters or regions such as Zhangjiakou, Shaoguan, Chongqing, Tianfu, Gui'an, Qingyang, Zhongwei, and Helinger have given relatively specific data center construction goals during the 14th Five-Year Plan period.

According to statistics from the National Development and Reform Commission, since the beginning of the year, 25 new projects have been started among the 10 national data center clusters across the country, with a data center scale of 540,000 standard racks, with a computing power of more than 135 billion floating-point operations per second, which is about 27 million personal computers, driving investments in all aspects of more than 190 billion yuan. Among them, investment in the western region increased by 6 times compared with the same period last year, and investment generally showed a good trend of transfer from east to west. It is expected that during the 14th Five-Year Plan period, investment in big data centers will also grow at a rate of more than 20% per year, and the cumulative investment in all aspects will exceed 3 trillion yuan.

The past low-price competition is expected to end, and the new sign price rebounds are expected. Take the rental prices of Wanguo Data and Century Internet as examples. The average monthly rental price of Wanguo Data cabinets is generally declining, mainly because of: 1) changes in downstream customer structure and an increase in the proportion of wholesale customers; 2) New infrastructure has brought about a surge in supply. In order to seize market share and digest the built cabinets as soon as possible, the company has adopted a low-price strategy.

Century Internet's most cabinets are located in the core urban areas of Beijing, Shanghai, Guangzhou and Shenzhen. They master the core area cabinets of many cities, have the first-mover advantage, and continue to enjoy the improvement of the resource value of IDC in the core location; secondly, Century Internet's downstream customers are mainly retail customers, and the customer concentration is low, so they have stronger bargaining power for downstream customers.

We expect that in the future, the cabinet prices will show an upward trend in the event of insufficient supply side.

focuses on the industry opportunities of the IDC industry chain under the background of "East Numbers and West Calculation" and carbon neutrality. From the supply side, the IDC industry has entered the "investment overheating" stage since the second half of 2020, and cabinet prices in second- and third-tier cities are under pressure.

Currently, 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, 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. Supply-side structural reforms, long-tail enterprises will be quickly cleared, accelerating the stability of leading manufacturers.

In addition, the "East Digital and West Computing" project is expected to significantly drive the demand for computing power in the central and western regions. New supply and acceptance demand will be added in the western hub areas to form a big data cluster to undertake long-distance transfer of some demand.

Enterprise Communications: The epidemic catalyzing the rapid development of the industry

Lack of user usage 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 and communicate online, and has completed forced cultivation of user habits of enterprise communication products, successfully crossed 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.

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 office 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 dissipates, business activities will gradually return to normal, and the 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 hard terminal highlights communication performance, and 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 successfully released.

cloud-based soft terminal products are more easy to deploy and low investment, and are less difficult to promote than hard terminal products, and are expected to benefit first. 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 completes user habit cultivation.

At the company level, taking Yilian Network, the leader in corporate communications, as an example: In 2021, the company achieved operating income of 3.684 billion yuan, a year-on-year increase of 33.76%, and net profit attributable to shareholders of 1.616 billion yuan, a year-on-year increase of 26.38%. We believe that as the impact of the global COVID-19 epidemic gradually eases, the general trend of the company's market demand continues to recover.

Looking forward to 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.

report summary

outlook 22H2. With the advancement of resumption of work and production, market sentiment is expected to recover. Through historical review, we believe that the communications industry has gradually moved from self-self to selflessness, has a strong track with endogenous alpha and high certainty in short-term demand, and has a certain valuation tolerance for individual stocks in the strong track.

key companies in the industry:

(1) Beidou: Beisan network has been completed, special institutions orders are expected to increase significantly, with strong certainty, and sectors are expected to see high growth in 2022, including Haige Communications and Huace Navigation;

(2) Intelligent Driving: As one of the next generation of 5G smart terminals, smart cars benefit from the increased penetration rate of new energy vehicles and huge market space.With the implementation of the policy, L3 is expected to quickly move towards mass production, focusing on high-precision positioning, communication modules, connectors, intelligent controllers, etc., Huace Navigation, Guanghetong, Yiyuan Communications, Tuobang Shares, Heertai;

(3) Digital Optical Module: The growth of the sector is still considerable, the overseas prosperity is determined, Tianfu Communications, Zhongji Xuchuang, Xinyisheng;

(4) New Energy: The 14th Five-Year Plan is clear, the offshore wind power prosperity is determined, and the high-quality benefit links are grasped, Zhongtian Technology.

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