20220225-招银国际-China_Software___IT_Services__Positive_cloud_outlook_despite_Russia-Ukraine_crisis_8页_821kb

CMB International Securities | Equity Research | Sector Update Summary

Core Content

This report provides an analysis of the China Software & IT Services sector, focusing on the cloud computing market and its outlook for 2022, particularly in light of the Russia-Ukraine crisis and market share dynamics among major cloud providers.

Key Points

• Russia-Ukraine Crisis Impact: The crisis could lead to a deepened data center chip shortage, as Ukraine produces over 70% of the world’s Neon gas, a critical component in semiconductor manufacturing. This may lengthen server delivery schedules, thereby delaying cloud expansion plans and affecting IDC utilization rates.
• Neon Shortage History: The last significant Neon shortage occurred in 2015-2016, triggered by the Russian invasion of Crimea in 2014, which caused Neon gas prices to increase 10x. Although current semiconductor companies have built up inventory, the long-term impact remains uncertain.
• AliCloud Performance: In CY4Q21, AliCloud reported only +20% YoY revenue growth to RMB19.5bn, due to loss of Bytedance's overseas cloud order, tightened regulations in online entertainment and education sectors, and losing hybrid cloud orders to Huawei and China Telecom.
• Market Growth: The China IaaS + PaaS market grew by +48% YoY in 9M21, reaching US$15.3bn. The report expects 30-40% YoY growth in 2022E and +15-20% YoY increase in cloud capex.
• Market Share Shift: Huawei and China Telecom are gaining share from AliCloud, with Huawei's share rising to 10.7% and China Telecom to 9.0% in 3Q21. AliCloud's share fell to 38.2%, down 3.5 ppts YoY.
• Data Center Strategy: The "Eastern Data, Western Compute" (东数西算) project aims to balance computing power and energy usage between eastern and western regions. Despite this, network bandwidth and data transmission costs remain bottlenecks for data centers in western regions.
• IDC Expansion: IDC providers are expected to accelerate M&A in tier-one cities due to scarcity of land and energy quotas. GDS is highlighted for its strategic moves, including issuing convertible bonds and collaborating with Sequoia Capital.
• Positive Outlook: Despite the slowdown in AliCloud growth, the overall cloud market in China is expected to recover in 2022E, with GDS and Innolight recommended as BUY due to their benefits from cloud capex rebound and optical module deployment.

Main Viewpoints

• The Russia-Ukraine crisis poses indirect risks to the cloud computing supply chain due to Neon shortages, but direct disruption is unlikely due to existing inventory buffers.
• AliCloud is facing increased competition from Huawei and China Telecom, especially in the hybrid cloud sector, and its growth has slowed due to regulatory challenges and lost business.
• Enterprise digitalization is the main driver of IaaS + PaaS demand, rather than new internet applications.
• IDC market is expected to expand in 2022E, with cloud capex growth anticipated at +15-20% YoY, driven by server replacement cycles and underspending in 2021.
• Data center location shift to western regions is challenged by network bandwidth and transmission costs, with latency-sensitive applications still relying on tier-one cities.
• GDS is positioned to benefit from the cloud capex rebound and is strategically expanding through M&A and partnerships.

Key Information

• IDC Market Size (3Q21): US$5.70bn, up 48% YoY.
• Cloud Capex Outlook (2022E): +15-20% YoY.
• Recommended Stocks:
  • GDS (GDS US): BUY, with a target price of US$61.06, EV/sales of 9.6, and sales CAGR of 28%.
  • Innolight (300308 CH): BUY, with a target price of CNY45.60, EV/sales of 4.1, and sales CAGR of 18%.
• Market Share (3Q21):
  • Alibaba: 38.2% (down 3.5 ppts YoY).
  • Huawei: 10.7% (up 1.5 ppts YoY).
  • China Telecom: 9.0% (up 1.2 ppts YoY).
  • Tencent: 10.9% (stable).
  • AWS: 7.2% (down 0.6 ppts YoY).
  • Others: 23.9% (down 1.6 ppts YoY).

Strategic Insights

• GDS is expanding its hyperscale data centers in tier-2 and tier-3 regions and is investing in M&A in tier-one cities to secure land and energy quotas.
• Innolight is benefiting from the deployment of 200G/400G optical modules, which is driving demand in the cloud supply chain.
• The "Eastern Data, Western Compute" initiative is not new, but it is accelerating the shift of data center operations to the west, though challenges remain.

Summary

The report maintains a positive outlook on the China cloud market for 2022E, despite short-term slowdowns in AliCloud's growth. Market share shifts towards Huawei and China Telecom are expected to continue, driven by government and enterprise demand for hybrid cloud solutions. IDC growth is anticipated, with GDS and Innolight highlighted as BUY recommendations due to their strategic positioning and growth potential. The Russia-Ukraine crisis may affect Neon supply and server delivery timelines, but direct disruption is not expected. Long-term trends suggest increased demand for data center services in tier-one cities, with higher rental prices likely due to scarcity of land and power.