In the past decade, China's X86 server market has flourished, and the industry status of local suppliers has also continued to improve. In 2020, the total revenue has accounted for 80% of the entire market. But we believe that the glory of the industry in the past decade is not the end: Although demand for Internet cloud manufacturers slowed down in the short term, the long-term hardware expansion trend remains unchanged, the construction of private clouds on government and enterprises has remained positive, and the long-term growth logic of the industry is clear and stable. In the short term, we believe that the supply side pattern in the Chinese server market may change. Combined with the current attractive valuation, we reiterate our optimism about investment opportunities in the server industry.
Summary
Demand side conclusion: Cloud computing customers have slowed down in the short term but there are signs of bottoming out, and the government and enterprise side remains positive. detailed look: 1) cloud computing customer side, Internet enterprise server procurement has entered the inventory digestion stage after 2Q20 high growth. The total capital expenditure of leading enterprises in 2Q21 declined year-on-year compared with , but we believe that the long-term trend of hardware expansion of Internet manufacturers remains unchanged, and demand is expected to begin to recover in the second half of the year; operators are also expected to continue to play their pipeline advantages in the mobile communication field and play the role of cloud computing infrastructure providers. We believe that the centralized procurement of servers in 2021 is expected to maintain growth; 2) From the government-enterprise side, although the government server procurement volume is constrained by the large number of IaaS layers in the early stage and the limited space for stock replacement, due to the overall government cloud market growth rate, the hardware share has not declined significantly, and we believe that it is still expected to bring stable demand. On the enterprise side, we believe that the financial industry has become an important growth driver for the X86 server market, and the preferences of banks, securities and other companies for private clouds will continue to benefit server procurement.
supply side conclusion: White label manufacturers in Taiwan in mainland China have limited impact on brand owners ; Huawei short-term chip procurement may have an impact on the share of other suppliers; supply chain shows that the business performance of server manufacturers in the second half of the year is improving. detailed: 1) The market is skeptical about the competitive barriers of local brands on China's cloud computing customer side, but we believe that local server companies such as Inspur , which operate in the JDM model rely on their early deep binding with customers and continuous meticulous research and development and production, resulting in the local advantages of the pure "white brand" model, and the profitability and market share of brands can be maintained; 2) As China's third largest local server supplier in 2020, Huawei may not be smooth in short-term chip procurement. The impact on the share of other suppliers, and the subsequent market competition pattern remains to be seen; 3) From the supply chain perspective, when the inventory of server enterprises 1H21 reaches a high level, the performance of CPU and BMC chip manufacturers in the first half of the year was still dull due to the production capacity , and Intel and Aspeed both gave optimistic performance guidance for the second half of the year, and the related memory prices also remained strong. We believe this provides a confirmation for the demand for server terminals.
risk
China's cloud computing industry development is lower than expected; new infrastructure construction is lower than expected, and trade frictions.
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China Server Market: Ten years of glory is not the end point, Five Questions and Five Answers in the future
Industry has flourished in the past decade, and local enterprises have dominated
The past decade has been a decade of booming development in the Chinese server market. As the cloud computing concept with the core goal of reducing costs and increasing efficiency has gradually been accepted by people and the popularization of virtualization technology, X86 server provides users with standardized hardware equipment and effectively establishes a shared resource pool, thus becoming the core driving force for the growth of the server industry in the past decade. China's X86 server industry has also shown rapid growth: shipments have increased from 740,000 units in 2011 to 3.44 million units in 2020; the market size has increased from US$2 billion in 2011 to US$22 billion in 2020. In addition, we also see that local server suppliers have become the most important part of the Chinese server market. compared with IBM/Dell /HP Overseas top three accounts for 80% of China's market share (by revenue), ten years later, the top three in China's server market have been occupied by local companies (Inspur, Huawei and New H3 ). Different companies also play an important role in their respective segments (such as Inspur in the cloud computing market, Huawei in the operator/government and enterprise market, etc.).
Chart 1: Chinese server manufacturer strength matrix (by application, 2020)
Source: Gartner, CICC Research Department Note: *** represents the top competitor in the market, ** represents the main competitor in the market, * represents the participant in the market, and * represents the participant in the market at the current time. Why do we recommend Chinese server manufacturers?
First, the long-term growth logic of the industry is clear and stable, and the glory of the past ten years is not the end. On the demand side, we believe that the unchanging trend of customers on the cloud is still the unchanging driving force for the growth of China's server industry. According to the industry segmentation: 1) Internet: Although Internet cloud manufacturers are under pressure in the short term, we see that the development of Chinese cloud manufacturers is still 5 years behind overseas development, and the strength of infrastructure investment in still has a large difference, and there is a broad room for server demand to grow; 2) Operator: We believe that with the help of our own "pipeline" advantages, operators are still The support for government and enterprise customers to go to the cloud is one of the important buyers of cloud computing's underlying hardware. The recent centralized procurement data also reflects the continued positive willingness of operators to purchase servers; 3) Government and enterprise: On the government, although most of the early government cloud construction is concentrated at the infrastructure level, and we believe that the market space for replacing the share of overseas suppliers in the server stock is limited, the recent emergence of concepts such as "state-owned cloud" also reflects the sensitivity of government customers to data security. We believe that government client server procurement is expected to remain stable. For corporate customers, we believe that server procurement in the financial industry is expected to dominate both in terms of growth rate and absolute scale, and financial customers prefer to build private cloud features, which is also expected to continue to benefit server demand. On the supply side, we also see that Chinese server suppliers are deeply bound to customers in various segments and have built high competitive barriers, especially on the cloud computing customer side with a fast growth rate and a high market share, the white card model of ODM has not seen eroding the market share of domestic leading brand server suppliers . We expect that in 2025, the market revenue of China's server industry is expected to reach US$42.9 billion, shipments are expected to reach 4.96 million units, the market is expected to maintain steady growth, and local companies are expected to benefit fully.
Chart 2: China's server market growth forecast
Source: IDC, CICC Research Department
Second, the short-term server factory business performance improvement is high, and the valuation level is at a low level. In the context of mobile phones and consumer electronic products, , and hardware inventory may face adjustments, We believe that the operating conditions of server manufacturers are expected to show a significant marginal improvement, and strong fundamentals may drive the stock price rebound: , in the first half of this year, due to the restriction of supply of some key chips, storage hard disks or other electronic components, and the weak growth of capital expenditure of cloud manufacturers, the overall performance of Chinese server companies is relatively weak. But we also see that the above-mentioned manufacturers and suppliers have a strong willingness to stock parts, and can produce them as much as possible, and the inventory level continues to rise. We believe that this aspect continues to provide evidence for the demand side of China's server industry. As the supply chain problems gradually ease in the second half of the year, the performance of China's server supply business in 2H21 is expected to usher in an accelerated release.
provides more solid evidence support for the above short-term and medium- and long-term views. In the following, we will answer five questions that the market is more concerned about one by one, analyze the characteristics of server demand in each sub-sector from the demand side in detail, and attach a discussion on the changes in the supply-side pattern.
Investment risks :
Demand Side #1: Where has the capital expenditure cycle of Chinese cloud manufacturers gone?
Overseas cloud manufacturers have a three-year cycle. The investment level is now stable. China temporarily faces weakness in the short term
Overseas cloud manufacturers have a capital expenditure cycle of about three years, and the investment level has stabilized. From 2013 to 2021, the capital expenditure of leading overseas cloud computing manufacturers maintained growth. We believe that it is mainly based on the following three reasons: (1) Cloud computing is developing rapidly, and the demand for workload and data storage drives Internet manufacturers to increase investment in data centers; (2) Consumer Internet businesses such as game film and television are in a period of prosperity, further increasing the demand for data centers. At the same time, the capital expenditure of overseas leading cloud computing manufacturers is also showing volatility in the growth channel, and also shows a cycle of about three years. We believe that the main reason behind it is that cloud vendor capital expenditure is related to the economic cycle and the change cycle of server core hardware CPUs. As the most core component of the server host and the highest cost ratio, we believe that its replacement and upgrade will drive cloud manufacturers to invest further capital; in addition to existing replacement, CPU changes have also promoted the continuous expansion of the market size of cloud computing infrastructure such as servers.
has experienced more than ten years of development, and with the hardware deployment of cloud computing infrastructure for leading enterprises, it has gradually reached the scale effect. We see that the capital expenditure cycle of cloud manufacturers has flattened since 1Q19, but due to the impact of the new crown epidemic in 2020, demand for remote office interaction expansion and other requirements continue to expand, and the growth rate of capital expenditure of cloud manufacturers continues to rise. Among them, Amazon capital expenditure significantly outperformed other companies in 2020. We believe that the main reason may be related to the rapid growth of e-commerce business under the influence of the epidemic (as shown in Figure 4, its IaaS share has not increased significantly). At present, we see that overseas cloud manufacturers keep 35%-40% of their operating cash in capital expenditure investment (as shown in Figure 5).
Chart 3: Capital expenditure of leading overseas cloud computing manufacturers is cyclical (labeled as the release time of each generation of Intel CPU)
Source: Bloomberg Information, Company Announcement, CICC Research Department
Chart 4: Judging from the market share of global IaaS manufacturers, Amazon The market share in 2020 did not increase but decreased
Source: Gartner, CICC Research Department
Figure 5: The operations of leading overseas cloud computing companies have stabilized, and 35%-40% of operating cash has been maintained for capital expenditure investment
Source: Bloomberg Information, Company Announcement, CICC Research Department
At present, the leading local cloud computing service providers in China are mainly Internet companies. The establishment of Chinese Internet cloud manufacturers was later than overseas, and it was not until after 2010 that leading companies began to form large-scale revenue. After 2017, cloud manufacturers ushered in explosive revenue growth. We believe that the main reasons are the support of a good policy environment, the accelerated development of China's Internet industry, and the superposition of a large number of factors that traditional companies have access to the cloud. Judging from the investment cycle , we believe that China's Internet cloud vendor business is expanding rapidly, with a capital expenditure cycle being relatively short, about 2 years being a full cycle (such as 1Q18-4Q19).In the recent cycle, we believe that the year-on-year growth rate of capital expenditure of China's cloud manufacturers in 2021 is still under pressure. The main reason is that from 2Q20, under the influence of the new crown epidemic, my country's digital transformation of accelerates and consumers accelerate their use of online services to drive the rapid growth of the demand side. Due to the supply chain security considerations under the background of the epidemic, cloud manufacturers have led to a peak in hardware procurement, resulting in a high capital expenditure base of 2Q20-4Q20.
Chart 6: Capital expenditure of Chinese cloud manufacturers is temporarily facing weakness
Source: Bloomberg Information, Company Announcement, CICC Research Department Note: The sample includes Alibaba, Tencent, Baidu, JD.com and NetEase
Cloud vendors have broad business development prospects, and long-term server demand is worry-free
Chinese cloud vendors still have broad business development space, and the short-term cloud vendor capital expenditure growth rate will not affect the long-term server procurement demand. compares Alibaba Cloud 's revenue in 2020 with AWS, we believe that the position of in the life cycle of lags overseas by at least 5 years, and the penetration rate of in China's cloud computing is still far behind that of in comparison with overseas. As the cloud computing market continues to develop, we see that the cash flow of major cloud manufacturers in China's operating is increasing year by year, which is conducive to cloud manufacturers' continuous increase in infrastructure investment. At the same time, local governments have introduced a series of policies to promote new infrastructure, and cloud manufacturers have responded positively. Based on the three-party data, Frost Sullivan predicts that the growth rate of China's cloud computing market in the future will remain relatively fast. It is expected that the total scale of China's cloud computing market in 2024 can reach 368.1 billion yuan, of which the scale of the underlying IaaS is close to 250 billion yuan. We believe that the above-mentioned long-term trends with high certainty will become the driving force for Internet cloud manufacturers to purchase servers.
In terms of relative investment level, currently the capital expenditure of major cloud manufacturers in my country accounts for only 3%-4% of revenue, and capital expenditure accounts for about 15% of operating cash flow. Compared with the steady-state level of 35%-40% overseas, we believe that the investment intensity of Chinese cloud manufacturers in still has a lot of room for growth, which is beneficial to the procurement demand of related servers.
Chart 7: Alibaba Cloud's revenue and AWS in 2020 15 years of level is comparable
Source: Company Announcement, Bloomberg Information, CICC Research Department
Chart 8: China's cloud computing penetration rate lags behind the global
Source: Gartner, Bloomberg Information, CICC Research Department
Chart 9: In 2020, the capital expenditure ratio of major Internet cloud manufacturers in China is about 4%
Data comes Source: Company announcement, Bloomberg Information, CICC Research Department Note: Samples include Alibaba, Tencent, Baidu, JD.com and NetEase
Chart 10: In 2020, the proportion of capital expenditure of major Internet cloud manufacturers in China's operating cash flow was around 15%
Source: Company announcement, Bloomberg Information, CICC Research Department Note: Samples include Alibaba, Tencent, Baidu, JD.com and NetEase
Demand side #2: How to view the procurement driving force of operators and government-enterprise sides?
operator: a major player in the cloud computing infrastructure market, and the short-term server procurement demand is positive
telecom operators are important players in the cloud computing market infrastructure market. We believe that operators have natural network advantages, and existing fixed network resources are expected to become a good pipeline between cloud data centers, saving a lot of bandwidth costs; on the other hand, operators have rich off-the-shelf IDCh resources, and are expected to quickly and agilely deploy cloud computing infrastructure (such as on-the-shelf servers). In the era of cloud computing, we believe that the business transformation method chosen by most operators is to first integrate and virtualize IT resources, and then gradually build the private cloud within the operator or participate in the construction of private cloud or public cloud for government-enterprise customers. In our opinion, the demand for operators to purchase servers does not conflict with customers: in government cloud computing, there is a way for government self-producing hardware and operators to be system integrators and purchase ; and on the side of enterprise customers, operators, as providers of cloud computing hardware, are expected to become an important support for enterprise customers to go to the cloud., for example, China Telecom , as the number one operator in the world, has high-quality government and enterprise resources, and the cloud computing business is developing rapidly. "Tianyi Cloud" was officially established in March this year. In the 2020 annual report, China Telecom also emphasized the optimization of the capital expenditure structure. In 2021, the company's network infrastructure investment will decline year-on-year, while capital expenditure in industrial digitalization increased significantly by 67% year-on-year, mainly for the layout of cloud and IDC infrastructure. China Telecom plans to deploy 100,000 servers in 2021 and expand the deployment of MEC/edge cloud services. In terms of China Mobile , the company also disclosed in its latest A-share prospectus that it plans to invest nearly 10% of the funds raised in cloud resource new infrastructure construction projects.
Judging from the data on the centralized procurement of the three major operators, the demand for operator server procurement in 2021 is still expected to remain strong. As of August 2021, the number of server procurement of the three major operators in China summarized based on public bidding information has reached 101,000 units, and the total procurement amount has reached 12.84 billion yuan. In comparison, the annual centralized procurement amount in 2020 was 25.07 billion yuan, and the annual centralized procurement amount in 2019 was 12.93 billion yuan. We believe that when server procurement has not yet been launched in the second half of the year, the existing bidding data shows that the demand for server procurement on operators is positive in 2021, and it is expected to maintain a strong trend throughout the year.
Chart 11: Bidding status of server procurement of three major operators
Source: Official websites of each company, CICC Research Department
Government: Government cloud-related server procurement remains stable, smart cities have become the new driving force
Similar to other industries, the Chinese government is also accelerating the construction of digital transformation. We believe that the government's digitalization mainly includes digital government affairs and smart cities, and helps improve government work efficiency in many applications such as taxation, finance, legal prosecution, human resources and social security, market supervision, and public infrastructure. We believe that the main way to realize digital government affairs is government cloud computing. According to iResearch Consulting data, the scale of China's government cloud market reached 52.8 billion yuan in 2019, and achieved rapid growth under the driving force of policy dividend from 2017 to 2019. The CAGR reached 27.5% from 2017 to 2019; and with the decline in local government fiscal expenditure in 2020, the growth of government cloud slightly slowed down; as China's economy gradually returned to normal levels, iResearch Consulting believes that the government cloud market is expected to exceed 100 billion yuan, and the overall market size can reach 111.4 billion yuan by 2023, and the CAGR was 21.7% from 2020 to 2023.
Chart 12: China's government cloud market size and forecast
Source: iResearch Consulting, CICC Research Department
Chart 13: China Government Cloud Market Split (2019)
Source: iResearch Consulting, CICC Research Department
Considering data supervision and security requirements, government agencies generally want to deploy controllable and fully dominant cloud service . Therefore, government cloud infrastructure is mainly built on private cloud or proprietary cloud. From the perspective of hardware purchasers, also adopts the method of directly conducting public bidding or business negotiations by the government. Judging from the situation in previous years, we believe that the construction and service of the infrastructure as a service layer (IaaS) is one of the important ways to implement early government cloud projects. From the perspective of platform as a service (PaaS) and software as a service (SaaS), the scale of its project implementation is limited. Since the development direction of cloud platform resources is more efficiently used, we believe that looking forward, the proportion of the "PaaS + SaaS" layer in the overall government cloud is expected to continue to increase. In the future, the software development of the government cloud market is expected to outperform the hardware, that is, to complete the transformation from "on the cloud" to "on the cloud". However, as the overall government cloud market growth rate is still high, the hardware share is still around 30% (as shown in Figure 14), and the recent emergence of hot topics such as "State-owned Cloud" also reflects the government's sensitivity to data and the importance of building its own cloud computing infrastructure. We still believe that the demand for servers of government cloud is expected to maintain steady growth.
View the existing market space rationally. According to IDC data, the government shipments of the Chinese X86 server market in 2020 were about 400,000 units.By volume split, Huawei and other five local companies have a share of nearly 80% (the share of local brands in government non-X86 architecture servers should be higher). We believe that the main reason is that the government has increased its requirements for cloud infrastructure hardware security, and has begun to adopt domestic server products on a large scale. Considering that the server replacement cycle is about 3-5 years, we believe that the government-side server ownership is 1 million units + the order of magnitude, while the stock share of overseas suppliers is around 20%-30%. If we consider the extreme situation of all replacements, we believe that the overall X86 server's stock replacement market space on the government side is more than one billion US dollars (assuming the unit price is $5,500). To the three-year dimension, the annual replacement space is $400-500 million, accounting for only about 10% of the new market. Therefore, we believe that unlike PC's large-scale replacement purchase of complete machine, the existing replacement demand of government procurement servers should be viewed rationally.
Chart 14: The share of the government cloud segment (2018)
Source: Forward-looking Industry Research Institute, CICC Research Department
Chart 15: China X86 server market government industry share (2020)
Source: IDC, CICC Research Department
Smart cities are expected to become the new driving force for government server procurement. Smart cities are built on data, while servers are the physical carriers of data, and they play an irreplaceable role in storing and analyzing data. We believe that with the advancement of new infrastructure policies, cloud computing infrastructure is expected to become an important support for smart cities. Although smart city construction requires collaboration among multiple industries, it is also inseparable from the government's own data centers. The construction of smart cities is expected to promote the continued growth of government-side server procurement demand.
Finance: Cloud computing is developing rapidly, and the financial industry has become an important role in server procurement
Ten years ago, because financial IT systems (especially the banking industry) have high requirements for reliability, financial institutions have adopted a more stable and prudent attitude towards IT construction (such as using the relatively ancient language programming language COBOL, etc.). Its IT industry chain is monopolized by three overseas companies, IOE (IBM whole machine + ORACLE database + EMC storage), and the hardware form is mainly large/small machine. But after 2013, we saw that the IT system supply chain began to shift to China in . In addition, the software level continued to develop, domestic manufacturers began to replace large/small machines in the form of X86 clusters, and the monopoly situation of IOE began to be gradually broken, and companies such as Lenovo , Inspur have gradually become the main suppliers of servers in China's financial industry.
Supported by the rapid growth of IT expenditure in the financial industry, my country's financial industry has now become an important major server demand category. According to IDC data, in 2020, the shipment of X86 servers in China's financial industry reached 319,000 units, a year-on-year increase of 22%, and the market size reached US$2.5 billion, a year-on-year increase of 30%, ranking fourth in each application market. In terms of growth rate, the year-on-year growth rate of the server market size in the financial industry in 2020 was second only to the Internet industry, and the growth rate of shipments ranked first. shows that the financial industry has become an important driving force for the growth of China's server market.
banking industry is the absolute main force in server procurement, and the relevant growth momentum continues. From the perspective of IT expenditure structure in China's financial industry, according to IDC data, banking expenditures in 2018 had an absolute advantage in scale, reaching 76%. We believe that the increase in server procurement in the future of the banking industry will still be considerable. In addition to the existing X86 servers continuing to replace large and small machines (as shown in Figure 17, the proportion of RISC/EPIC architecture servers in the banking industry is still large), the investment in financial technology funds is also expected to become an additional driving force for server procurement. iResearch Consulting predicts that from 2019 to 2023, the proportion of technical capital investment in the financial industry of Bank of China will continue to be more than 60%, and related banking companies are also actively establishing relevant subsidiaries (as shown in Figure 19), actively responding to the "Guiding Opinions on the Development Plan of the "13th Five-Year Plan for Banking Information Technology" and other relevant national policies.
Chart 16: IT Expenditure Structure of China's Financial Industry (2018)
Source: IDC, CICC Research Department
Chart 17: In 2020, the revenue of RISC/EPIC servers in China's financial industry reached 50% of the overall RISC/EPIC server market revenue
Source: IDC, CICC Research Department
Chart 18: China's banking industry technology expenditure continues to grow from 2019 to 2023
Source: iResearch Consulting, CICC Research Department
Chart 19: A list of financial technology subsidiaries established by the banking industry
Source: Toubao Research, CICC Research Department
Other financial institutions will maintain their preference for private clouds, which is beneficial to server procurement. We believe that other financial businesses (such as insurance, securities, etc.) except banks are also special (with high requirements for security, speed, etc.). Their core businesses and important sensitive data are basically retained on the private cloud. While going to the cloud, they maintain good control over IT resources and data. Only some insensitive businesses are deployed on the public cloud to maximize IT cost efficiency. According to the calculations of the Toubao Research Institute, from the end of 2018, 80% of Chinese financial institutions use private cloud deployment. We believe that building a private cloud is the main situation not only applies to the banking industry with huge absolute value of IT expenditures ( CCB , Ping An Bank , etc. all prefer to build private clouds, and also open redundant computing resources to small and medium-sized enterprises at the same time), is also applicable to the securities and insurance industry , which will continue to occupy an increasing proportion of IT expenditures in the future (we will continue to use data to support it). Continuous deployment of private clouds is expected to become a solid driving force for server procurement in the financial industry.
Chart 20: The proportion of three cloud deployment methods of Chinese financial institutions in 2018
Source: Toubao Research, CICC Research Department
Chart 21: Global Financial Industry IT Expenditure Structure Forecast (2022E)
Source: IDC, CICC Research Department
Take securities companies as an example. On the policy side, we see that the China Securities Association has been calling on securities companies to increase investment in financial technology, and for the first time since 2018, the investment in securities company information system construction will be included in the annual securities company operating performance evaluation. We believe that with the continuous expansion of securities companies' business, there is a demand for cloud access to their trading systems, account systems and peripheral channels, and IT hardware urgently needs to expand capacity. From the data side, according to the disclosure of the China Securities Association, the overall investment in in China's securities industry achieved accelerated growth in 2020, with an amount exceeding 25 billion yuan. In terms of the number of information technology personnel in securities companies, some institutions have exceeded 1,000 information personnel. We believe that the above statistics show the determination of securities companies to digitally transform, and as the scale of their own IT construction continues to expand, 's self-built private cloud is expected to become a way to maximize investment cost efficiency in the future, and securities companies are also expected to become the procurement driver of servers. For the insurance industry, we believe that related companies prefer to deploy private clouds.
Chart 22: China's securities industry's information technology investment achieves accelerated growth in 2020
Source: China Securities Association, CICC Research Department
Chart 23: The number of information technology personnel in major securities companies in China has increased rapidly
Source: Wande Information, Company Announcement, CICC Research Department
Chart 24: The level of information technology investment in major securities companies in China has increased rapidly
Source: Wande Information, Company Announcement, CICC Research Department
Supply Side #1: White Brand vs Brand, who will win in the Chinese market?
ODM model has emerged overseas, and cloud computing has changed the competitive landscape of server suppliers
The so-called "white brand server" is ODM (Original Design Manufacturer, original design manufacturer), and customized assembled and shipped products according to customer needs.Previously, ODM manufacturers only carried out production and manufacturing work for the design of brand server customers (i.e. Level 1-Level 5 links shown in Figure 25). With the emergence of cloud computing service providers, server demand is more inclined to be low-cost and customized. Now ODM manufacturers have begun to provide Level 6 and above services (such as motherboard design, rack-level design, system testing, etc.), and "white brand servers" are becoming an important part of the server market.
Chart 25: Server manufacturing level split
Source: AMAX, CICC Research Department
Cloud computing market is growing rapidly, especially the expansion of the public cloud market has caused changes in the overall ecology of the server market. In the past, server brand owners were the most critical link in the entire industrial chain. Since we are directly facing enterprises rather than cloud computing service providers, our client software capabilities are weak and there are few huge purchases, so customers have strict requirements on individual differences in server stability and security. Brand server manufacturers not only need to provide stable and perfect machine design, but also provide customers with mature and stable management software and actively provide after-sales service to gain customer stickiness. We believe that after the cloud computing market began to grow rapidly, the demand side of the server has undergone major changes. The core driving force of the
white card server model lies in reducing costs. We see that most cloud computing service providers are Internet companies, with strong overall software capabilities, and use virtualization technology to allocate cloud virtual computing resources to liberate local computing power, weakening the requirements for single server performance indicators. For example, ordinary dual-channel servers have become the key model for Internet cloud manufacturers to purchase, and Internet customers tend to purchase a large amount of standardized hardware to reduce costs and achieve economic benefits. We believe that the above requirements are very consistent with the characteristics of white card servers. The white card servers that were originally unable to enter the data center due to insufficient stability have now been recognized by cloud computing customers.
Chart 26: Comparison of server business model
Source: official websites of each company, CICC Research Department
hardware open source is a necessary condition for the rapid development of the white-brand server market. We believe that the technical barriers of server manufacturers lie in the hardware architecture (such as server motherboard, appearance, power supply, etc.) and management software. Almost every brand server manufacturer has relevant hardware design patents or closed source software code. We believe that for cloud computing service providers with strong software capabilities, self-developed management software is not a problem. However, in terms of hardware, cloud computing service providers hope to achieve some unified design solutions through industry sharing to promote the standardization of non-standard hardware components to achieve the goal of reducing hardware costs. Therefore, we believe that hardware open source is of great significance. At present, two major alliances, led by Facebook, emerged overseas and domestically, namely the OCP (Open Computing Project) and the ODCC (Open Data Center Committee, formerly the Scorpio Alliance) advocated by the three major BAT giants. OCP and ODCC have always advocated providing standardized design and hardware manufacturing specifications for the industry. At the same time, mature design solutions contributed by major brands have also reduced barriers to other allies' own data center hardware, breaking up the barriers between ODM and brand owners.
Chart 27: List of OCP Alliance Members (2020)
Source: Zhongguancun Online, CICC Research Department
Chart 28: List of ODCC Alliance Members (2020)
Source: ODCC Research Department Note: The figure only contains some ODCC Alliance members, listing incomplete
white-brand server market is growing rapidly, and Taiwan’s old assembly companies continue to maintain their lead. According to IDC data, the shipments of global white-brand server manufacturers have achieved rapid growth in the past decade. In 2020, the market size has reached US$24.6 billion, with shipments of 3.8 million units, accounting for 27%/31% of global industry revenue and shipments. We also see that Taiwanese manufacturers in China have inherited the advantages of low-cost production in the field of PC assembly since the 1990s, and continue to occupy an important position in the global supply chain in the field of server foundry.But when we entered the era when Internet cloud service providers dominated demand, we saw that many electronic assembly manufacturers such as Inyeda, Wistron (and its subsidiary Weiying), Hon Hai Precision, and Quanta all occupied a place in the white-brand server market. While producing OEM for brand customers, they also directly shipped to Internet cloud computing manufacturers. According to Digitimes data, we see that in 2018, Yingyeda, Weiying, Hon Hai and Quanta accounted for 25%/90%/29%/77% of the revenue of the four Internet cloud computing giants (i.e. Facebook/Amazon/Microsoft/Google).
Chart 29: Global white card server revenue scale continues to grow
Source: IDC, CICC Research Department
Chart 30: Global white card server shipments continue to rise
Source: IDC, CICC Research Department
Chart 31: The proportion of major server factories to customers in 2018
Source: Digitimes, CICC Research Department
Chart 32: Microsoft cooperates with OCP to launch Project Olympus
Source: GitHub, CICC Research Department
Chart 33: Project Olympus 1U/2U cabinet design
Source: GitHub, CICC Research Department
Domestic manufacturers respond quickly, JDM model builds a strong moat
As latecomers in the server industry, domestic companies actively embrace the cloud computing server market. We believe that Inspur Information is one of the suppliers that respond quickly to changes in the demand side of the server industry. It launched a customized server since 2009 and has been actively involved in the preparation and establishment of the Scorpio plan (i.e., the subsequent ODCC). In addition to contributing the specifications of the entire cabinet server, it has also quickly begun cooperative development with Internet cloud manufacturers (for example, it launched the Smart Rack entire cabinet server at the end of 2012 with Baidu). is in contrast to the ODM model of white-brand servers. Inspur has created a new generation of JDM model (Joint Design Manufacture, joint development business) to respond to changes in cloud computing customers' server needs. We believe that the core of the JDM business model lies in the following five points: 1) common demand mining (repeated communication and running-in with Internet customers); 2) collaborative R&D (aggregation with customer R&D teams, the R&D team of server brands is almost one with Internet cloud manufacturers); 3) product control (backed by smart factories and intelligent transportation); 4) delivery and service (the own team ensures that the product safely enters the data center computer room and subsequently responds to customers' after-sales needs); 5) supply chain docking (the ability to quickly face customer capacity expansion is the factory and production line that fully utilizes intelligent robots). Although the server industry is relatively thin, Chinese server suppliers represented by Inspur rely on the above-mentioned intensive business model to build barriers of strength and compete strongly with white-branded servers in the era of cloud computing.
Chart 34: Inspur JDM business model schematic
Source: Inspur official website, CICC Research Department
JDM model moat is still tough today. We see that in the past three years (2018-2020), in terms of the absolute revenue volume, Inspur's China revenue has maintained steady growth and continued to rank first, which has obvious advantages compared with ODM companies (the revenue statistics of Taiwan ODM manufacturers in China are all business revenue). In terms of revenue growth in China, after excluding Weiying's 2018 data, Inspur data outperformed white-card server manufacturers or were on par with white-card server manufacturers. We believe that the excellent achievements of the JDM model are closely related to Inspur's continuous R&D investment. Inspur achieved a reverse over the absolute value of Inspur's R&D expenses in in 2019. From the perspective of R&D expense ratio, Inspur's R&D expenditure level has also reached nearly twice that of ODM companies (2020). According to IDC data, Inspur's market share in the X86 server market in the Chinese Internet industry in 2020 has reached 48%, ranking first, and its gross profit margin has not been significantly eroded by white-label manufacturers in the past few quarters. We believe that local server companies such as Inspur operated in the JDM model rely on their early deep binding with customers and continuous meticulous cultivation, resulting in the advantages of the pure "white brand" model of the Chinese mainland market are not obvious.
Chart 35: Server manufacturers' revenue in China (2018-2020, Inspur vs. White Card)
Source: Company financial report, Bloomberg information, Wande Information, CICC Research Department
Chart 36: Revenue growth rate of Taiwan white card server manufacturers in China vs. China revenue growth rate
Source: Company financial report, Bloomberg information, Wande Information, CICC Research Department
Chart 37: Absolute value comparison of R&D expenses: Inspur vs. Taiwan, China ODM
Source: Company Financial Report, Wande Information, Bloomberg Information, CICC Research Department,
Chart 38: R&D Expense Rate Comparison: Inspur vs. Taiwan, China ODM
Source: Company Financial Report, Wande Information, Bloomberg Information, CICC Research Department
Chart 39: In the share of China's X86 server Internet industry manufacturers in 2020, Inspur reached nearly half
Source: IDC, CICC Research Department
Chart 40: Inspur maintained a relatively stable gross profit margin, and was not significantly eroded by Taiwanese factories
Source: Company Financial Report, Wande Information, Bloomberg Information, CICC Research Department
Supply Side #2: How will Huawei's poor CPU chip procurement affect the competitive landscape of the server industry?
insists on independent innovation, and Huawei servers have become an important challenger in the industry.
The opening of Huawei server business can be traced back to 2002 and has a history of nearly 20 years. With its comprehensive advantages of deeply rooting in the hardware industry for many years, Huawei is oriented towards customer needs in its server business, and has continued to innovate and achieved excellent results in many aspects such as underlying chip technology (such as self-developed processor interconnect chips and BMC chips), I/O acceleration technology (launched PCIe SSD card), engineering design, quality control, etc. From the new generation of integrated architecture blade server E9000, to the entire cabinet server X8000, to the latest KunLun (the world's first 32-channel open architecture minicomputer), Huawei has keenly grasped the market development trend with its deep R&D strength and in-depth market insight and has rapidly emerged as an indispensable force in the server market. In 2Q17, Gartner has positioned Huawei's server business as a "global challenger". Later, we saw that Huawei has fully utilized its software strength to launch Huawei Cloud, providing cloud-based full-stack solutions to help server business revenue grow rapidly. In terms of revenue scale, Huawei's server business contributes about 1/4 of Huawei's corporate customers' revenue (in 2020), and is an important part of corporate business revenue and a driving force for growth. Currently, Huawei provides Fushion series products based on Intel X86 CPU (including racks, high-density and other servers), Taishan series products based on self-developed ARM architecture Kunpeng chips, and server product lines such as Kunlun minicomputer products.
Chart 41: Huawei server development history and innovative ideas
Source: PC Online, Huawei official website, CICC Research Department
Chart 42: Huawei server business innovation history and product list
Source: PC Online, Huawei official website, CICC Research Department
Huawei X86 server business was affected, and the rest of the suppliers ushered in the opportunity to replace quota
Since Huawei's procurement of CPU chips was affected in May 2019, its semiconductor supply chain has been greatly affected. Starting from the fourth quarter of 2020, Huawei and its affiliates listed on the entity list will purchase chips designed by US companies, and they will obey the export control regulations and need to obtain approval from the US Department of Commerce in advance [1]. In Huawei's server product line, the Fusion series uses a large number of Intel CPUs. We believe that poor supply chain procurement has led to a sluggish performance in the X86 server business. According to IDC data, by revenue, Huawei's 2Q21 X86 server's global market share is 2.5%, and its absolute revenue value declined by 45.9% compared with the same period last year. We believe that the decline in revenue will also lead to intensifying cost pressure from the company. The X86 server business, which originally had relatively low profit margins and fierce market competition, may drag down the group's financial performance.
We believe that Huawei's short-term chip procurement may have an impact on the share of other suppliers.According to the facts of , we believe that Huawei X86 servers have strong competitive strength in the government (Huawei Cloud has also been participating in government cloud construction, with a market share of 25% in 2020, ranking first), operators (with the advantages of its network equipment and customer channels, which have a large share in the centralized procurement of the three major operators), and some traditional industries, but they are slightly inferior to the Internet customer side, and only rank fifth in the market share in 2020. Regarding the impact of Huawei's decline in market share on other server suppliers, our views are summarized as follows:
1) We believe that in the short term, Huawei's chip supply is under pressure, which may first bring opportunities to competitors in the segmented markets with relatively weak competitiveness, such as the leader in Internet customers or H3D;
2) We believe that for Huawei's server business, such as the government side, due to Huawei's deep binding with customers on the cloud server side, its share replacement may be slower than the Internet side;
3) We believe that Huawei servers are basically sold to domestic customers, so the share replacement basically comes from domestic suppliers;
4) Finally, considering that the profitability of X86 servers is under pressure after the decline in the profitability of X86 servers is under pressure, we do not rule out the possibility that Huawei will sell X86 server business.
Chart 43: Changes in the global server industry market share (by shipment volume)
Source: IDC, CICC Research Department
Chart 44: Share of Internet manufacturers in China's x86 server market in 2020
Source: IDC, CICC Research Department
Chart 45: Share of government industry manufacturers in China's x86 server market in 2020
Source: IDC, CICC Research Department
Supply side #3: How to view the impact and inspiration brought by the supply chain?
We believe that the hardware structure of the server is mainly divided into the following five parts: 1) CPU (i.e., central processing unit, different servers have dual-channel, four-channel configurations) and chipset (including motherboard and chipset, substrate controller BMC, etc.); 2) DRAM (there are generally multiple slots on the server motherboard); 3) Solid-state or mechanical hard disk (occupies a large space and has a large difference in server configurations for different applications); 4) Power-related accessories and 5) structural parts and others. We estimate that for a relatively balanced rack server, CPU, chipset, DRAM memory and storage are the three most important parts of the cost, accounting for about 80%. We believe that tracking the changes in the operating fundamentals of the above three types of semiconductor chip suppliers has certain reference value for judging the prosperity of the server industry.
Chart 46: Cabinet single node disassembly example
Source: Zhongguancun Online, CICC Research Department
Chart 47: Server cost proportion split (taking balanced type as an example, 2015)
Source: Twiki, CICC Research Department
Server manufacturers are located downstream of the industry, and they all bear the impact of fluctuations in raw material prices to varying degrees
Different server manufacturers use different business models to ship products, but fluctuations in raw material prices have an impact on their profitability. As mentioned above, in addition to traditional brand manufacturers, assembly plants in Taiwan also play an important role in the server supply chain. Assembling companies such as Quanta, Inerta, and Hon Hai not only play the role of helping brand manufacturers OEMs (i.e. OEMs), but also compete with brand customers in the cloud computing era by relying on their own production scale advantages and the hardware design capabilities strengthened by the open source alliance, and ship servers and complete machines or cabinet products in the ODM model. We believe that the profitability of brands and white-branded brands is directly related to the price of raw materials. Although there is a "buy-and-sell" model in OEM, server manufacturers can avoid the risks brought about by fluctuations in raw materials to some extent, the issuer's customers and suppliers under this business model are the same. In the case of high customer concentration, customers have a greater say. If customers use this model to raise the price of raw materials and lower the price of the whole machine, it may also test the profitability of server manufacturers.If the sensitivity of profitability of different server manufacturers to fluctuations in raw material prices at the same time, we believe that the raw material inventory level and orders in hand will lead to differences in the results.
Chart 48: Business models of different server suppliers
Source: Financial reports and prospectus of various companies, CICC Research Department
chip supply chain enlightenment: 2H21 server industry is expected to usher in prosperity
CPU and motherboard management chip related manufacturers performed poorly in the first half of the year, but are expected to usher in changes in the second half of the year. Intel 1H21 DCG business, the main supplier of X86 server CPUs, achieved revenue of US$12.1 billion, a year-on-year decline of 14.2%. We believe that this part reflects the continuous increase in the market share of competitor AMD EPYC series server CPUs, but it also shows that the server industry has weak demand in the first half of the year and the out of stock of some components affecting the shipment of the entire machine. Intel pointed out in the 2Q21 performance meeting that although the company expects the DCG business to decline year-on-year throughout the year, due to the strong recovery of the government and enterprise market and cloud computing service provider demand, the DCG business revenue in 3Q21/4Q21 is expected to achieve year-on-year growth and is expected to be significantly higher than in the first half of the year. In terms of
motherboard management chip (BMC), we saw that the year-on-year revenue growth of the leading supplier Aspeed performed mediocrely in the first half of the year due to chip production capacity issues. Although the monthly revenue growth rate in August increased significantly, it was still lower than market expectations. We believe that this is mainly due to the limitation of its chip production capacity (Xinhua 1H21 inventory fell by 32% year-on-year and 17% month-on-month, which indirectly showed its chip shortage problem). The company still maintains its positive forecast of 15%-20% revenue growth throughout the year in the performance meeting.
Chart 49: 1H21 Intel DCG revenue declined year-on-year
Source: Company financial report, CICC Research Department
Chart 50: Aspeed monthly revenue was suppressed in the first half of 2021
Source: Company financial report, Wande Information, CICC Research Department
Chart 51: Aspeed inventory level 1H21 has reached a relatively low level, reflecting its chip out of stock
Source: Company financial report, Bloomberg Information, CICC Research Department
Server with memory prices remain firm. We have seen that since 3Q21, due to the weakening of the market demand for mobile phones/PCs and other early stages, the spot price of mainstream DRAM has dropped significantly, but we also see that the August contract price of Server DRAM has remained at its highest level since the beginning of this year, and related demand has not been loosened.
Chart 52: Mainstream spot DRAM prices continue to fall in the past month
Source: DRAMeXchange, CICC Research Department
Chart 53: Server DRAM contract prices remain firm
Source: Inspectrum Tech, Bloomberg Information, CICC Research Department
chip supply chain provides verification of the terminal demand of the server industry. From the perspective of server suppliers, since 1H21, the inventory of mainland brand suppliers such as Inspur and white-brand server suppliers in Taiwan and China has continued to rise, and they are willing to prepare stocks. Against this background, CPU and motherboard management chip suppliers are affected by the shortage of production capacity and some electronic components, and their performance has not yet been released significantly, but the above-mentioned companies are generally optimistic about the performance outlook for 3Q21/4Q21. We believe that the current operating status of chip companies also verifies the fact that the demand for 2H21 server terminals continues to improve.
Chart 54: The inventory level of raw materials for the main server supplier 1H21 reaches a high level
Source: Company financial report, Bloomberg Information, CICC Research Department
Chart 55: The overall inventory level of the main server supplier 1H21 has not seen a downward
Source: Company financial report, Bloomberg Information, CICC Research Department
[1]https://www. commerce.gov/news/press-releases/2020/05/commerce-addresses-huaweis-efforts-undermine-entity-list-restricts
Article source
This article is excerpted from: "China X86 Server: Ten Years of Glory Not the End, Five Questions and Five Answers to the Future"
Li Shiwen, which was released on November 24, 2021 SAC Certification Number: S0080521070008 SFC CE Ref: BRG963
Cheng Qiao Sheng SAC Certification Number: S0080521060004
Chen Hao SAC Certification Number: S0080520120009 SFC CE Ref: BQS925
Peng Hu SAC Certification Number: S0080521020001 SFC CE Ref: BRE806
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