FOXCONN INDUSTRIAL INTERNET(601138)TRACKING REPORT：BENEFITING FROM AI-DRIVEN DEMAND FOR CLOUD SERVERS AND NETWORK DEVICES

　　As an important supplier to North American cloud giants, Foxconn Industrial Internet （FII） is set to benefit from increasing demand for graphics processing unit （GPU） servers driven by AI developments. At the same time, large-scale models require distributed computing architecture, which will drive the growth of connected equipment. As a key supplier of communications network equipment, FII enjoys visible earnings growth ahead. We raise our 2023E/24E EPS forecasts to Rmb1.22/1.33. Taking the lower of PE and SOTP valuation results, we arrive at a target price of Rmb17 on 14x 2023E PE and reiterate the "BUY" rating.
　　 Cloud servers: As AI developments promote demand, orders and earnings may grow. q As a supplier to North American internet giants, FII is set to benefit from the AI-driven demand for GPU servers. According to our estimation, large language models （LLMs） handling 100mn daily user visits may warrant a market worth US$400mn for GPU servers; the total incremental market space for GPU servers is likely to reach more than US$4bn in the short term; in the long term, user traffic approaching that of Google （3bn daily visits） will create additional market space. In the AI server market, manufacturers with customization capabilities and good cooperative relationships with internet companies are likely to take the lead, and FII, as a long-term partner of Amazon Web Services （AWS） and Microsoft Intelligent Cloud, is on track to benefit. q As the largest ODM, FII stands to benefit from the higher % of IT spending on cloud computing and the improving prospects of cloud capex. According to IDC statistics, global cloud spending accounted for 60% of the total information technology （IT） spending in 2022, with spending on public clouds accounting for 40% of the total IT spending, and both ratios are likely to continue to rise. Original design manufacturing （ODM） vendors are likely to benefit from the increasing proportion of IT spending on cloud computing and public clouds. According to Counterpoint statistics, FII ranks first among ODM vendors in 2021, taking up about 42% of the US$30.2bn ODM server market, and is likely to be the first to benefit.
　　In addition, from the perspective of orders, electricity prices and other factors, the prosperity of North American cloud giants is likely to pick up, thus fueling a rise in capex and giving a boost to FII.
　　Communications equipment: Benefiting from the growth in demand for switches and optical modules driven by large-scale models. q Large AIGC models are redefining the computing architecture, driving growth in the switch and optical module market. Large AI-generated content （AIGC） models require far more computing resources than traditional models, and the computing architecture will move towards distributed and multi-node cluster training. In cluster training, each GPU card needs to communicate with the help of a high-performance network to exchange training parameters, thus driving the demand for high-performance switches and high-bandwidth optical modules and further creating additional market space.
　　As an important supplier of communications equipment, which accounts for about 60% of its revenue, FII is poised to benefit.
　　According to huaon.com, a provider of industry and economic data in the Greater China region, IT equipment other than servers accounts for about 30% of the cost of data center devices, and communications network equipment, including switches, routers and optical modules that are required by data centers, accounts for about 60% of FII's revenue. The demand for computing power will brew the demand for interconnection, where FII is well-positioned to benefit.
　　Investment value merits attention with the stock trading below 10x PE.
　　Since 2022, FII has been basically trading below 10x TTM PE, at a lower level compared with a number of server manufacturers or consumer electronics manufacturers, which warrants room for a rerating.
　　Potential risks:
　　Cloud prosperity not up to expectations; AI-driven GPU demand falling short of expectations; exchange rate fluctuations; raw material price fluctuations; industry-wide competition beyond expectations.
　　Investment recommendation:
　　The Company's cloud server business is benefiting from the GPU server demand driven by AI developments, while the communications equipment business may also achieve rapid growth with the construction of data centers.
　　We choose the lower of sum-of-the-parts （SOTP） and PE valuation results to give FII a target price of Rmb17 and reiterate the "BUY" rating. q Profit forecasts: Considering the boost to its businesses from AIGC, we raise our 2023E/24E revenue forecast to Rmb553.04bn/602.41bn （from Rmb538.839bn/578.025bn） and our 2023E/24E attributable net profit （ANP） forecast to Rmb24.263bn/26.351bn （from Rmb23.979bn/25.689bn）。
　　We maintain our 2022E EPS forecast of Rmb1.10 and raise our 2023E/24E EPS forecast to Rmb1.22/1.33 （from Rmb1.21/1.19）。 q Valuation discussion: As FII has three different business segments of cloud servers, communications equipment, and industrial internet, we first adopt the SOTP valuation framework and arrive at a 2023E market cap of Rmb365.4bn, corresponding to a target price of Rmb18, based on the PS valuations and revenue forecasts of its three segments. Specifically: 1） In　terms of cloud servers, as FII's profit margin is close to that of Inspur Electronic Information （000977.SZ）， we assign 0.7x 2023E PS to value the segment. 2） In terms of communications equipment, we select ZTE （000063.SZ） and Unisplendour （000938.SZ） as comparable companies and assign a conservative 0.6x 2023E PS multiple to value the segment considering the profit margin. 3） In terms of industrial internet, FII’s profit margin is similar to that of comparable peers like Inovance （300124.SZ）， we assign 6x 2023E PS to value the segment. If using the PE valuation　method, we select Inspur Electronic Information （000977.SZ）， Universal Scientific Industrial （601231.SH）， ZTE （000063.SZ） as comparable companies, which are on average trading at 15x 2023E PE based on our forecasts. We err on the side of caution to derive a target price of Rmb17 on 14x 2023E PE. Taken together, we choose the lower of the two results to give FII a target price of Rmb17 and reiterate the "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。