Overview of the 2023 Annual Report and Q1 Report of the Communication Industry

In 2023, the telecommunications industry showed a trend of rising first and then falling. In the first half of the year, the recovery of economic activities boosted industry investment, but in the second half, increased macroeconomic uncertainty led to a slowdown in growth. Looking at the whole year, the telecommunications industry maintained revenue growth thanks to the low base effect and the boom in sectors such as AI hardware and operators. The industry achieved revenue of 286.37 billion yuan in 2023, a year-on-year increase of 5.3%. Excluding the three major operators and ZTE Corporation, the revenue reached 83.07 billion yuan, a year-on-year increase of 2.7%.

The industry profits are under significant pressure. In 2023, the telecommunications industry achieved a net profit attributable to the parent company of 200.6 billion yuan, a year-on-year increase of 3.2%. Excluding the three major operators and ZTE Corporation, the net profit attributable to the parent company was 20.54 billion yuan, a year-on-year decline of 18.3%. Some companies made substantial asset impairment provisions in the fourth quarter, which affected the profit performance in 2023 to some extent, but also alleviated the burden for growth in 2024.

As we enter the first quarter of 2024, the industry’s development has shown positive changes. Benefiting from the performance release of leading AI hardware companies such as optical modules and PCBs, as well as the continued stable performance of traditional leaders like telecom operators, the communication industry’s performance and revenue have both recovered. In the first quarter, the industry achieved a revenue of 728.6 billion yuan, a year-on-year increase of 4.5%; net profit attributable to the parent company reached 50.74 billion yuan, a year-on-year increase of 8.1%. Excluding the three major telecom operators and ZTE, revenue grew by 4.9% year-on-year, and net profit attributable to the parent company grew by 22.9% year-on-year.

From the perspective of sub-industries, the differentiation trend intensified in 2023. In terms of revenue, areas such as operator network planning and optimization, satellite communication and navigation, and cloud computing performed well. In terms of profit, there was a significant improvement in the satellite communication and navigation, cloud computing, and mobile internet sectors, while operators maintained stable growth, and optical modules achieved positive growth due to AI demand in the second half of the year. Other sectors faced certain profit pressures.

Looking ahead to 2024, amidst the backdrop of increasing industry differentiation, it is recommended that investments become more focused and selective, adopting a "AI hardware + operator" dumbbell strategy:

1. In terms of AI hardware, firmly hold leading optical module stocks and seize opportunities as the industry chain gradually expands. Overseas cloud vendors are starting to cycle, and domestic hardware leaders are verifying performance; AI will continue to be the core of offensive allocation in the telecommunications industry. Focus on sub-sectors such as optical modules, optical devices, PCBs, and thermal management.

2. In terms of operators, as a core asset that combines the dual attributes of "essential consumption" and "technology growth", the performance of the three major operators has maintained stable growth. In the AI era, operators are expected to become the computing power foundation of China, playing a more important role.

Core Asset Recommendations:

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

Risk warning: AI development may not meet expectations, computing power demand may not meet expectations, data statistical standards may be distorted, etc.