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Horizon Insights Inc ·Consumer ·Healthcare

uTech ·New Energy

July 2022

The Tech Investment Framework

- Q2 Updates

Tech team|Horizon Insights

Xu Xiaowei

xwxu@hzinsights.com

Zhang Jing

jzhang@hzinsights.com

Quarterly Strategy

Feng Guanru

grfeng@hzinsights.com

Zhihong Ouyang

zhouyang@hzinsights.com

Xiuyuan Wang

xywang@hzinsights.com

Tech Research Updates & Coverage List

Direction

Industry Changes

Coverage

Internet

Video related traffic is still the main area of competition for Internet of

Things. For example, Tencent has made a breakthrough via live streaming

videos; Meituan’s local life online traffic growth continues.

•Tencent Holdings

•Meituan

Servers

Overseas cloud computing business maintains high growth, data center

investment accelerates, Intel’s new computing platform will soon come

onstream.

•Inspur

•Montage Tech

•Giantec-Semi

•Shennan Circuits

•WUS Printed Circuit

Optical

Communication

Domestic and foreign optical modules are entering into the upgrade phase;

"double gigabit" network synergy development and the implementation of

the “east data west computing “ policy to increase demand for fiber optic

cable.

•Zhongji Innolight

•Yangtze Optical Fiber & Cable

•Hengtong Optic-Electric

•China Mobile

Smart Devices

Smart devices demand recovery; advancement of new domestic

infrastructure-related policies; machine vision and video-related products

are the fastest-growing smart hardware product segment as their

penetration rate continues to increase.

•Hikvision

•Dahua Security

•OPT

•Guangzhou Shiyuan

Domestic

Software

Documentation and process automation of information in terms of mobile

and online office collaborations are enhanced; benefits from the gov’t

sponsored Xinchuang Standard IT system for the financial sector are

starting to kick in.

•Kingsoft Office

•Hundsun Technologies

•Weaver Network

•Beijing Seeyon Internet

Software

弘则弥道（上海）投资咨询有限公司

TMT Q2 Updates:

Hardware

Overseas IT infrastructure investment cycles, and technological improvements in

the semiconductor industry

•Demand-side perspective: IT infrastructure investment is cyclical, with the last round of investment peaking in

2015-2017. After five years of a smooth transition, replacement demand began to emerge again despite

reoccurring global pandemic disruptions. Now with the easing of the global pandemic, demand from enterprises

for IT upgrades has increased as indicated by the high growth in the IaaS/PaaS market, which has, in turn,

boosted the willingness of IT companies to invest in IT infrastructure.

•Technology upgrade perspective: The semiconductor industry has completed two generations of upgrades in the

last 5-6 years as the manufacturing process transitioned from 14 nm to 7nm process; data processing capacity

has also increased significantly; high computing power of HD video and AI applications have required higher

demand from data centers; optical transmission modules have upgraded from 100G to 200G/400G and 800G;

and lastly, a new generation of DDR5 CPU chips based on DDR5 memory standard is being introduced to the

market as both network and computing devices enter a new generation of IT system.

•Overseas market demand: Growth of data centers optical communication receivers' modules is greater than

domestically. Chip shortages led to delivery delays in 2H21. With the supply chain recovery, overseas Internet

company investment is reemerging via normal channels. Advanced packaging manufacturers represented by

Zhongji Innolight are optimizing their production capacity volume and structure. And next-generation silicon light

chip makers are poised to become global leading optical module core component suppliers. We expect Zhongji

Innolight to benefit from new CAPEX cycle and strengthern its leading position.

•DDR5 memory interface chips in terms of value and volume have more than doubled compared to DDR4. DDR5

products for consumers have been introduced ahead of schedule during 4Q21; sales growth of domestic supply

chain companies represented by Montage Technology and Giantec-Semi have already shown impressive results

in 1Q22. As server chips enter the promotion period in the second half of the year, the premium new chips will

provide a greater sales contribution in FY23.

The remarkable sales growth of the IaaS/PaaS cloud computing market remains

the highlight of overseas Internet companies' first quarter earning reports

Source: Bloomberg

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

100

120

140

160

180

200

22Q121Q421Q321Q221Q120Q420Q320Q220Q119Q419Q319Q219Q118Q418Q318Q218Q117Q417Q317Q217Q116Q416Q316Q216Q115Q415Q3

Cloud Computing Company Cloud Services Revenue Comparison ($100 million)

AWS Ali cloud Google Cloud

AWS-Year-on-Year Aliyun-Year-on-Year Azure-Year-Over-Year

Google Cloud - Year over year

Amazon and Microsoft’s cloud businesses have maintained their high CAPEX

growth; Google significantly increased its CAPEX in 1Q22

-50%

50%

100%

150%

100

200

300

400

500

600

700

22Q1

21Q3

21Q1

20Q3

20Q1

19Q3

19Q1

18Q3

18Q1

17Q3

17Q1

16Q3

16Q1

15Q3

15Q1

14Q3

14Q1

13Q3

13Q1

Amazon CAPEX ($100 million)

CAPEX-TTM

-50%

50%

100%

150%

100

150

200

250

300

22Q1

21Q3

21Q1

20Q3

20Q1

19Q3

19Q1

18Q3

18Q1

17Q3

17Q1

16Q3

16Q1

15Q3

15Q1

14Q3

14Q1

13Q3

13Q1

Google CAPEX ($100 million)

CAPEX-TTM

-20%

20%

40%

60%

80%

100%

120%

100

150

200

250

22Q1

21Q3

21Q1

20Q3

20Q1

19Q3

19Q1

18Q3

18Q1

17Q3

17Q1

16Q3

16Q1

15Q3

15Q1

14Q3

14Q1

13Q3

13Q1

Microsoft CAPEX ($100 million)

CAPEX-TTM

Source: Bloomberg

-40%

-20%

20%

40%

60%

80%

100%

120%

100

150

200

250

22Q1

21Q3

21Q1

20Q3

20Q1

19Q3

19Q1

18Q3

18Q1

17Q3

17Q1

16Q3

16Q1

15Q3

15Q1

14Q3

14Q1

13Q3

13Q1

Facebook CAPEX ($100 million)

CAPEX-TTM

The global optical communication transceiver modules market size reached US$6

bn in 2021

•According to Yole data, the global data center optical module market stood at US$5.3 billion in 2020 and will reach

US$15 billion in 2026, which translates into an annual compound growth rate of 19% during 2020-2026. Overall,

the growth rate of the datacom market far exceeds that of the telecom market.

•According to Lightcounting data, the global data center optical module market reached US$6 billion in 2021. The

volume of 100G optical modules will be gradually phased out after 2022, while 200G/400G/800G will become the

mainstream products and the core growth driver of the market segment.

Source: Lightcounting, Yole

Growing big data traffic drives a new wave of data center growth

Continued rapid big traffic growth is driving cloud computing vendors to continue to invest more in their data

centers. Google's latest data on its network traffic growth shows a 40% increase in regular server traffic and a 55-

60% increase in traffic supporting Machine Learning (ML) applications. Artificial intelligence traffic accounts for

more than 50% of Google’s total data center traffic.

Source: Arista, The 650 Group, Synergy Research Group

Chinese manufacturers, represented by Zhongji Innolight (300308.SZ), occupy the

leading position in global optical communication transceiver modules production

•In terms of market share ranking of optical communication transceiver module manufacturers, U.S. companies II-VI

(acquired Finisar), Zhongji Innolight (300308.SZ), Lumentum (acquired Oclaro) occupy 17%, 10%, 9% market share,

respectively. Chinese manufacturers are expected to account for nearly 50% of the global market share, and its share

is still expanding.

•Several important overseas customer orders have been secured for 2022. However, order deliveries are delayed by

the recent reemergence of the pandemic. 200G optical modules are in mass production, 400G orders are growing

steadily, and 800G products will come online for delivery in 2H22. Chip shortages are a major risk.

Top 10 Optical Module Manufacturers and Market Share Change in 2021

Source: Omdia

Zhongji Innolight (300308.SZ) continues to maintain its global competitiveness

in optical communication transceiver modules thanks to high R&D investments

•Product improvements: In terms of optical modules, the company has already introduced the next generation 200/400G

products while phasing out the 100G optical modules. With global 400G demand continuing to rise, domestic 200G

modules are in mass production as the company‘s 200/400G shipments are expected grow QoQ throughout the year;

the 800G module will begin shipments in the second half of the year and is expected to arrive at volume production in

2023.

•Impacts on operations: The domestic pandemic has a limited impact on the company’s operations. The company has

sufficient capacity and has an orderly capacity expansion plan. The chip supply shortage may affect the company’s

shipment delivery at present, but the situation is expected to improve in 4Q. Chip foundry costs are expected to rise

during the year, but the impact on the company relative to peers is minimal, all is within expectations.

•Product expansion process: The introduction of silicon light products into the market will be a gradual process and will

not disrupt the traditional optical module applications; 400G silicon light products have begun to occupy part of the

company’s production capacity in 2022. The company 400G silicon light products have begun its customer certification

process, with volume production anticipated after the completion of customer certification in 2023. However, it is

expected that some North American customers may also skip 400G silicon light products and import 800G silicon light

products directly.

•Improving margin outlook: The company’s overall sales demand is better in 2022 than in 2021, with orders and

shipments expected to peak in 3Q-4Q. Gross margin continues to improve, with the high-end product shipments

accounting for an increasing percentage of total sales and is expected to gradually rise throughout the year from 1Q to

4Q as the higher-margined 200G module reaches mass production this year in the domestic market.

•Competition landscape and overseas market shares of optical module makers are relatively stable. Zhongji Innolight and

another global optical module leader occupy the majority share of the overseas market, with other domestic

manufacturers exporting mainly to small & medium-sized overseas customers.

Intel's 10 nm Ice Lake series server processor is in the mass production phase,

thereby driving a new round of data center upgrades and replacements

Intel server’s x86 chip platform

roadmap in 2019 and 2020

indicated the introduction of a

14 nm Cooper Lake processor in

2020, to be followed by the 10

nm Ice Lake series; in 2021, it

will launch the next generation

10 nm (10++) Xeon series

processors codenamed

Sapphire Rapids.

The 10 nm Ice Lake server

processor series has entered

the mature mass production

stage in 1/Q22. Intel’s x86

architecture chips still dominate

the mainstream market, and it

has been driving a new round of

data center upgrades and

replacements.

Source: Intel

DDR5 memory standards begins to roll out as high-end complex manufacturing

processes and next-generation computing platforms are promoted

Compared to DDR4, the number of DB chips in the DDR5 chip cache has increased. The 3 components,

namely: 1) the SPD HUB, 2) PMIC, and 3) the temperature sensor, have also changed. For example, to reduce

the operating voltage and power consumption, a new power management chip (PMIC) was added. Major

industry suppliers include IDT, Montage Technology, and Rambus. The shipping price for DDR5 at volume is

estimated to be more than twice the price of DDR4.

Source: Lanqi Technology

The server PCB industry indicates continual growth as DDR5 enters the high-

volume production stage in 2H22

•The server PCB market demand has maintained growth year-on-year in spite that 1Q22 orders have slightly declined

compared to 4Q21. In 2Q22, the overall PCB demand is estimated to have slowed down in April and May, and it is

expected that demand will gradually rebound after June. Since the impact of the pandemic on overseas markets is

limited, the overseas markets are expected to benefit from the ongoing cloud computing companies’ capital

expenditures as well as their growing sales in 1Q & 2Q, which outperformed the domestic market.

•Due to weak consumer electronics demand, the overall CCL demand also weakened as the price in 1Q decreased by

about 5% to 10%. And the price is expected to continue to drop in 2Q. The domestic server PCB market competition

is fierce - there is also heavy pressure to reduce prices. Despite the price reduction of CCL, the benefit of the price

reduction for PCB manufacturers’ profitability is insignificant. Competition in overseas markets is more moderate

relative to domestic competition, prices are also more stable. WUS Printed Circuit is one of the few major domestic

players exporting to overseas markets, while Guanghe and Shennan Circuits mainly focus on the domestic market.

•Intel’s new generation Eagle Stream PCB platform has begun shipments, and volume production is expected in 4Q22.

The new platform server motherboard volume is expected to increase by about 20% to 30% over the older version.

With the domestic 400G PCB to replace the 100G model, switches & routers PCB is expected to have an increasing

number of stacked layers. PCB’s overall value is expected to increase by 60% to 70%.

•The supply of DDR4 memory interface chips remains tight due to the lack of wafer capacity: Persistent demand for

the old platform is driven by the continued full capacity of interface chip manufacturers, resulting in the inability to

achieve 100% delivery of 2Q orders on time. The new generation Eagle Stream chip platform’s official launch date is

still unknown. The new platform is currently shipping in small quantities, the DDR5 chip penetration rate is still low,

and volume production is not expected until 3 months after the launch date of the new Eagle Stream platform.

Among suppliers of DDR5 chips, Montage Tech, Rambus, and IDT have similar market shares. After the last round of

price cuts, DDR5 interface chip prices are currently ~US$6 dollars and are expected to remain stable before DDR5

chip mass production. In addition, DDR5 will add 3 additional chips (PMIC, SPD Hub, and temperature sensor) with a

combined cost of ~US$3-$4, expected to be supplied in sets by interface chip vendors, with a combined sales value of

~US$9. 12

Domestic operators realign their 5G investments downstream as they shift

toward servicing the enterprise business sector

Source: China Mobile

In 2021, China Mobile‘s government related sector revenue accounted for circa 18% of its total revenues, with a year-

on-year growth rate of more than 20%. Among which, the DICT business reached 62.2 billion yuan, up 43.2% year-on-

year; the cloud computing revenue reached 19.2 billion yuan, up 110% year-on-year. 2022 computing network capital

expenditure reached 48 billion yuan; the number of externally available networking racks increased from 407,000 to

450,000 networking racks. China Mobile's DICT business grew 50.9% year-on-year in 1Q22.

China’s telecom industry continues to invest in its cloud infrastructure via

Internet Data Centers (IDC) to upgrade its overall computing power and storage

Source: China Telecom

In 2021, the digital revenue of China telecom industry will reach 25% of its total revenue, among which the

2021 revenue of Tianyi Cloud grew 102% to reach 27.9 billion yuan. In 2022, the overall computing power is

planned to be improved and upgraded by 80%. The number of servers will increase by 160,000 units and the

number of networking racks will increase by 45,000 on top of the already existing 470,000 racks. In 1Q22,

China telecom industry’s digital sector grew by 23%.

The national “east data west computing" initiative has become a potential driver

for accelerating nationwide big data center construction in 2H22

Source: Development and Reform Commission

•On February 17, 2022, the National Development and Reform Commission, the Central Internet Information Office, the

Ministry of Industry and Information Technology, and the National Energy Administration jointly issued a notice,

agreeing to start the construction of a national computing hub & network in eight regions: Beijing, Tianjin and Hebei,

Yangtze River Delta, Guangdong, Hong Kong, and Macao Bay Area, Chengdu and Chongqing, Inner Mongolia, Guizhou,

Gansu, and Ningxia. Altogether, the construction of 10 national data center hubs is planned in these regions. The overall

layout design of the national integrated big data center network has been completed, and the “east data west

computing" initiative has been officially launched.

•According to the statistics of the Development and Reform Commission in April of 2022, 25 new sub-projects have been

started in 10 national data center hubs. The scale of the data center boasts 540,000 standard racks and the computing

power exceeded 135 billion floating points of operations per second, which is about the computing power of 27 million

personal computers. This new initiative has resulted in a total investment of 190 billion yuan in various related areas.

Among them, the related investment in the western region will have increased 6 times when compared to the same

period last year, and the investment indicates a desirable trend of shifting development from the eastern region to the

western region of China.

•As an operational base for the digital economy, big data centers not only effectively drive investment in upstream and

downstream industries including IT R&D and manufacturing and communication networks, but also promote the

comprehensive digital transformation and upgrade of the general economy and society. Furthermore, it facilitates the

circulation and application of big data and plays an important fundamental role in continuously improving China’s digital

economy. It is expected that during the “14th Five-Year Plan” period, investment in big data centers will grow at an

annual rate of over 20%, and accumulated investment will exceed 3 trillion yuan. The initiative is expected to improve

government policy coordination and implementation results via the data gathering power of 8 major regional data

center networks. Since the new initiative will affect upstream and downstream sectors of China’s big data center

industry, it should be emphasized that during the construction process, strict energy consumption constraints will be

imposed, utilization efficiency measures will be implemented, and overall green development will be promoted.

The overseas fiber optic cable industry, along with its related IT infrastructure

industries, has become an important engine for growth in the global IT industry

Source: Corning

Corning’s fiber optic cable business has become an important part of its sales growth due to increasing demand for 5G,

broadband networks, and cloud computing-related products & services, with the company’s sales of fiber optic cable

growing 28% in 1Q22 YoY. In addition, demand from public infrastructure and private networks is expected to support

double-digit sales growth in the years ahead. Although the U.S. market is currently inaccessible to Chinese companies due

to policies, other overseas demand constitutes an important future growth focal point from a global demand perspective.

China’s fiber optic cable industry to benefit from government’s bidding projects

and policy to drive the development of the optical communications sector

Overseas market demand for fiber optic cable has entered a period of significant growth. Europe and the United

States markets are mainly driven by demand for 5G transmission stations. Southeast Asia and other developing

countries have significantly increased their market penetration of fiber optical cables to households. In China, the

fiber optic cable government contract prices bottomed out in 2021 but have reovered recently. In 1Q22, China

Mobile was able to benefit from the recovered prices as it captures increasing volume of governmental projects

during the first round of bidding in 2022. Meanwhile, China Telecom’s government bidding project volume has

remained relatively stable.

32.00

20.98

16.55

0.00

18.68

11.60

7.03

5.30

3.98

6.9%

1.7%

-36.5%

-0.1%

24.3%

19.3%

17.4%

47.0%

26.8%

-11.4%

61.0%

65.0%

32.6%

33.2%

-60%

-40%

-20%

20%

40%

60%

80%

100%

100

21211919H11817161514

Yangtse Optical Fiber & Cable Regional Revenue

Continental Non-Continental Continental year-on-year Non-continental year-on-year

33.44 40.48 49.43

26.28

20 19 18 14

Gross margin

Source: Wind

Global semiconductor supply-side constraints and shortages have resulted in

record-breaking sales orders and an overall industry boom

Source: SIA

-60%

-40%

-20%

20%

40%

60%

80%

100

200

300

400

500

600

2203

2109

2103

2009

2003

1909

1903

1809

1803

1709

1703

1609

1603

1509

1503

1409

1403

1309

1303

1209

1203

1109

1103

1009

1003

909

903

809

803

709

703

609

603

509

503

409

403

309

303

209

203

109

103

Total order size of the global semiconductor market (US$100 million)

Order size Year-on-year growth rate

TSMC maintains high growth despite global supply shortage

Source: TSMC

As the global leader in the high-end OEM manufacturing process of semiconductor chips, TSMC’s 1Q22 sales revenue

grew 36% YoY and 12% QoQ despite its 5 nm process chips accounting for a declining percentage of its total sales. In

terms of industries, the strong 1Q22 growth can be largely attributed to 1) the high-performance computing servers

that grew 26% QoQ, and 2) the automotive-related industry that also grew 26% QoQ.

High-performance computing & energy-efficient servers and their related

components are experiencing high growth and rapid expansion

Companies

CAPEX

CAPEX-Year-on-Year

Revenues - year-over-year

Construction in progress /

fixed assets

21Q3

21Q4

22Q1

21Q3

21Q4

22Q1

21Q3

21Q4

22Q1

21Q3

21Q4

22Q1

Lixun Precision

31.75

40.68

45.34

98.0%

102.7%

16.2%

42.4%

121.2%

97.9%

19.4%

10.8%

11.3%

Goer Corporation

25.09

17.73

18.26

53.8%

5.1%

8.0%

17.5%

10.5%

43.4%

12.6%

11.7%

13.2%

Leading Puzzle Maker

12.98

7.94

6.84

53.5%

-2.9%

-39.0%

17.6%

1.3%

9.9%

20.6%

12.6%

13.8%

Pengding Holdings

16.45

17.69

11.20

-17.8%

13.6%

-44.4%

23.1%

-0.7%

24.4%

10.7%

10.8%

12.6%

China Resources Micro

3.02

4.67

2.86

106.5%

212.9%

110.2%

35.4%

11.2%

22.9%

12.7%

11.6%

14.1%

SMIC

64.70

124.09

64.72

-48.9%

-15.5%

21.3%

21.5%

53.8%

62.6%

28.4%

38.6%

37.0%

Yankee Technology

3.40

3.87

3.42

191.8%

219.3%

89.1%

64.2%

49.5%

50.5%

53.8%

75.2%

63.3%

Changdian Technology

13.65

13.45

8.99

88.1%

6.1%

50.5%

19.3%

11.5%

21.2%

5.6%

3.6%

3.1%

Huatian Technology

16.31

15.24

15.65

99.2%

61.5%

46.4%

47.5%

31.0%

15.8%

3.1%

3.9%

4.4%

Shennan Electric Road

7.21

6.02

8.89

8.6%

6.8%

42.7%

26.3%

59.9%

21.7%

17.2%

8.1%

12.0%

Shanghai Electric Co.

1.34

1.47

1.52

52.5%

1.0%

41.8%

-7.6%

5.5%

9.8%

4.8%

14.3%

12.5%

Faraday Electronics

0.68

0.70

1.54

42.2%

12.1%

74.4%

47.7%

42.5%

44.7%

1.0%

0.9%

Jianghai shares

0.48

1.80

1.92

20.7%

244.1%

97.4%

33.6%

9.2%

31.2%

7.0%

8.9%

12.4%

Sanhuan Group

7.88

0.60

4.75

158.3%

-89.8%

-9.8%

55.8%

30.9%

7.1%

40.2%

16.8%

22.8%

Shunluo Electronics

3.16

4.23

3.20

5.1%

33.8%

26.4%

15.1%

7.7%

-4.5%

29.3%

28.3%

40.0%

Fenghua Hi-Tech

5.01

7.51

2.67

205.7%

66.2%

-38.9%

10.0%

-22.1%

-6.1%

98.8%

60.6%

69.1%

Cleantech

1.55

1.10

2.08

3.9%

-37.7%

19.4%

29.1%

-5.7%

-24.9%

117.7%

86.6%

72.7%

Aihua Group

0.43

0.29

0.21

-38.5%

2.8%

3.1%

29.2%

11.1%

28.9%

28.3%

15.4%

15.3%

Hikvision

8.40

9.72

9.11

303.0%

144.3%

51.7%

22.4%

20.1%

18.1%

33.7%

34.7%

32.2%

Source: Wind

5G IoT, AI technology, and localization are the cores of China’s domestic digital

economy

Source: compiled by Horizon Insights Research

•The rapid development of 5G IoT and AI technology has brought enterprise digitalization from back-office analysis to

operation management. With the value of data in business operations gradually amplifying, centralized data analysis has

transformed to guide the manufacturing process during the testing stage. From an industrial point of view, we see an

exponential increase in 1) the number of traditional hardware becoming part of the IoT network, 2) front-end intelligent data

filtration, and 3) back-office software analysis as demand for 5G IoT and Al technology is expected to gradually explode.

•Machine vision technology as an application to guide the production process is undergoing widespread rapid growth.

However, in terms of monitoring surveillance systems, some issues remain. For example, “see clearly” as a basic issue has not

been solved, “understanding” is in the product segmentation stage, and ”see accurately” is in the state of benchmarking

demonstration. The demand for certainty in the industry is high, and the challenge lies more in the visual application effect

manifestation and production capacity for volume shipments. Hikvision, as the industry leader, has not only unified hardware

standards but also cultivated the underlying software development platform standard, aiming to rapidly develop a video-

centered intelligent IoT ecology by means of industrial collaborations. In addition, the domestic educational IT market has

entered a stable period, while the overseas educational IT sector has begun intensive promotional campaigns as the price

reduction of LCD panels has enhanced the profitability of flat panel devices used by the education sector.

•In the context of Sino-US technology competition, localization has become an ongoing focus, especially for semiconductors

and basic software. In the past two years, large-scale investments in domestic semiconductors have been made to achieve

domestication and localization. From the perspective of overseas semiconductor companies' capacity planning, the chip

problem is expected to be gradually alleviated, and the downstream demand for intelligent applications should be met

without a problem. In any case, as a relatively stable B-end market business, the smart software industry is suitable for early

investment during an economic downturn.

•Recently, gov’t sponsored Xinchuang program has expanded from government departments & agencies to eight major

industries. In 2021, the financial industry pioneered the usage of all domestic-made software localization as well as the

online collaboration of office systems via the Xinchuang program. In comparison with Xinchuang in governments, the

Xinchuang program in the eight major industries is more intensive and expected to be more sustainable.

The three stages of Hikvision's digital product promotion

Market penetration of the 100

billion security market by

providing solutions for enterprise

digitalization.

With video surveillance systems as

the core, combined with cloud

data processing to complete the

digital empowerment of

traditional industries and improve

the efficiency of enterprises’

business management.

From the perspective of a single

project value, the total enterprise

market value is estimated to be

100 billion yuan.

Rely on existing channels and

develop partners to expand

solution delivery at scale.

Raise the ceiling of output value

per capita, reduce the

dependence of business

expansion on the company’s own

inhouse personnel, enable

authorized channels to deliver

standardized solutions directly to

customers even after making

changes, and allow developers to

use Hikvision's development

platform to customize

development for customers

Company’s revenue growth

accelerates with new channel

expansion, developers provide

incremental solutions, business

model evolves, revenue scale

doubles.

Integration of data and

development platform; integrate

data analysis with smart hardware

to form a unified cloud computing

platform.

Combine useful data and

integrated IoT platform systems to

enhance loyalty and customer

stickiness in usage, thereby

demonstrating platform value

Market potential can not be

assessed, there has not been

enough similar models for

comparison; Apple is in only the

consumer market, and Amazon’s

AWS-IOT application platform

focuses more on software only.

Solutions

IoT Platform

Intelligent Ecology

Source: compiled by Hongze Research

Hikvision’s business revenue breakdown: EBG & SMBG security surveillance

systems and innovation businesses are the key engines of growth

2019

2020

2021

Domestic

PBG System

153.14

159.87

191.61

4.09%

4.4%

19.9%

EBG System

124.49

147.24

166.29

23.88%

18.3%

12.9%

SMBG System

93.46

92.09

134.90

23.38%

-1.5%

46.5%

Innovative

Businesses

44.36

61.68

122.71

64%

39%

50.0%

Overseas

162.39

176.97

219.85

14.43%

8.98%

24.2%

Total

576.58

635.03

814.20

15.69%

10.14%

28.2%

Source: Company Announcement

Despite short-term macro and pandemic control impacts, Hikvision has clearly

demonstrated the ability to innovate

Domestic market: macroeconomic uncertainty and the resurgence of the pandemic have affected business demand and order execution. However, government

infrastructure and other government-related projects are in the recovery phase.

•PBG: the market for security surveillance projects in first and second-tier cities has remained relatively stable; after four years of downturn, the

government project bidding market in third and fourth-tier cities has begun to recover. However, due to the short-term impact of pandemic control

measures, project implementation has been delayed.

•EBG: the demand for finance and real estate industries is relatively weak, while the demand growth from education, energy, and enterprise markets is

more obvious. The growing demand brought about by the need for an intelligent upgrade of surveillance systems is obvious. Intelligent applications in

manufacturing have not yet formed a standardized solution. The company is meeting customer demand by way of rapid product iteration. Hikvision’s

Cloud Eyes is becoming an integral part of enterprise software ecology. Hikvision’s PaaS platform business is gradually expanding its number of ISV

partners as software sales revenue account for an increasing percentage of total sales. The overall EBG business growth is expected to be relatively stable

in the near term.

•SMBG: in 2021, due to rising raw material prices and chip supply shortages, inventory hoarding is a prevalent practice. In addition, due to the impact of the

pandemic, the speed of inventory reduction is relatively slow. The inventory level of distributors-agents has been relatively high compared to previous

years. In the short-term, sales volatility and uncertainty for the SMBG business are relatively higher. Although the SMBG Division’s new products account

for a small percentage of total revenue, it is showing a doubling growth trend.

•Competitive landscape: the chip supply shortage faced by mainstream hardware vendors has led to changes in the competitive landscape as large brands

have significantly increased their market shares through their ability to switch suppliers. In terms of the project solution market, AI and cloud vendors are

focusing new marketing efforts on promoting the effects and benefits of intelligent product recognition.

Overseas market: in 2022, overseas demand is relatively normal compared to 2021. The across-the-board product price increases in 2021 have led to inventory

hoarding by distributors and agents, and therefore, existing inventory is currently still in the process of de-stocking.

•Regional differences: sales in North America is basically stable. Previous supply chain problems in China and the United States have been resolved, and the

sales percentage of own-brand & private labels have increased. In the European market, the sales of project solutions and new hardware have grown to

account for a larger percentage of total sales. The Asia Pacific and Latin America posted the highest growth rates because the social patterns and demand

are like the China market, and therefore, Hikvision’s domestic support team and its international project team were able to successfully market and

implement project solutions for these two overseas markets. The de-stocking phenomenon affected the growth rate in the first quarter, but its impact on

the full year is limited. The sales contribution of new innovative products & services has reached 13% of its overseas sales.

Innovative business: The performance of the company’s robotics business has consistently exceeded expectations, and new businesses represented by

automotive electronics and thermal imaging are expected to become key engines for future growth.

China’s machine vision market is boosted by demand from new energy and

automotive industries, on top of other high-precision manufacturing sectors

According to Cognex estimates, the global machine vision market was approximately US$4.2 billion in 2018 and is

expected to continue to grow at a CAGR of 12%. According to China Machine Vision Market Research Report published by

the China Machine Vision Union (CMVU), the size of China‘s machine vision industry grew from 10.18 billion yuan in 2018

to 14.42 billion yuan in 2020, with a CAGR of 19.02%, and is expected to grow from 18.07 billion yuan in 2021 to 29.6

billion yuan in 2023, with a CAGR of 28.0%. Thanks to new energy battery and automobile production capacity

investment, new infrastructure investment, data center construction, and manufacturing automation advancement,

China’s machine vision industry is expected to be able to maintain its high growth momentum.

Global Machine Vision Market Size China machine vision industry size (million yuan)

Source: Cognex, CMVU.

2013 2014 2015 2016 2017 2018 2019

USD1.4bn USD1.0bn USD1.0bn

Logistics

Automatic factory

recognition

2D vision

USD0.4bn USD0.2bn

USD0.2bn

3D vision Mobile

terminals

Life and

health

2D vision

Automatic factory

recognition

Logistics

3D vision

Life and health

Mobile terminals

Narrowing gap between Chinese manufacturers and overseas leaders

Company

Name

Market Position

Operations (2021)

Keyence

Founded in 1974 and listed on the Tokyo Stock Exchange, one of Forbes list of 100 most innovative companies in the world from

2011-2018. Its products include sensors and measurement instruments, image processing equipment, control and measurement

equipment, analytical equipment for R&D, and business information equipment.

Revenue at 32.2

billion yuan and

net profit at 11.8

billion yuan

Cognex

Founded in 1981 and listed on the NASDAQ in the United States. Cognex is a leading global provider of machine vision products,

including vision systems, vision software, vision sensors and industrial code readers.

Revenues at 6.6

billion yuan and

net profit at 1.8

billion yuan

HIKROBOT

Hangzhou Hikrobot Technology Co., Ltd. was established in 2016 as a subsidiary based on Hikvion’s former machine vision business

division (established in 2014), which mainly operates three business segments: mobile robotics, machine vision and drones.

2.76 billion yuan

(including mobile

robots, machine

vision and drones)

CCS

Founded in 1993, a global leader in light sources for machine vision. OPTEX, a company listed on the Tokyo Stock Exchange, acquired

in 2016 for its MVL (Machine Vision Lighting) business segment.

Revenue at 670

million yuan

Moritex

Founded in 1973 and headquartered in Japan, manufacturing and engaging in products related to applied optical devices and

functional materials, including telecentric lenses for machine vision, bear-resistant macro lenses, and line-scan lenses.

Stemmer

Imaging

A Germany-based supplier of machine vision technology with products from a variety of manufacturers, including cameras, lenses,

lighting products, machine vision systems, and its own customized solutions.

Revenue at 900

million yuan, net

profit at 71 million

yuan

OPT

Established in 2006, one of the earlier enterprises in China to engage in machine vision. Its machine vision products have been widely

used in various high-end equipment, serving many industries such as 3C electronics, new energy, semiconductors and for some

scientific research and teaching, and have been recognized by Apple, Omron, Amphenol, Hans Laser and other enterprises.

Revenue at 875

million yuan, net

profit at 303

million yuan

China

Daheng

Established in 1987, now the holding subsidiary of Daheng Technology. In terms of machine vision components, it has cooperation

with many international famous brands and is their agent sales channel in China. Meanwhile, China Daheng also provides machine

vision-oriented inspection equipment, with competitive advantages in printing, textile and other industries.

Revenues at 780

million yuan

The domestic education tablet market extends to colleges and universities, and

the overseas market demand has grown rapidly

Global shipments of educational intelligent interactive display devices

•According to Future Source, global education intelligent interactive display devices shipped nearly 1.7 million sets

in 2017, including 1.1 million sets in the Chinese market. We expect the global market size to be approximately 25

billion yuan, with the Chinese market accounting for a 50% share.

•Education information technology originated from overseas, and the intelligent interactive display industry started

with the invention of the world's first electronic interactive whiteboard by SMART of Canada in 1992. The

overseas market is dominated by brands such as Promethean and SMART, while the domestic market is

dominated by local brands such as Seevo and HiteVision, with foreign brands accounting for less than 5% of the

domestic market.

Source: Future Source

Overview of major domestic & foreign brands of educational interactive tablets

•Shiyuan and HiteVision Technology are the leading manufacturers of educational interactive devices in China, with a

domestic market share of over 40% and 20%, respectively, and a combined share of over 60% in 2018. The two

manufacturers differ in their production models and market strategies, with Shiyuan producing in an outsourced OEM

manner and focusing on the domestic market; HiteVision Technology has its own production facility and its own brand

business, in addition to an ODM/OEM business for the overseas markets.

•The major brands in the overseas market are SMART and Promethean, and Promethean’s main OEM/ODM

manufacturing partner is HiteVision Technology.

Source: Hongze

Research

Brand Manufacturers

Domestic Market

Brands

Foreign Market

Brands

User

Channels

Equipment

Distributors

Integrators

Education and other

gov’t departments

OEM/ODM

Manufacturer

Schools & Educational

Institutions

HiteVision

5.6 billion

yuan,+36%

4.2 billion

yuan, +21%

2.6 billion

yuan,+22%

弘则弥道（上海）投资咨询有限公司

TMT Q2 Updates:

Software

Overview of domestic and foreign software companies’ valuations

Company valuations according to Wind estimates as of 5/18/22

Source: Wind

FY21

FY22

Market

Value

Revenue

Cash

Flow

Cash

flow/revenue

Gross

margin

POCF

FY22 Revenue

Expectations

Adobe

1938

158

46%

88.2%

13.8%

Salesforce

1621

264

22%

73.8%

20.4%

ServiceNow

866

37%

77.1%

26.5%

Autodesk

425

34%

90.0%

16.0%

SAP (billion euros)

1217

278

22%

72.3%

5.9%

Oracle

1918

405

159

39%

80.6%

5.0%

Atlassian

439

38%

83.9%

29.0%

SnowFlake

459

74.0%

417

66.6%

Market

Value

Revenue

Cash

Flow

Cash

flow/revenue

Gross

margin

POCF

FY22 Revenue

Expectations

Hang Seng Electronics

545

18%

73.0%

25.2%

Jinshan Office

959

55%

86.9%

32.2%

Panmicro Network

20%

95.6%

33.2%

Zhiyuan Internet

14%

72.3%

35.1%

Kingdee International (HK$

billion)

520

16%

63.1%

25.3%

Ufida Network

647

13%

61.3%

21.4%

Domestic enterprise digitalization overlaid with localization trend

Different aspects of business management are handled by different applications

Business

Management

Instant

Message

Project

Management

Document

Editor

WeChat-

Email OA ERP Office 365 WPS

Collaborative office softwares

I n sta nt M e s s a g e

D o c u m e n t

E d i to r

P ro j e c t

M a n a g e m e nt

Collaborative office

Enterprise management software can be grouped into instant

messaging, project management, and document editing

applications. However, the independence of the different

applications from each other creates inefficiencies and information

silos in enterprise management.

As a result, numerous collaborative office applications that can

integrate instant messaging, project management, and document

editing have emerged. For example, vendors such as Slack provides

an integrated by starting with instant messaging, while Teams’

integrated system began with document editing. In addition, despite

a shorter development period, domestic vendors benefitted not

only from the growing demand for integrated collaborative and

remote office systems due to the Covid pandemic but also from the

overall rapid development of the domestic collaborative office

ecosystem. Source: Horizon Insights Research

The domestic software market is gradually shifting from cloud-driven to

localization-driven as the gov’t sponsored Xinchuang Program pushes forward

Source: Channel Research, Horizon Insights Research

O f f i c e m a c h i n e s

A t t h e e n d o f F Y 2 1 , p e n e t r a t i o n

r a t e o f h a r d w a r e e q u i p m e n t

w a s s t i l l l o w a t s i n g l e - digit; i n

F Y 2 2 , p r o c u r e m e n t o f

X i n c h u a n g P C s a n d s e r v e r s w i l l

b e i n c r e a s e d .

O f f i c e s o f t w a r e

D o c u m e n t e d i t i n g t o o l s , O A a n d

o t h e r g e n e r a l o f f i c e s o f t w a r e

a r e e x t r e m e l y w e l l - a d a p t e d t o

t h e X i n c h u a n g e c o s y s t e m a n d

a r e t h e i n t e g r a l p a r t o f i n i t i a l

X i n c h u a n g c o n s t r u c t i o n a n d 2 0 2 2

r e p l a c e m e n t u p g r a d e s .

B a s i c s o f t w a r e

D a t a b a s e & m i d d l e w a r e

r e p l a c e m e n t p a c e

m a i n t a i n s a s t r o n g

c o r r e l a t i o n w i t h s e r v e r

r e p l a c e m e n t .

B u s i n e s s s o f t w a r e

C o r e b u s i n e s s s y s t e m s a r e d i f f i c u l t t o

r e p l a c e , b u t p e r i p h e r a l b u s i n e s s s y s t e m s

a r e b e g i n n i n g t o e n t e r t h e p l a n n e d

r e p l a c e m e n t p h a s e .

Accelerated penetration of Xinchuang Program in the financial sector

The gov’t sponsored Xinchuang Program has expanded from the party and government agencies to eight major industries, with the aim

of domesticating and localizing all IT infrastructure, with the financial sector leading the way and is making the fastest progress. The gov‘t

policy mandates a 100% localization rate by 2025.

•The financial industry is expected to see large double-digit growth via 1) further expansion of the scope of pilot programs; 2) a

significant increase in the budget allocated to the Xinchuang Program as a percentage of the national IT budget.

•The energy industry is still in the early stage of Xinchuang implementation, and there is no clear timetable and localization rate

requirement for the time being. However, starting from this year, there is a required Xinchuang procurement target for office IT

equipment in order to promote the process of localization in the energy industry.

Kingsoft’s WPS document editing, and office collaboration software is an integral part of

the Kingsoft Office product matrix for businesses

Transformation of Kingsoft Office for Businesses

Cultivate C-user h

ADD YOUR TEXT

Microsoft: first to launch Office suite

Kingsoft: mobile focus to dominate the

domestic market

Microsoft: bundling Windows

systems

Kingsoft: excellent experience, value-

added services

Microsoft: launching Office 365, Teams

and more

Kingsoft: WPS+, document multi-sync

Microsoft: forming an office

ecosystem

Cultivate C-end

user habits

Increase the stickiness

of C-end user

Cloud-based collaboration

C-end to B-end shift

Kingsoft Office’s B-end enterprise

business development path is

gradually becoming clear with its

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