CITIC SEC: Computing power price increase spreading, focus on three clues of first quarter report exceeding expectations.

CITIC SEC released a research report stating that looking ahead to April, the A-share technology sector is under pressure in the current macro environment and geopolitical disturbances. Given the performance window and stable performance of first-quarter results, solid stocks with good performance and reasonable valuations are still the preferred choice for allocation. The firm recommends focusing on three areas: 1) domestic semiconductor equipment benefiting from continuous expansion of production; 2) domestic computing power remains in short supply, focusing on companies like Bytechain and Ascendchain, benefiting from the outbreak of ultra-nodes, exchange chips, and server outsourced manufacturing; 3) sectors such as optical modules, optical fiber cables, PCBs, storage, and passive components with logic for a rise, with a preference for leading optical module companies with high performance certainty and relatively reasonable valuations. The OFC conference will enhance the visibility of the optical communication market space, and the sector's performance forecast for 2027 may be revised upward; attention should be paid to the possibility of overseas orders in the middle of the year. The firm also points out opportunities that may arise from the iterative multi-modal model in May and June. CITIC SEC's main points are as follows: The overall heat of the technology sector is declining, with structural differentiation in trading volume. Funds in the A-share market are no longer pouring into the technology sector as a whole, but are concentrating on leading companies like semiconductor giants. Vertically, the technology sector in the A-share market has transitioned from a general rally at the beginning of the year to structural differentiation, with the hardware sector remaining relatively active due to increased demand for AI computing power and rising prices of storage chips, while the software sector has been relatively lackluster due to a lack of new catalysts. Horizontally, the overall pressure in the technology sector in the Hong Kong market has eased, but it still accounts for a larger proportion of the overall Hang Seng Index trading volume, with a decline in heat. In April, the technology sector as a whole may be under pressure, seeking structural opportunities. Based on the market conditions in April from 2021 to 2025, the technology sector has generally been under pressure, underperforming the broader market most of the time in the A-share, Hong Kong, and US stock markets. April is the period of concentrated disclosure of annual and first-quarter reports, entering a window of performance verification in the market. Based on the annual earnings forecasts already disclosed in the A-share market, media and computer industries have a high warning rate of annual losses in their reports and may face significant adjustment pressure. In contrast, the automotive and electronics industries have a significant proportion of positive warnings in their reports, indicating good earnings stability. At the same time, industry leaders with high performance certainty and parts of the sub-sectors with high economic activity are expected to present structural opportunities. Economic activity: Looking back at March, the rise in upstream hardware industry prices, performance verification, and the domestic computing power narrative are worth paying attention to. Price increases remain the main theme in the hardware industry, expected to continue into Q2 and spread to multiple sectors. 1) Upstream sectors like storage, PCB, and optical fiber cables maintained high economic activity in March, with substantial price increases or a halt in new orders; 2) Price increases are expected to continue into Q2, with leading companies in storage, BT resins, wafer foundry, and analog chips confirming price hike plans for Q2; 3) Price increases are gradually spreading to multiple sectors: AI-related sectors such as wafer foundry, power devices, analog chips, optoelectronic devices, passive components, and CPUs are starting to increase prices, either due to demand for inventory replenishment. The economic growth potential of the optical communication, storage, and PCB sectors is gradually being verified. 1) The performance of companies like Biwin Storage Technology in January and February, Victory Giant Technology and Wus Printed Circuit in 2025, and Lumentum and Coherent in FY26Q2 exceeded market expectations or approached the upper limit. 2) Leading companies in the optical module, optical fiber cable, PCB, and storage sectors have a forward PE ratio generally below 20x for 2027, with a possibility of surpassing expectations. The sector has high performance certainty under geopolitical tensions. 3) The stock price performance of optical module companies shows resilience, with opportunities for CSP orders in May and June; the long-term market outlook for the optical communication market significantly increased visibility at the OFC conference, raising the probability of exceeding expectations for the sector's 2027 and future performance. Domestic computing power continues to improve, with a focus on opportunities for domestic replacements. 1) Strong demand downstream, with Tencent Cloud, Alibaba Cloud, and Baidu Cloud all raising prices for large models. Tencent confirmed at a 2025 performance exchange meeting that its AI investment will double to 36 billion yuan in 2026, and the National Bureau of Statistics disclosed that the daily Token calls in China have exceeded 140 trillion (a thousandfold increase in two years); 2) Continuous use of domestic alternatives upstream. Alibaba Damo Academy released the Xintie C950 CPU on March 24, Dawning Information Industry released the 400G lossless high-speed network scaleFabric on March 12, and The Information reported that Alibaba, ByteDance, and Tencent are accelerating their shift to domestic storage chip manufacturers on March 5; 3) Ascendchain has shown outstanding performance, with Huawei unveiling and displaying the AI training inference acceleration card Atlas 350 equipped with the new Ascend 950PR processor on March 20, claiming performance comparable to the H20 (single-card computing power reaching 2.87 times that of NVIDIA H20, supporting FP4 low precision, etc.), with independent third-party testing company Shanghai V-Test Semiconductor Tech. achieving a combined revenue of 321 million yuan in January and February of 2026, a year-on-year increase of 79.15%. Preview of the technology themes in April and May: Agent Harness unleashes the potential of models, expanding the boundaries of multi-modal models. On the Agent side, model capabilities and Harness ecology mutually contribute to each other, with Agents expected to remain a core theme in 2026. With model software engineering capabilities already preliminarily implemented, Agent Harness represented by OpenClaw integrates private data, constructs task loops, and nurtures a Skills ecosystem, significantly expanding the boundaries of model capabilities and driving explosive demand for Agents. Looking ahead to 2026, as Harness reinforces complex task data construction and reinforcement learning and improves the long-range task capabilities of models, Agents are expected to evolve to the "self-evolution" stage and accelerate penetration into high-frequency scenarios like offices. On the multi-modal side, consistency and generation time are expected to continue improving, with video generation welcoming a "Nano Banana2" moment. The new generation of models represented by Seedance 2.0 enhances the referencing ability, supporting multi-modal inputs such as images, videos, and audio, significantly improving the stability and controllability of content generation, and achieving higher realism in complex actions and continuous shots. Looking ahead, given the similarities in underlying technologies of text-to-image and video technology, video generation is expected to surpass a "Nano Banana2" moment, driven by the improvement in multi-modal understanding capabilities, resulting in increased generation time. Looking ahead, May and June are expected to be the burst period for the next round of model iterations. Models like Veo4 preview, Minimax M3, and Kimi K3 are expected to continue expanding the boundaries of model intelligence. Risk factors: The risk of a decline in high-valuation stocks; slower-than-expected macroeconomic recovery progress; risks from industrial policies not meeting expectations; risks from companies' core technology and product development progress falling short of expectations; risks from the slower-than-expected deployment of AI applications by cloud providers; uncertainties from global and domestic epidemics; risks from weak macroeconomic growth leading to lower-than-expected IT spending by the government and enterprises, and others.