Guotai Hantong: Favorable conditions for the Chinese stock market's "bullish transformation" are forming, and attention should be paid to AI investment in upstream computational power.

Guotai Haitong releases a research report stating that the market has a fairly comprehensive understanding of the long-term and complex nature of economic transformation. The main contradiction is shifting from understanding economic cycles to a decrease in discount rates, and from focusing on old economic demands to assessing the emergence of new quality-driven growth. It is expected that the favorable conditions for the formation of a "transition bull market" in the Chinese stock market are taking shape. In terms of AI investment, considering that AI is still in the "information infrastructure" stage, upstream computing power has the strongest certainty. Currently, the valuation performance matching of data centers and leading AIDC companies in China is reasonable, with a discount compared to overseas leaders, making it the most worthwhile sub-direction to focus on after a correction. The overall prosperity of the software side is constrained by the weak macro environment, with TOG directions such as finance, transportation, and communications being more certain. The timing of explosive applications is difficult to predict, but internet platform-type enterprises benefit from certainty, and the A-share trend market requires a high securitization rate support, with the media and gaming industries being the most worth watching. Guotai Haitong's views are as follows: 2010-2015: Mobile Internet as an enlightenment for A-share industry trend investment. 1) July-December 2010: iPhone 4 initiates a new era of smartphones, with the Apple chain and touch screen performance leading the way and becoming the strongest theme in the market, with active theme investments in cloud computing, the Internet of Things, etc.; 2) 2011- 2012: "Intensified competition" coupled with "liquidity tightening" led to a hardware side market adjustment, which then turned to an innovation-driven structural market; the overall prosperity of the software side was under pressure due to weak economic demand, but TOG structural opportunities remain rich; 3) 2013: The year of the explosion of internet applications, with the game direction being the strongest field where business models landed first; the ignition of mobile payments, completing the final piece of the O2O puzzle; 4) 2014-2015: O2O model explosion, pure online business model of Internet finance rising first, followed by new business models such as online car-hailing, group buying for dining, reshaping traditional industries with mobile internet. Four insights brought by the mobile internet market: 1) Technological structural bull markets are not completely independent of the macro economy. Technological innovation requires macroeconomic support, and the full fermentation of optimistic economic expectations also relies on the quantitative change to qualitative change of technological breakthroughs; 2) The crowding index in industry trend markets has limited reference significance, but valuation constraints under the final goal-oriented thinking need to be considered. For example, overshooting three years of performance expectations in the hardware side, valuation significantly losing cost-effectiveness compared to globally comparable companies, etc.; 3) Hardware side investments conform to the law of the capital cycle. After the intensification of industry competition, it is necessary to find directions that can create incremental demand, which often relies on technological progress and expanded scenarios; 4) Application investments follow the rule of "information infrastructure construction" - "basic software deployment" - "online application explosion" - "reshaping offline industries". The market space increases sequentially, with platform-based enterprises benefitting the most in the medium term. The most imaginable space on the application side is still in native scenarios, but in the early stages of A-share investment, it may face constraints of a low securitization rate, making it difficult to form a systematic market trend, therefore the strongest investment trend on the application side in A shares is more likely to focus on the transformation of traditional industries with higher securitization rates. Risk Warning: Stagnation in the development of the AI industry trend, escalation of global geopolitical uncertainties.