IAAs is essentially an IT infrastructure and will directly benefit from the construction of Digital Economy: on January 12, 2022, the State Council issued the “14th five year plan” for the development of digital economy, which puts forward the development goal of increasing the added value of China’s core industries of digital economy to 10% of GDP by 2025. IAAs (infrastructure as a service), i.e. infrastructure as a service, is essentially an IT infrastructure. It is an important part of digital infrastructure and the source power driving the development of digital economy. It plays an important role in China’s industrial digital transformation and the improvement of the digital level of public services.
IAAs products are highly homogeneous, and its competitiveness mainly comes from its own ecological construction: the homogenization of IAAs upstream hardware resources determines the high homogenization of IAAs product functions. The limited pricing power of IAAs industry makes the price competition among IAAs manufacturers more intense. The leading manufacturers continue to “enclosure” through low price strategy. At the same time, Alibaba Tencent and Huawei continue to strengthen their channel capabilities and product and service delivery capabilities. IAAs manufacturers’ core competitiveness lies in their own ecological resources. By deeply cultivating their own business scenarios, they can fully absorb the user groups related to their own business.
The driving force of the cloud has migrated from the Internet industry to traditional fields, and the leading manufacturers have different ability circles in subdivided fields: China’s IAAs industry still has broad space, mainly due to the incremental demand for it facilities driven by the mismatch between the growth rate of data and computing power And the stock demand brought by the continuous penetration of cloud computing in IT systems (there is still a large gap between China’s cloud computing penetration rate of 4% and the global cloud computing penetration rate of 7% in 2020). In the future, with the further promotion of industrial digital transformation, non internet fields such as government and industry are expected to become the main growth force driving cloud computing. Based on their IDC resource differences and ecological construction differences, leading manufacturers have formed different capability circles in each market segment: 1) Huawei has advantages in government, enterprise and financial fields, mainly because it is better at private cloud as an upstream resource provider; 2) Alibaba public cloud excels in finance, retail, industry and other fields, mainly based on its financial, retail, supply chain and manufacturing genes accumulated from ant financial services and e-commerce businesses; 3) Tencent is in a leading position in the field of Internet, especially in the field of games and video.
The profit margin is mainly supported by the formation of scale effect and ecological construction: the capital expenditure of IAAs industry has been at a high level for a long time, which puts pressure on depreciation and affects the profit margin. We believe that the improvement of IAAs manufacturers’ profitability mainly comes from two aspects: 1) scale effect. From the historical data, with the formation of revenue scale, the profitability of AWS and Alibaba cloud has been greatly improved. The operating profit margins of 3q21aws and Alibaba cloud are 30% / – 10% respectively. There is still much room for Chinese IAAs manufacturers to improve their profitability; 2) In terms of ecological construction, IAAs manufacturers enhance customer stickiness in relevant scenarios through good ecological construction, so as to enhance their IAAs service pricing ability. At the same time, PAAS and SaaS businesses involving higher gross profit margin can drive the improvement of the overall profitability of cloud computing business, and the formation of ecological construction can further consolidate the scale effect.
Investment suggestion: Based on the increase in IT infrastructure investment and cloud computing penetration driven by the mismatch between data volume and computing power growth, China’s IAAs industry still has broad growth space. In the short term, due to the continuous capital expenditure investment, the profitability of cloud computing manufacturers is under pressure; In the long run, with the cost dilution after the formation of scale effect and the enhancement of service pricing ability after the improvement of ecological construction, the profit margin of IAAs manufacturers will continue to improve. We are optimistic about the long-term growth momentum and profit improvement opportunities of the IAAs industry, and give the IAAs industry a “buy” rating for the first time.
Suggestions: Amazon; Microsoft; Alibaba SW; Tencent holdings; China Mobile; China United Network Communications Limited(600050) ； China Telecom Corporation Limited(601728) ； Jinshan cloud; Ucloud Technology Co.Ltd(688158)
Risk analysis: enterprise IT construction expenditure is lower than expected; The risk of price war caused by the intensification of industry competition; Policy risk.
