Overview of the 2023 Annual Report and Q1 Report of the Telecommunications Industry: Focus on AI Computing Power and Operators

The telecommunications industry in 2023 presents the following characteristics:

1. The income growth rate was high at first and then low, achieving a 5.3% growth for the whole year. The first half benefited from economic recovery, while the growth rate slowed in the second half.

2. Industry profits are under pressure, with an annual year-on-year growth of 3.2%. Some companies have made significant impairment provisions that affect overall performance.

3. The differentiation in niche sectors has intensified. High-growth segments such as AI hardware and operators are experiencing strong growth, while other segments are under pressure.

4. Cost control is stable, and leading enterprises are increasing their R&D investment. The R&D expense ratio of the entire industry has increased by 0.5 percentage points year-on-year.

5. Operating cash flow continues to improve, reflecting the quality enhancement of the industry.

6. The proportion of inventory has decreased, and the reserves of raw materials have increased, reflecting a easing of supply chain tensions.

The industry shows signs of recovery in the first quarter of 2024:

1. Revenue increased by 4.5% year-on-year, and profit grew by 8.1%, exceeding the full-year level of 2023.

2. Leading AI hardware companies such as optical modules and PCBs experience explosive performance, driving a overall recovery in the industry.

3. The fee rate has decreased both month-on-month and year-on-year, reflecting the industry's achievements in reducing costs and increasing efficiency.

Investment Strategy Advice:

1. Focus on the "AI hardware" + "operator" dumbbell-shaped configuration.

2. Focus on leading companies in the fields of optical modules, optical devices, PCBs, and heat dissipation in AI hardware.

3. The operator sector continues to be optimistic about the stable growth and high dividends of the three major operators.

4. Grasp the gradually increasing opportunities in the AI industry chain, focusing on the performance release of upstream links such as optical devices.

Core Asset Recommendations:

• Optical modules: Zhongji Xuchuang, NewEase, Tianfu Communication
• Optical Devices: Tai Chen Guang, Teng Jing Technology
• Optical Chip: Source Jie Technology
• PCB: Huadian Co., Ltd., Shenzhen South Circuit
• Heat dissipation: Invid Tech, Vertiv Technologies
• Operators: China Mobile, China Telecom, China Unicom

Risk Warning:

• AI development did not meet expectations.
• Computing Power demand is below expectations
• Analysis of the Impact of Changes in Data Statistical Standards