Debon Securities: IDC sector supply and demand structure improvement, AIDC opens a new cycle in the industry.

Debon Securities released a research report stating that currently, under the wave of generative AI, the explosive demand for smart computing may drive a resurgence in the prosperity of China's IDC industry; the industry is moving towards AIDC. The construction technology of AIDC is raising the industry threshold, and the expected acceleration of industry consolidation under the explosive demand. The industry believes that the supply and demand situation in the IDC industry is expected to improve, and it is recommended to focus on domestic leading IDC companies with core regional resources endowments and industry heavyweight clients as well as key links in the IDC industry chain. Debon Securities main points are as follows: IDC is evolving towards AIDC, and the demand for smart computing may drive a revival in industry prosperity Data centers, as important carriers of new-generation information and communication technologies such as artificial intelligence and cloud computing, have become the computing bases of the new digital infrastructure, with unprecedented strategic importance, and can be called the "engine of the digital economy." The size of the data center market in China is steadily rising, with the total number of racks in use nationwide expected to exceed 8.1 million standard racks by 2023, a 25% year-on-year increase, and the total computing power reaching 230EFLOPS, ranking second in the world. In recent years, the rapid supply of data centers in China has led to a short-term oversupply in the industry. Currently, under the generative AI wave, the explosion of smart computing demand may drive a resurgence in the prosperity of China's IDC industry. 2020-2023: New infrastructure strengthens supply & weak demand for internet regulation, short-term imbalance in supply and demand in China's IDC On one hand, in 2020, driven by the new infrastructure policy, there was a short-term investment boom in IDC supply, resulting in a surge in market supply with varying quality; on the other hand, in 2021, the start of strict internet anti-monopoly regulation, the saturation of public cloud customer demand, and the absence of new internet industry demands led to a slowdown in IDC demand. In the short term imbalance between supply and demand in the industry, data center resource utilization and cabinet service fees have both declined, with oversupply leading to further price wars exacerbating market supply and demand changes. Looking at the cabinet service fees in first-tier cities, since 2020, both the occupancy rate and service fees have shown a gradual downward trend. After 2023: New supply slows down & smart computing drives AIDC demand, China's IDC industry prosperity is expected to rise again In terms of supply, according to data from the China Institute of Communications and the Research Institute of Cloud Computing and Big Data, in 2022, the year-on-year growth rates of IDC cabinet numbers and investment amounts in China were 25% and -37.36%, respectively, with growth rates falling by 4.68% and 57.10% year-on-year, respectively, indicating a slowdown. In terms of demand, referring to overseas data centers benefitting from the rising demand for smart computing centers in 2023, leading to a decrease in IDC vacancy rates and rising rental prices. Currently, China's domestic large models represented by DeepSeek or accelerated AI models are promoting the popularization of AI big models and the penetration of the AI applications industry, leading to the growth in computing demand, and smart computing center as a new infrastructure for providing computing services is expected to start a new growth cycle, driving a resurgence in the prosperity of China's IDC industry. According to Intelligence Consultancy, the market investment scale of China's smart computing centers in 2023 reached 87.9 billion yuan, a year-on-year growth of 102%, and the predicted CAGR from 2023 to 2028 is 26.8%. Industry analysis: AIDC construction technology raises industry threshold, with accelerating industry consolidation under explosive demand, focus on leading IDC companies with resource endowments and customer advantages Demand side: Deepseek promotes major cloud players' heavy Capex investment, the AIDC market may exceed one trillion in the next three years. The industry believes that the DeepSeek series models, with characteristics like open source, low cost, and high cost-effectiveness, are quickly narrowing the gap between large models in China and the US, which may lead to the migration of the AI industry logic to the domestic market, inspiring large CSPs to invest in AI in small to medium-sized enterprises at lower costs, deploying complex artificial intelligence solutions, and driving the explosive demand for AIDC. This year, domestic Internet giants are gradually replicating the routes of overseas cloud giants, increasing AICapex investment in the future to seize market opportunities. The industry predicts that the total capital expenditure growth rate of the four major domestic cloud players (Baidu, Alibaba, Tencent, and Byte) in 2025 will be 70%, and it is expected to be 35% and 15% in 2026 and 2027, respectively. Based on this, from 2025 to 2027, the domestic Internet giants are expected to add AIDC market size by 36.4, 51.4, and 61.7 billion yuan respectively, totaling nearly 150 billion yuan over three years. Supply side: Intensification, greening, and high-density are raising industry thresholds, and industry consolidation is benefiting leading companies. 1) Intensification: The layout of the data center industry revolves around the development of "eight major hubs and ten major clusters," gradually concentrating deployments in core regions. At the same time, competition among large models has made the Tenka cluster a standard in the industry, driving the rapid growth of super large data centers and raising the entry threshold for the data center industry. 2) Greening: Data centers have a high energy consumption ratio, and governments worldwide are actively promoting the development of data centers towards green and sustainable directions, with stricter energy consumption controls in core cities, enhancing the advantages of resources in core regions. 3) High-density: The rise of smart computing centers is leading data centers towards higher density and efficiency, with the average power consumption per rack in global data centers increasing from 5.6KW/rack in 2017 to 12.8KW/rack in 2023, and the power consumption of supercomputing and smart computing centers even exceeding 30KW per rack. The industry believes that as a heavy asset industry, the trend of intensification, greening, and high-density is gradually raising industry thresholds, and leading data center operators are concentrating market share gradually due to resources, customer advantages, and technical capabilities. According to IDC, the market share of the top 5 service providers in mainland China has increased from 49% in 2022 to over 51% in 2023. Risk Warning: AI technology iteration falls to meet expectations, cloud supplier Capex does not meet expectations, data center production does not meet expectations, data center occupancy rate slope does not meet expectations, industry competition intensifies, etc.