China Galaxy Securities: The long-term bullish trend in the communications industry is expected to continue. We recommend focusing on investing in four major sub-sectors.

China Galaxy Securities released a research report stating that the market valuation of the communication industry is still relatively conservative, not fully reflecting the industry's high growth potential, and the long-term bull market in communications is expected to continue. Looking ahead to 2026, industry growth will not only come from the strong demand for artificial intelligence both domestically and internationally, but also from the resonance of future and emerging industries, requiring a focus on early positioning. The firm recommends focusing on the direction of investment in technology innovation-led trends, with a focus on four major sub-sectors: operators, optical communications, satellite internet, and quantum technology. Key viewpoints from China Galaxy Securities: Review of the communications industry in 2025: High prosperity catalyzes AI performance growth, impressive performance of AI computing power Since the beginning of the year, the communications industry has increased by 51.67%, ranking 2nd in the industry as a whole, with certain optical module targets seeing nearly a tenfold increase in value, showing outstanding market performance. In 2025, with the rapid development of the global artificial intelligence industry driving industry growth, the AI-related optical communication sub-sector has become the second-largest sub-sector in the communications industry, following only the operator sub-sector, with revenue quality improving season by season and AI strong growth exceeding expectations. In terms of holdings, public funds' holdings in the communications industry have repeatedly hit new highs, exceeding 6.5%. Combined with the high-speed growth of the industry as a whole and the horizontal and vertical comparisons of the current valuation percentile and median percentile of the communications industry, the firm believes that the market valuation of the communications industry is still relatively conservative and the potential for continued growth in communications is promising. Outlook for 2026: Resonance between AI demand and policies, simultaneous rise of emerging and future industries In contrast to the market's views, the firm believes that the development of the communications industry comes not only from the high demand but also from the iteration of infrastructure and policy guidance. Based on this, looking ahead to 2026, against the backdrop of the continuous increase in the country's focus and development in the technology industry, with new quality productivity as the foundation, further leading the technology innovation trend, industry growth will not only come from the strong supply and demand resonance of AI both domestically and internationally but also from the resonance of future and emerging industries, requiring a focus on early positioning. Investment recommendations: Focus on the super-expectations brought by technology innovation-led trends, with four major sub-sectors as investment directions The firm believes that the development of emerging industries and future AI-empowered industries will be important topics during the "14th Five-Year Plan" period, specific to the communications industry, mainly reflected in marginal improvements in the AI computing industrial chain, the increasing dominance of satellite internet + quantum technology, and the performance in operators, optical communications, satellite internet, and quantum technology. (1) Operators: Undervalued with high dividends, operators' profitability and cash flow assets continue to improve, highlighting asset value advantages, continuously increasing dividends to shareholders, and making the second growth curve during the "14th Five-Year Plan" period clear. (2) Optical Communications: Cloud vendors' AI capital expenditures are increasing, driving the vigorous development of the PCB, GPU, optical communications, and copper cable industrial chains, and it is expected that during the "14th Five-Year Plan" period, domestic substitution and industrial upgrades will continue to deepen. (3) Satellite Internet: With the gradual maturity of commercial rocket development and the increase in government capital expenditures, as well as the gradual decrease in the value per unit of a single satellite, the commercial aerospace satellite internet development cycle may begin in 2026. (4) Quantum Technology: With the construction of China's integrated space-air communication, the quantum information industry demonstrates high growth potential, and the market size of quantum technology is expected to continue to rise. The application scenarios during the "14th Five-Year Plan" period will further expand. Risk factors Risk of international uncertainty; Risk of increased competition in the AI computing industry; Risk of slower-than-expected development in the satellite industrial chain; Risk of slower-than-expected development of quantum technology and applications.