In 2024, the communications industry focuses on AI hardware and operators, and optical module PCBs may become an investment hotspot.

2023 Communication Industry Review and 2024 Outlook

The telecommunications industry in 2023 overall showed a trend of initially high and then low. In the first half of the year, as economic activities resumed, industry investment saw some recovery, but in the second half, increased macro uncertainty led to a slowdown in growth. For the whole year, benefiting from a low base and the booming sectors such as AI hardware and operators, the revenue scale of the telecommunications industry continued to grow. In 2023, the industry achieved revenue of 28,637 billion yuan, a year-on-year increase of 5.3%. Excluding the three major operators and ZTE Corporation, revenue reached 8,307 billion yuan, a year-on-year increase of 2.7%.

In 2023, the industry's profit fluctuations intensified, and the substantial impairment losses of some companies affected the overall profits of the industry. However, industry leaders and high-growth segments still maintained good profit resilience. In 2023, the industry achieved a net profit attributable to shareholders of 200.6 billion yuan, a year-on-year increase of 3.2%. After excluding the three major telecom operators and ZTE Corporation, the net profit attributable to shareholders was 20.54 billion yuan, a year-on-year decline of 18.3%.

Entering the first quarter of 2024, benefiting from the performance release of leading AI hardware companies such as optical modules and PCBs, coupled with the steady growth of traditional leaders like telecom operators, the net profit and revenue of the telecommunications industry are recovering simultaneously. In the first quarter, the industry achieved a net profit attributable to shareholders of 50.74 billion yuan, a year-on-year increase of 8.1%. Excluding the three major telecom operators and ZTE Corporation, the net profit attributable to shareholders was 7.11 billion yuan, a year-on-year increase of 22.9%.

In terms of sub-industries, the differentiation continued to intensify in 2023. The revenue growth rates in segments such as operators, network planning and optimization, and satellite communication and navigation are relatively high. In terms of profits, there has been a noticeable improvement in satellite communication and navigation, cloud computing, and mobile internet, while operators continue to maintain stable growth. Optical modules achieved positive growth due to AI demand in the second half of the year, while other segments are experiencing some profit pressure.

Looking ahead to 2024, amidst the increasingly diverging operating conditions in the current sub-industries, industry investment needs to be more focused and selective, pursuing not only current certainty and performance but also future growth potential and space. It is suggested to primarily focus on two main sectors: "AI hardware" and "operators":

1. In terms of AI hardware, the sector led by optical modules will continue to benefit from the opening of the overseas positive cycle and the performance verification of domestic leading companies. It is recommended to focus on leading enterprises in the sub-sectors of optical modules, optical devices, PCBs, and heat dissipation.

2. In terms of operators, the three major operators have both "essential consumption" and "technological growth" dual attributes, making them high-quality dividend assets in the A-share market. With the stabilization of C-end business and the rapid growth of B-end cloud computing and computing power businesses, operators are expected to maintain high-quality development. At the same time, the role of operators as the computing power base in China is becoming increasingly important.

In terms of investment strategy, it is recommended to adopt a "dumbbell strategy" of "AI" and "operators", aggressively allocating to AI hardware while defensively positioning in operators. Key targets to focus on include:

Optical Modules: Zhongji Xuchuang, NewEase, Tianfu Communication Optical devices: TACHYON, Tengjing Technology Optical Chip: SourceJet Technology PCB: Huadian Co., Ltd., Shenzhen South Circuit Cooling: InnoTek, Vertiv Operators: China Mobile, China Telecom, China Unicom

Risk warning: AI development is below expectations, computing power demand is below expectations, and data statistics are distorted.