Core Viewpoint - The domestic leading technology companies are increasingly exploring AI large models and commercial innovations, indicating a strong willingness and confidence in AI development. This shift is expected to drive a new upward cycle in capital expenditure for cloud service providers (CSPs) in China, particularly benefiting mainstream suppliers in the server, switch, and optical module sectors [1][4][16]. Group 1: AI Investment Trends - The capital expenditure of North America's top four CSPs is projected to grow by 63% year-on-year in 2024 and by 32% in 2025, reflecting a robust investment cycle in AI infrastructure [4]. - Domestic CSPs are expected to significantly increase their data center investments, with Alibaba projecting over 100 billion RMB in cloud computing and AI infrastructure investments over the next three years, surpassing the total of the past decade [4][16]. - The total data center investment by domestic CSPs is anticipated to reach nearly 400 billion RMB in 2025, representing a year-on-year growth of 79% [5][29]. Group 2: Impact of DeepSeek and Domestic AI Models - The launch of the DeepSeek model has reshaped global perceptions of China's AI capabilities, enhancing confidence among domestic tech giants in AI commercialization [7][16]. - The DeepSeek-R1 model has gained significant traction, with its app downloads reaching over 40 million within a short period, indicating strong market interest and application potential [5][7]. - The domestic AI investment landscape is evolving, with major players like ByteDance and Alibaba actively developing and deploying AI models, contributing to a more collaborative ecosystem [8][16]. Group 3: Hardware Market Opportunities - The server market in China is projected to grow significantly, with an expected market size of 263.2 billion RMB for servers by 2025, driven by AI data center demands [30]. - The optical module and switch markets are also set to expand, with expected market sizes of 18.9 billion RMB and 22.7 billion RMB, respectively, as AI applications drive higher bandwidth and lower latency requirements [30]. - The domestic Ethernet switch market is characterized by high concentration, with the top three suppliers holding over 80% market share, indicating strong competitive dynamics [25][30]. Group 4: CSP and Telecom Capital Expenditure - The combined capital expenditure of domestic CSPs and telecom operators is projected to exceed 6,000 billion RMB by 2027, with a significant portion allocated to cloud and AI data centers [29][30]. - Major telecom operators are also increasing their investments in computing networks, with China Mobile planning to invest 47.5 billion RMB in 2024, reflecting a strategic shift towards AI and digital economy support [27][30].

Investment Rating - The report suggests focusing on sectors such as servers, IDC, switches, switching chips, optical modules, and liquid cooling driven by domestic AI development, as well as servers and optical modules driven by overseas AI development [5]. Core Insights - DeepSeek has disclosed the theoretical cost and profit margin of its V3/R1 inference system, with a theoretical daily revenue of $562,027 and a profit margin of 545%. This advancement, along with the launch of the general-purpose AI Agent product Manus by Monica, is expected to accelerate the domestic AI application deployment and enhance profitability in the AI sector [1][10]. - The acceleration of AI technology iteration is leading to increased demand for computing power, prompting major internet companies like ByteDance and Baidu to potentially raise capital expenditures to expand their computing investments [1][12]. - The report highlights that in March 2025, Broadcom's Q1 revenue reached $14.916 billion, a 25% year-on-year increase, with net profit soaring by 315% to $5.503 billion, indicating strong performance in AI semiconductor revenue [1]. Summary by Sections Server Sector - Approximately 60% of the investment in large models is allocated to hardware procurement, with servers accounting for 69% of total capital expenditure. The year 2025 is projected to see a significant increase in inference demand, benefiting domestic ASIC chip manufacturers like ZTE and Unisoc [2][7]. Switch Sector - Network equipment procurement, including switches, constitutes about 11% of hardware procurement. Major suppliers like Ruijie Networks and Unisoc are positioned to benefit from the demand from leading internet companies [2][10]. IDC Sector - Data centers are crucial for AI development and deployment, with companies like Data Port and Runjian signing agreements to provide computing services. IDC suppliers are expected to benefit significantly from large-scale construction in 2025 [3][12]. Liquid Cooling Sector - The liquid cooling market is anticipated to expand significantly, with NVIDIA's NVL36/72 cabinets expected to be shipped in bulk by 2025. Domestic suppliers are accelerating their international expansion, indicating a promising growth trajectory [3][14]. Core Data Updates - In December, the three major telecom operators achieved a total telecom revenue of 141.7 billion yuan, a year-on-year increase of 10.10%. New business revenue reached 39.6 billion yuan, growing by 66.39% year-on-year [4][20]. Investment Recommendations - The report emphasizes the importance of monitoring sectors such as servers, IDC, switches, switching chips, optical modules, and liquid cooling, driven by both domestic and international AI developments [5].

Investment Rating - The industry investment rating is "Maintain Buy" [7] Core Views - The three major telecom operators have fully integrated with DeepSeek, which is expected to enhance the valuation of the operators [12][27] - The EU has announced the AI Super Factory plan, which is anticipated to benefit the computing power sector [13][27] - Shandong province has initiated a pilot program for 10G optical networks, which is likely to benefit related sectors [14][28] Summary by Sections 1. Core Views and Investment Recommendations - Telecom operators are expected to benefit from the full integration with DeepSeek, enhancing their valuation [12][27] - The EU's InvestAI plan aims to mobilize €200 billion (approximately ¥1.5 trillion) for AI investments, with a new €20 billion (approximately ¥151.4 billion) fund to establish AI super factories [13][27] - Shandong's pilot program for 10G optical networks focuses on residential, industrial, and park applications, aiming for a robust digital infrastructure [14][28] 2. Market Review - The A-share Shenwan Communication Index rose by 3.01%, outperforming the CSI 300 Index by 1.82 percentage points [16] - The communication services sector saw a significant increase of 9.74%, while the communication equipment sector experienced a decline of 0.49% [18][21] 3. Investment Recommendations - Positive outlook for the optical module, telecom operator, and communication equipment sectors [15] - Recommended stocks include Zhongji Xuchuang, Tianfu Communication, and Xinyisheng for optical modules; China Mobile, China Telecom, and China Unicom for telecom operators; ZTE and Unisplendour for communication equipment [15] 4. Industry News - The three major telecom operators have fully integrated with DeepSeek, enhancing their capabilities in various applications [27] - The EU's InvestAI plan aims to create the largest public-private partnership for AI development [27] - Shandong's pilot for 10G optical networks is set to enhance digital infrastructure and economic integration [28] 5. Company Dynamics - China Unicom launched its 5G-A action plan, focusing on enhancing network capabilities and service innovations [29] - Zhaochi Co. has registered a subsidiary in Singapore, aiming to expand its global market presence [30] 6. Company Announcements - Dongguan Mingpu Optical Magnetic Co. obtained four invention patents [32] - Guanghe Communication completed the repurchase and cancellation of restricted stocks [32]