leaf

1. New Infrastructure, New Engine, New Opportunities

Author: @Zhou Jianbing
Published on: 2020-09-15
Below is the transcript of the roadshow by the Chief Analyst of Guojin Securities, Zhou Jianbing.
Dear investors, if we talk about the hottest term in the Chinese economy in 2020, I believe "New Infrastructure" definitely ranks among them. New infrastructure has become a social consensus and a national strategy. It has profoundly changed the development of the macro economy and various industries. We also know that new infrastructure has been included in the 2020 government work report, which mentions strengthening the construction of new infrastructure, developing a new generation of information networks, expanding 5G applications, building data centers, and increasing charging and battery swap facilities. At the same time, the government work report also mentioned promoting new energy vehicles to stimulate new consumption and demand, assisting in the upgrading of industries.
We also know that since the pandemic, the global economic crisis and Sino-U.S. trade frictions have sparked a major discussion among investors about the future development of the macro economy and policies. In this great transformation opportunity, how should we as investors respond to challenges and emerge from the crisis? We believe that new infrastructure is born of the times and has become a key factor in saving the crisis and competing among major powers.
From historical experience and practical reality, new infrastructure is the simplest and most effective method to address economic crises. It balances short-term effective demand expansion with long-term effective supply expansion, playing a significant historical role in stabilizing growth, employment, adjusting structure, promoting innovation, and benefiting people's livelihoods. We see that during this pandemic, the U.S. excessively relied on quantitative easing, while China vigorously promoted new infrastructure, creating opportunities from crises. In the future, the construction of 5G, data centers, artificial intelligence, charging piles, and urban clusters will be launched on a large scale, bringing profound changes and development opportunities to various industries. It has also attracted global industrial chains, seizing the high ground of technological innovation, breaking the current U.S. strategic suppression of China, and laying a strong foundation for the rejuvenation of the Chinese nation. Today, we take this precious time to share with you four aspects discussing how the warm wind of policies frequently blows, and new infrastructure investment is expected to reach trillions. Additionally, I will briefly introduce the investment opportunities in the seven sub-sectors of new infrastructure. The final conclusion is that we must embrace new infrastructure, embrace certainty, and seize new opportunities.
We know that the central government accelerated the layout of new infrastructure at the end of 2018, further clarifying the scope of new infrastructure. At the same time, we saw that in March this year, CCTV reported on the scope of new infrastructure, which mainly involves seven major fields, which we usually refer to as the seven major fields of new infrastructure: ultra-high voltage, new energy vehicles, charging piles, 5G base stations, big data centers, artificial intelligence, industrial internet, and intercity high-speed rail and intercity rail transit. The term new infrastructure was first proposed at the Central Economic Work Conference in December 2018, where President Xi mentioned the need to play a key role in investment, increase the technological renewal of manufacturing, accelerate the commercialization of 5G, and strengthen the construction of new infrastructure such as artificial intelligence, industrial internet, and the Internet of Things. In the past two years, we have seen the central government repeatedly emphasize the need to accelerate new infrastructure since the pandemic. The connotation of new infrastructure is also constantly enriching. We believe that new infrastructure is different from the "old infrastructure" of the 2008 financial crisis. We know that the 4 trillion investment in 2008 was the "iron public infrastructure" of the old infrastructure. In 2008, the problem of employment and GDP growth caused by the financial crisis was rapidly resolved through railways, highways, subways, and public facilities. This time, we also see that the new infrastructure mentioned by the central government is expected to be different from the previous "iron public infrastructure." This new infrastructure is mainly guided by new development concepts, driven by technological innovation, and based on information networks to provide digital transformation and upgrading for high-quality development, including information infrastructure, integrated infrastructure, and innovative infrastructure. We believe that new infrastructure will drive the development of related emerging industries through increased investment, increase employment, and stimulate GDP growth. We believe that new infrastructure will be the foundation for social and economic prosperity and development in the next 20 years. Advanced and forward-looking infrastructure construction will release new growth momentum for the economy.
We simply summarize new infrastructure as the energy transportation network, information network, and basic rail transit network, which also meets the growing demand for a better life for the people. We see that in April 2020, the National Development and Reform Commission officially defined new infrastructure, dividing it into three parts: information infrastructure construction, integrated infrastructure, and innovative infrastructure. Today, due to time constraints, I will not elaborate further.

In summary, new infrastructure consists of seven emerging fields:

The second half of the PPT is as follows.

• 2. New energy vehicle charging piles;
• 3. 5G base station construction;
• 4. Big data centers;
• 5. Artificial intelligence;
• 6. Industrial internet;
• 7. Intercity high-speed rail and intercity rail transit. These are the seven major fields of new infrastructure. At the same time, we also see local governments actively responding to the central government's call to accelerate the implementation of new infrastructure projects. We also see that technology giants led by BAT are optimistic about the development of new infrastructure and are accelerating the layout of related new infrastructure businesses. For example, in August, the Hunan provincial government mentioned 100 goals for digital construction, with a total investment of over 560 billion; at the same time, on April 20, Alibaba Cloud announced its three-year upgrade target for new infrastructure, involving 5G, satellite internet, and basic computing power facilities; Tencent recently announced that it would invest 500 billion in the layout of new infrastructure, focusing on cloud computing, artificial intelligence, blockchain, big data application centers, supercomputing centers, and industrial internet bases.
     New infrastructure and traditional infrastructure are both beneficial to economic and social development, but the difference between the two mainly arises from the new economic driving force generated under different development stages. We see that new infrastructure and traditional infrastructure have different historical backgrounds. Traditional infrastructure mainly responds to financial crises, including the Asian financial crisis. New infrastructure, especially in the context of the global spread of the COVID-19 pandemic, has become a necessity for China's transformation and development. We know that the global pandemic has further impacted export trade, and new infrastructure must be used as a lever to drive GDP growth through investment. In a nutshell, we believe that new infrastructure is conducive to promoting the high-quality development of the Chinese economy. To get rich, one must first build roads. In the context of digitalization and the pandemic, we believe that new infrastructure will help the high-quality transformation and development of the Chinese economy. At the same time, new infrastructure is suitable for applying new technologies to new scenarios, mainly involving new technologies, new industries, new applications, and new infrastructure for new entities.

New infrastructure is different from old infrastructure in that it has three characteristics: digital empowerment, coordinated and integrated development, and flexible application. We emphasize that new infrastructure is a data-driven internet ecosystem, an interactive system of data development. The construction of new infrastructure is driven by the international environment and domestic macroeconomic conditions, while also responding to the demand for upgrading traditional infrastructure and the impact of the COVID-19 pandemic on the economy.

From an international perspective, the technological wave of the 21st century is a new opportunity for China to grasp innovative development. From the perspective of the domestic economic situation, we believe that the growth model of new infrastructure is shifting, traditional growth drivers are slowing down, and the scale of the digital economy is continuously expanding. We believe that new infrastructure will become a new driving force for China's economic development. Earlier, we also discussed how new infrastructure responds to the impact of the COVID-19 pandemic. During the pandemic, we often saw cloud office, cloud gaming, cloud education, and cloud healthcare. Digital consumption and some digital economic activities have become trends in the development of various industries. We also know that all enterprises are undergoing digital transformation, which has created new demands for new infrastructure. New infrastructure can stimulate economic growth in the short term and counteract the economic downturn caused by the COVID-19 pandemic.

We believe that before the arrival of the Fourth Industrial Revolution, new infrastructure is China's layout to respond to the fourth industrial wave and seize new opportunities for industrial development. The waves of the four technological revolutions, from the mechanization represented by the steam engine in the 18th century to the electrification era in the 19th century, and the information age in the early 20th century, have led us to the fourth technological revolution in the 21st century, represented by intelligence.
As we know, China's economic growth rate is gradually slowing down, and the momentum of traditional economic growth is gradually weakening. The central government has also mentioned that the development model is shifting from high-speed growth to high-quality development. We need new infrastructure as support. The scale of the digital economy is continuously expanding, becoming the latest driving force for high-quality economic development in the future. New infrastructure will build a digital infrastructure. We have made a simple statistic: in 2005, the scale of the digital economy was only 2.6 trillion, and by last year, the digital economy had reached 35 trillion, nearly 36 trillion, accounting for an increasing proportion of the entire GDP, which has now reached 36%. We repeatedly emphasize that the driving force of the digital economy for the development of the Chinese economy is becoming increasingly evident and important. The connotation of the digital economy mainly includes "four transformations": digital industrialization, digital governance, data-driven industrialization, and the value of data. This is our comprehensive understanding of new infrastructure from the perspective of the "four transformations" to push the infrastructure of the digital economy.

China's overall economic stock ranks first in the world, but there is still a certain gap in per capita level and quality compared to developed countries. We need new infrastructure to fill the gaps and serve as an important supplement.
We know that the trend of urbanization in China is becoming increasingly evident, and the future population flow and urban cluster construction will also bring new investment opportunities for new infrastructure. Here we display the urbanization ratio and the population settling in cities. In the future, the new population will be concentrated in the Yangtze River Delta, Pearl River Delta, and Beijing-Tianjin-Hebei regions. We believe that the current construction of urban agglomerations in China still needs to be strengthened, and new infrastructure has brought new investment opportunities for population flow.
Additionally, we also know that the COVID-19 pandemic has caused short-term negative impacts on China's macro economy, with GDP down 6.8% in the first quarter and 3.2% in the second quarter. We believe that new infrastructure, through a large amount of infrastructure construction, will help counteract economic downturn pressures and bring significant investment opportunities to our securities investments. The Fifth Plenary Session of the 19th Central Committee, which will be held in October, will propose new goals and requirements for major central-level deployments regarding new infrastructure.
From a micro perspective, we believe that the COVID-19 pandemic has accelerated the cultivation of digital consumption habits. The closure of listed companies has adapted to the trend of future development, strengthening digital transformation and stimulating demand for new infrastructure investment. Later, I will elaborate on this, including remote office, remote healthcare, online education, online gaming, and online retail, all of which are digital habits cultivated during the pandemic. The demand for consumption has prompted enterprises in various industries to accelerate digital transformation, and digitalization has also stimulated the demand for new infrastructure. Overall, we believe that new infrastructure balances short-term and long-term needs, serving both short-term economic stability and long-term structural adjustment, benefiting people's pursuit of a better life. This is my explanation of new infrastructure.
I will briefly introduce the several sub-sectors of new infrastructure, which are the seven major fields mentioned earlier. Let’s go through them briefly:
We start with the energy network. We know that the ultra-high voltage network is a calling card of the Chinese economy. We see that the future development goal of new infrastructure in the high-voltage field is to reach 1.01 trillion by 2025, which is over a trillion. We have always emphasized that ultra-high voltage is the "electricity highway," the internet is the "information highway," and ultra-high voltage is the "electricity highway." Using ultra-high voltage will greatly improve the efficiency and capacity of energy transmission. Although ultra-high voltage technology started relatively late in China, we have caught up, and we possess independent intellectual property rights, leading the world in ultra-high voltage technology. Preliminary forecasts indicate that the investment scale in the next six years will exceed one trillion.
Another energy network is the new energy vehicles we often see. The future popularization of new energy vehicles requires a large amount of infrastructure, which we usually refer to as charging piles. We have studied that by 2025 (the next five years), the investment scale for new energy vehicle charging piles will reach over 150 billion, which is also a very large investment scale.
Having discussed the energy network, mainly focusing on charging pile infrastructure and ultra-high voltage infrastructure, we will now introduce the information network infrastructure. The largest infrastructure in the information network is the 5G we have repeatedly emphasized in the secondary market. We say that 5G investment is "hard for three years, soft for three years, and service applications for another three years." Last year was the first year of 5G, and in the next five years, its scale will reach 2.5 trillion. 5G will become the future customized network for information technology, opening capabilities, valuing data, and providing intelligent services. 5G will integrate with various industries, driving industrial upgrades and transformations across all sectors. The proposal of new infrastructure will further accelerate 5G investment.
We have also studied that in April this year, the three major network operators released a 5G white paper to jointly build a 5G ecosystem, with an investment scale expected to reach 2.5 trillion by 2025. We have also made annual forecasts for 5G-related statistics. Based on the information network, the cumulative investment scale in big data over the next five years will reach 1.9 trillion, nearly 2 trillion.
China's IDC industry has already shown signs of scaling, centralization, and greening, with a gradually reasonable layout, forming data industry clusters in places like Guizhou, Langfang, and Zhangbei in Hebei. According to data from the Ministry of Industry and Information Technology, the market size of big data in China reached 156.2 billion in 2019. According to think tank forecasts, the annual compound growth of big data will reach double digits, and the investment scale will reach 1.9 trillion in the next six years, which is also a very large scale.
Additionally, in the field of artificial intelligence, we predict that the investment scale in artificial intelligence will also reach over one trillion (1.04 trillion) in the next six years. Artificial intelligence has surpassed the concept of technology and has risen to a high point in domestic industrial transformation and the enhancement of international competitiveness. In July 2017, the State Council released a plan for the development of a new generation of artificial intelligence, proposing that by 2020, the overall technical application of artificial intelligence should keep pace with the world's advanced level. Artificial intelligence has become a growth point for the new economy, and by 2030, the overall development level of artificial intelligence in China should reach a world-leading level, becoming a major center for artificial intelligence innovation globally. The entire industry scale of artificial intelligence is expected to exceed one trillion, with a high compound annual growth rate of 40%.
Next is the industrial internet, one of the seven networks we focus on. By 2025, the cumulative investment scale of the industrial internet will reach 32.32 trillion. The industrial internet is mainly based on the integration of IT, OT, and CT technologies. We believe that the industrial internet is expected to transform the production model of enterprises, which is also an important component of new infrastructure. Currently, China has completed five national top-level networks, with more than 3.7 billion connected devices, far exceeding the current top-level policy planning. In the future, we expect the scale of the industrial internet to reach 32 trillion in total investment over six years, which is not small. This is our annualized forecast for the next six years, and by 2025, the annualized compound growth rate will also reach 17%.
Additionally, one of the seven major projects of new infrastructure is the intercity transportation network. Previously, we talked about the energy network, ultra-high voltage, charging piles, information network, artificial intelligence, 5G, cloud computing, big data, industrial internet, and the construction of intercity rail transit. We expect the investment scale of the new rail transit network to reach 6 trillion in the next six years. This is intercity high-speed rail, which complements high-speed subways. It serves as the capillary for the flow of energy, information, funds, and people. The intercity rail transit can solve the interaction of funds, passenger flow, information, and material flow between cities. We have repeatedly emphasized the need to jointly create an urban economic circle on the rails. In the future, the new population will be concentrated in large urban agglomerations, mainly in the Beijing-Tianjin-Hebei, Yangtze River Delta, and Pearl River Delta regions. We believe that the intercity rail transit mentioned in new infrastructure will help form the future urban agglomeration economy. We have statistically found that in 2019, intercity rail transit reached 6,730 kilometers, with an increase of 969 kilometers. The future investment forecast within six years will reach 6 trillion, and the annualized growth of the industry will also reach over 15%.
In this PPT, we summarize that the construction of new infrastructure mainly focuses on the construction of technology-based infrastructure, including three major networks: the energy network, which mainly includes new energy charging piles and ultra-high voltage; the information network, which includes artificial intelligence, 5G, big data, and industrial internet; and the other network is intercity high-speed rail and rail transit. New infrastructure mainly constructs three basic networks.
Regarding the secondary market, we previously discussed the future industrial development prospects of new infrastructure, the future investment scale, and the role of new infrastructure in promoting economic transformation. We have also sorted out companies related to new infrastructure in the secondary market, focusing on companies in the main areas of new infrastructure, such as ZTE for 5G network main equipment, related companies like Guanghui New Network, New Yi Sheng, and StarNet Ruijie for big data and cloud computing; Inspur Information and Zhongke Shuguang for cloud computing; Qihoo 360 and China Software for data security; and for industrial internet-related companies, we focus on Yonyou Network; in the field of artificial intelligence, we also have excellent listed companies like iFlytek and Hikvision; in the blockchain field, we have Changliang Technology, Newland, and Yuxin Technology. For new energy vehicle charging piles, we have Teruid, Wanma Co., and besides charging piles, there are also hydrogen refueling station infrastructures, such as Houp Co. and Meijin Energy; for smart express cabinets, we focus on New Baiyang; including rail transit, we focus on CRRC, Jiadu Technology, and for the pan-electric grid ultra-high voltage, we recommend Guodian Nanrui, Minjiang Hydropower, Yuanguang Software, and Pinggao Electric. This is our overview of companies related to new infrastructure.
To further focus, after the arrival of 5G, we believe that last year was the first year of 5G. We previously mentioned "hard for three years, soft for three years, and service applications for another three years." 5G will usher in a new technological revolution and innovation cycle. We have sorted out some companies in the upstream and downstream industrial chains related to 5G, such as ZTE, which is the leading equipment manufacturer besides Huawei; StarNet Ruijie for small base stations, Zhongji Xuchuang for optical communication, Luxshare Precision for components, and Shunluo Electronics for electronic components, and Huaxin Electronics for module packaging. These are some of the listed companies we are closely tracking.
Of course, when we talk about 5G, we cannot avoid discussing semiconductors. We continue to be optimistic about the domestic substitution and self-control of chips across all fields. In the semiconductor-related chip field, we focus on equipment from North Huachuang, optical CIS chip self-control from Weir Shares, leading power semiconductor enterprises like Wentai Technology, consumer electronics IoT chip leaders like Huiding Technology, quality chip packaging leading companies like Changdian Technology and Changchuan Technology, leading listed companies in chip storage like Zhaoyi Innovation, and some leading companies in the industrial internet like Industrial Fulian. Recently, some leading enterprises in the third-generation semiconductor industry, such as Sanan Optoelectronics, have attracted attention, as well as SMIC among the advanced process foundries across all fields.
We have sorted out all companies related to new infrastructure, involving 5G, infrastructure, and the entire A-share listed companies, totaling 35 targets, with the core targets listed on this PPT. I have also introduced each industry, only mentioning two companies.

For 5G infrastructure, we have ZTE and Fenghuo Communication; for 5G network facilities, we have Chuangshi Digital. For ultra-high voltage, we have Guodian Nanrui; for charging piles, we have Teruid; for big data, we have Unisplendour and Guanghui New Network; for artificial intelligence, we focus on iFlytek; for industrial internet, we have Yonyou Network. This is the relevant target in the field of 5G consumer electronics applications.

Due to time constraints, I will introduce a power network-related company: In the power sector, we believe that the future development direction will trend towards intelligence and communication. The future annual compound growth will exceed 20%, with an investment scale reaching over 100 billion annually. Relevant ultra-high voltage power network information equipment includes the leading enterprises in the second-tier equipment, Guodian Nanrui, Minjiang Hydropower, and application infrastructure providers like Juhua Technology and Yuanguang Software.
Previously, we also talked about the four major application scenarios of the cloud economy during the pandemic: cloud education, cloud healthcare, cloud office, and cloud gaming. We have sorted out the relevant targets in these four application areas. For cloud education, we focus on online classrooms and relevant family big-screen classrooms, with a focus on iFlytek and Wanda Information; for cloud office, we focus on Kingsoft Office (listed on the Sci-Tech Innovation Board) and Yonyou Software, a leading ERP company; for cloud healthcare, we focus on Donghua Software and Weining Health; for cloud gaming, we focus on Shunwang Technology, Youzu Network, and 37 Interactive Entertainment, among other relevant targets.

Finally, we also share about new energy vehicles in the charging pile sector. In the future, cars will achieve electrification, e-commerce, intelligence, and sharing. We have sorted out the new energy vehicle industry chain, including charging piles. We previously mentioned Teruid, the intelligent car industry chain represented by OFILM, Siwei Tuxin, and Beidou Star Communication, and intelligent window devices from Desai Xiwai.

Finally, we also share that as new infrastructure investments, we have always emphasized that China's economy is transitioning from a major manufacturing country to a strong manufacturing country, from large to strong. China is gradually shifting from an extensive economic growth model to one driven by technological innovation. It is essential to build new infrastructure well, requiring investment in the seven major fields we discussed earlier. As elements of investment in new infrastructure industry companies, I will briefly introduce that when investing in new technology companies, we should pay attention to the growth space of the industry and the growth rate of the company, which is commonly referred to as the track and ceiling. Investment in the technology industry should start from the perspectives of space and growth rate, rather than simply looking at PE, PB, ROE, and valuation. We should focus on high-growth related industries and pay attention to the growth rate of industrial development space. Our investment philosophy is to track and verify the trajectory of growth. Next time, if there is an opportunity, I will share with you our investment principles for new infrastructure, which should have certain trading discipline constraints and also involve asset allocation. We should not overly concentrate on individual stocks, and the buying and selling principles should be adjusted based on the long-term development trends of the industry and the company. We do not pursue selling at the highest point or buying at the lowest point. We believe that when the expected return attractiveness meets the standard, we can start buying, and when the attractiveness gradually decreases, we should sell, trying to achieve appropriate diversification. Our investment in companies is to invest in good companies, focusing on the core competitiveness of the investment company. Therefore, we need to strengthen our research on the new infrastructure industry, emphasizing safety margins in investment, selecting industries and companies, and strengthening industry research, while avoiding speculation on market concepts and themes, and focusing on risk control.
This is our sharing on the theme of "New Infrastructure, New Engine, New Opportunities."
Interactive Session:

Question: New infrastructure is different from traditional infrastructure. New infrastructure requires global universality. Can our country still achieve global leadership? Currently, China is under blockade from some countries (mainly referring to the United States). What do you think about the future development of new infrastructure?
Answer: This investor raised relevant questions about new infrastructure in the context of the recent escalation of Sino-U.S. friction. As this investor mentioned, the U.S. blockade of new technology in China is also coming. We know that on September 16, the U.S. suspended the blockade of Huawei's advanced process chip technology. Recently, we also learned that the U.S. military has placed SMIC on its watch list, and it is possible that SMIC will also be included in the U.S. entity list. How do we view the impact of U.S. technology blockade on the future development of new infrastructure?
I understand it this way. In the previous PPT, I also shared with everyone that precisely because of the suppression of China's new technology by overseas countries (especially led by the U.S.), it has further promoted the transformation and development of the Chinese economy. We must vigorously invest in new infrastructure and develop self-controlled new infrastructure. We also know that China's new infrastructure is under the background of the COVID-19 pandemic and Sino-U.S. friction (not only in the trade field, but it may develop into finance and has already developed into the technology field), which requires us to build new infrastructure represented by information networks, energy networks, and transportation networks. As for the investor's question about whether new infrastructure needs to be globally universal and whether our country can still achieve global leadership under the blockade, the central government recently mentioned that President Xi has repeatedly mentioned "dual circulation," with domestic economic circulation as the main body and international and domestic economic dual circulation as an important supplement to the economic development model. Of course, some people say that in the context of the Sino-U.S. technology war, will the world form an international network and a domestic network as Guo Taiming said? We believe that China has the innovative engineer dividend, the institutional dividend for concentrating on major tasks, the talent dividend, and the technology dividend. Given time, China will gradually catch up with advanced countries in the field of technology.
Let me share a joke. In the Sino-U.S. trade war and technology war, China will surely win. Why? Because given time, China will surely develop advanced process chips, while the U.S. will never be able to brew Maotai liquor. We believe in the innovative capabilities of the Chinese people, including our technological institutional dividends. We believe in the integrity of the industrial chain, and China will surely enter the ranks of advanced countries under the layout of the seven major infrastructure constructions.
Question: Answering the second question, new infrastructure includes many sub-sectors. If we study this industry, what indicators should we focus on, and how do we interpret these indicators?
Answer: This question is very good and very professional. For the new infrastructure industry, we have always emphasized that the last thing I want to share with you is that for new infrastructure, we have always emphasized the industry space. I mentioned the future investment development space of the seven major sub-sectors earlier. Secondly, we should pay attention to the growth rate of the industry. When it comes to the micro level, the listed companies are the growth rate of the company's development. We focus on two major indicators: growth space and growth speed. Additionally, we should pay attention to the important infrastructure role of this industry in the national economy. We first recommend focusing on the information network of the seven major sub-sectors of new infrastructure, including artificial intelligence, cloud computing, big data, and industrial internet. The indicators to focus on are the pull of economic growth and the development of industry growth rates. From the industry background, we can also observe whether the technological penetration rate is rapidly increasing, the sales growth rate, and the investment in technological innovation and research and development (among other indicators). We should also pay attention to the relationship between technology supply and demand, whether there is a supply-demand imbalance. Additionally, from the micro level of the company, we should consider the company's gross profit margin and profit margin improvement status, which means we should look at the ROE of companies in the sub-sectors. We believe we can focus on the growth rate of industrial development space, while the micro level focuses on ROE, including technological penetration rate, research and development investment ratio, and penetration rate improvement.
Question: With the development of digitalization, will traditional manufacturing usher in a spring? Are there any industry trends to grasp?
Answer: We believe that the traditional manufacturing industry will benefit from the development of digitalization, which empowers all industries with technology. As we mentioned earlier, under the impact of the COVID-19 pandemic, major enterprises are undergoing digital transformation, and various industries are moving towards online and intelligent operations. We believe that traditional manufacturing will undergo transformation and development, and all industries will undergo transformation, bringing revolutionary development opportunities. The most typical example is the empowerment of artificial intelligence. We previously mentioned a table showing smart cars. If artificial intelligence is combined with driving technology and travel, it gives birth to autonomous driving, which is smart cars. The four transformations of cars are intelligence, electrification, sharing, and networking, which combine infrastructure with traditional cars. The relevant investment targets I shared with you include high-precision maps, laser radar, cameras, millimeter-wave radar, and communication modules, as well as safety solutions from Neusoft Group. We believe that empowering all industries, including the industrial internet, will upgrade traditional manufacturing and bring enormous investment and development space.
This is our grasp of industry trends. Focusing on the secondary market, we also shared with you the smart transportation industry chain, the combination of artificial intelligence and driving. Additionally, we see new energy vehicles and charging piles. With everything in place for future development, once charging pile facilities are complete, new energy vehicles will bring investment opportunities in the wind. We also know that the lithium battery industry, represented by CATL, the complete vehicle represented by BYD, and the positive and negative electrodes represented by Ganfeng Lithium and Tianqi Lithium, as well as cobalt represented by Huayou Cobalt and Huichuan Technology, will all be key areas of focus.
Additionally, we previously discussed the cloud economy, and after moving to the cloud, various industries will have related investment opportunities. If I were to recommend, we believe that 5G and new energy vehicles are the two largest tracks in the future. We also have applications for 5G. This table is very clear, showing that 5G applications will bring a spring to the development of consumer electronics. We say that 5G is the core information highway of information technology, and technology will usher in a new cycle of innovation.
Well, the one-hour live broadcast is about to end. Thank you very much for taking the precious time to participate in the "Understanding the Top Ten Industries: An Investor Education Activity for Smart Investors" organized by the Xueqiu Community, the Inter-Institutional Market Investor Education Base, and the Securities Canteen. Thank you all, and finally, I will give a brief summary of new infrastructure. In fact, new infrastructure is guided by new development concepts, driven by technological innovation, and based on information networks, providing a construction system for digital transformation, intelligent upgrading, and integrated innovative development aimed at high-quality development. New infrastructure will accompany technological revolutions and industrial changes. The connotation and extension of new infrastructure are not static; with the future development of technology and the economy, the connotation will continue to expand. As for secondary market securities investment, whether from a macro or micro perspective, we have discussed a lot. We believe that new infrastructure provides us with new development opportunities and new investment timing.

2. A Brief Discussion on the Research Framework of the Media Industry

Author: @Lei Tao
Published on: 2020-09-17
Hello everyone, I am very pleased to have this opportunity to share the research framework of the media industry with you, and I would like to thank the Inter-Institutional Market Investor Education Base, the Xueqiu Community, and the Securities Canteen for providing me with this opportunity to share. I am Lei Tao, a TMT industry researcher from Debang Securities. The materials for this presentation were assisted by Lu Yang, who is also our group's media analyst. Without further ado, let's officially begin the sharing.

First, let's take a look at the market review of the media industry. Generally speaking, the media industry adopts the classification method of Shenwan, namely the Shenwan first-level industry. We also consider more detailed classifications and adopt the Shenwan second-level industry classification, which has three categories: one is cultural media, including publishing, broadcasting, and film and television; another is marketing communication, including traditional advertising marketing and new media marketing; and the last is internet media, including online games and internet information services.
We see that from the beginning of this year to September 7, the entire Shenwan media index has increased by 28.16%, ranking 10th among the 28 Shenwan first-level industries, which is moderate, neither high nor low. However, during the same period, we see that the Shanghai and Shenzhen 300 index has fluctuated by 13.98%, meaning that the relative return of the media sector is 14.18%. This number may not seem particularly high, but looking back at history, from 2016 to 2019, the relative return of the entire media industry has been declining every year. In these five years, only this year has seen the first positive relative return. The market performance has made us analysts feel somewhat gratified; after five years of hardship, we finally see a relative positive return, and the market performance has improved. I believe this indicates the emergence of an inflection point for the entire industry, and we have better expectations for the future of the media industry.
Next, let's analyze the four most important sub-sectors of the media industry: the film industry, the gaming industry, the marketing industry, and the internet industry, and then make a brief summary.

I. Investment Framework of the Film Industry

From the perspective of industrial structure, the film industry mainly includes movies, TV series, variety shows, and animations, among which movies and TV series occupy the largest market share, while variety shows and animations are the two fastest-growing sub-sectors. The film industry mainly meets the demand for spiritual consumption. As the overall living environment and income improve, spiritual needs have come to the forefront.

Moreover, the demand is increasing. In 2019, the relevant industry accounted for nearly 287.8 billion, with a year-on-year growth rate of 20%. Except for 2018, which was significantly affected by policies, other years maintained a growth rate of over 20%. The policy impact in 2018 was mainly due to the Fan Bingbing incident, tax investigations, and restrictions on costume dramas, but overall, the Chinese film and variety market has maintained a high growth rate of over 20%. In the future, with the rise of 5G and VR/AR technology, the film industry will usher in new user experiences and has better explosive potential.

We won't elaborate on the relevant data. When we analyze an industry, understanding the industry chain is very helpful for our research. We try to look at the upstream, midstream, and downstream of the film industry.

• From the perspective of the industry chain structure, the film industry mainly includes funding providers, such as advertisers, large production companies, and industry funds. After the funding providers, we need to connect with content providers, such as IP owners, IP literature adaptations into films or TV series, overseas copyright imports, and original content, which is the entire upstream of the film industry.

• The midstream consists of content producers, who process funds and materials into content. This is a very important segment of the entire industry. Some well-known film companies, such as Huayi Brothers, are in this field, including movie, TV series, and variety show production companies like Hunan Broadcasting and Television.

Once the content is produced, it needs to be disseminated. The next step is the content dissemination side, including cinemas, theater chains, TV stations, Douyin, and other dissemination channels. After these dissemination channels, we can finally charge downstream customers, including box office revenue, platform memberships, and for some animated IPs, we can also create merchandise, usually called IP derivatives, to realize monetization.

• In the entire chain, participants in each link are based on their core business. For example, Hunan Broadcasting and Television has excellent content production, and these players will continuously expand upstream and downstream based on their core competencies, broadening their capability boundaries to gain stronger bargaining power in the industry chain.
  In addition to traditional methods such as box office revenue, there are many new business models. How to charge has produced new characteristics, such as membership fees, merchandise derivatives, and even e-commerce services during movie screenings. The transformation and innovation of this industry chain are ongoing.

Let's further break down the entire film industry chain, focusing on movies, which are the core segment of the film industry. In 2019, China's box office reached 64.1 billion, firmly ranking as the second-largest box office market globally, with the U.S. in first place. We can see from the upper right chart that the growth rate in 2015 was very high, at 46%, mainly due to a wave of platform subsidies that year, leading to a box office boom. After the gradual decline of ticket subsidies in 2016, the entire industry entered a normal market development state, showing growth rates of 13% and 12%. This is not considered slow for the overall industry growth rate; it is still a relatively good growth rate. The natural growth of the market is very beneficial for the overall market's healthy cycle. In recent years, we have often seen some excellent film creations, such as animations, suspense dramas, and crime dramas, which are all increasing the quality of content creation in this industry.
Of course, this year has been significantly affected by the pandemic, and many cinemas have not yet opened or have just opened, resulting in significant losses for the entire film industry this year. However, due to the good control of the pandemic in China, the industry is likely to recover to normal conditions next year. Currently, the entire domestic film industry has shifted from state monopoly to free competition, so we can see that the entire Chinese film industry has always been in a virtuous cycle.
In the lower right corner, we have a simple illustration of box office revenue distribution. We often hear about a movie's box office reaching around 2-3 billion. How is this revenue distributed? In fact, for the producer, such as Huayi, which produced the excellent film "The Eight Hundred," how much can it earn? We see in the lower right corner that in statistical terms, it is usually divided into box office revenue and total box office revenue. The total box office revenue deducts about 8% for the National Film Fund (about 5%, plus some turnover taxes and additional taxes). After deducting this, the remaining amount is called the box office revenue share. In the box office revenue share, cinemas take about 50%, theater chains take about 7%, and some distribution companies take a share of the box office revenue. Finally, the amount that falls into the hands of the production company is about 30%. Of course, this data is not absolute; it is a rough guideline. Some production companies with very strong films can take more than 30%. Therefore, the overall box office revenue may only fall into the hands of the production company by about one-third, which helps everyone better understand the cash flow in the film industry.

Next, let's take a look at the situation of the TV series industry. In fact, the Chinese TV series market has also become quite large, with over 140 billion. In recent years, it has been subject to significant regulation, but in 2015, the growth rate was around 15%, which is also a good growth rate. The characteristic of this industry is that it is B2B2C. In the past, we often heard the term "watered-down plot," where a series would have over 70 or 80 episodes. Now, various regulations have been quite strict against this, and this year we can see more and more quality productions being broadcast on platforms or TV stations, so the entire industry is entering a quality era, and we can see this structural change.

We also see that some revenue-sharing series are constantly breaking through revenue ceilings. After two years of regulation, the industry has entered a virtuous cycle.

The film industry, including movies and TV series, as well as variety shows, usually requires some data support for tracking and research. This industry has some trackable rigid data. We can usually track audience evaluations and revenue situations for a movie or TV series through professional movie versions of platforms like Lighthouse and Maoyan, Douban ratings, and real-time box office tracking on Maoyan. The data from these tools is very accurate and timely, which is very helpful for researching the entire film industry. If anyone is interested in these industries, these tools can be utilized.

How should we make corresponding investments? With data, understanding of the industry, and knowledge of the industry chain, the investment logic of the film industry can be divided into three stages:

1. Short-term. In the short term, we usually look at a film company by examining a blockbuster work. We try to predict which blockbuster work will be successful, and another very important factor is the release schedule, such as during the Spring Festival or National Day. We expect these schedules to bring significant revenue to the company.
   The above chart shows an analysis we conducted on a certain company. We can see that the largest part of the middle circle indicates that this film company has outperformed the Shanghai and Shenzhen 300 index, and this wave is a very beautiful upward curve. This rise was mainly due to the high expectations for a particular movie, and everyone believed that this movie would likely become a blockbuster, so the market gave it a very good increase during this wave. This is how we look at a company in the short term, focusing on its potential blockbuster works and the important schedules that support the company's performance.

2. Mid-term. This refers to looking at the company's work reserves for this year and next year, seeing which of its work reserves has blockbuster potential, as well as the progress and launch plans of its key projects. This is an important focus for mid-term investment in a film investment company.

3. Long-term. In the long term, we may not need to focus on individual works themselves, but rather on the company's systematic production capabilities and the project resources it has. For example, if it has a rich IP resource and some strategic plans that can be implemented, such as gradually developing certain key IPs into series or universes, if its strategy and feasible direction are clear, we can pay attention to such a company at the right time. For example, a certain video platform has a good drama production plan and various income sources from memberships, and in the long term, we look at how much long-term investment returns these can bring to the company.

II. Investment Research Framework of the Gaming Industry

The gaming industry is also an important segment of the media and internet sector. We analyze the gaming industry similarly to the film industry. First, let's look at its overview:
In 2019, the Chinese gaming market, including overseas exports, reached 310 billion yuan. The Chinese gaming market is relatively special; it is usually divided into domestic and overseas gaming exports. Domestic gaming, in 2019, mobile games had already surpassed 150 billion, which is a very large scale, and the growth rate remained good at 13%; while PC games, which are played on computers, have remained relatively stable, fluctuating around 60 billion over the past five years; web games have further shrunk, dropping below 10 billion.

Next is cloud gaming, which is our expectation for the future of the gaming industry. The gaming industry has released new works, but currently, it does not contribute much revenue; it may become a core track in the future.
The domestic gaming market has exceeded 11 billion U.S. dollars in overseas markets, with growth slightly higher than domestic gaming. Global gaming revenue is close to 150 billion U.S. dollars, with a year-on-year growth of 7.2%. Therefore, the growth rate of domestic gaming in overseas markets is higher than the overall growth rate of global gaming, reflecting the ability of domestic gaming manufacturers to go overseas. Mobile games remain a key focus of global gaming.

In the domestic gaming segment, the gaming user market is essentially a stock market. It is difficult to see a significant increase in the gaming audience because the penetration rate of smartphones and PCs is already high. For domestic gaming, we consider that different technological carriers can bring significant differentiation to the gaming track. Essentially, it is a migration of user habits, transitioning from web games to mobile or PC games. We need to pay attention to structural changes and the improvement of ARPU (Average Revenue Per User) value. The so-called ARPU value refers to how much money gaming users spend on a particular game. Previously, playing web games did not cost much, but playing mobile games incurs costs, which is a clear increase in revenue for the entire market and gaming industry, even though the overall user base may not increase rapidly.

Gaming, as the most common form of entertainment in today's society, has an increasing attribute of social consumption, especially among young people, such as those born after 2000 or Generation Z, who have strong online consumption capabilities and spending power. Therefore, the increase in ARPU value has great potential. In overseas markets, gaming can still enjoy user growth dividends because there is still a high penetration rate of smartphones in places like India and Europe, where there is still significant room for growth in the number of people who play games and spend money on them. Therefore, user growth and the increase in ARPU value are both very important dividends for overseas markets.

Just as we analyzed the film industry chain, we also conducted an analysis of the gaming industry chain, which can be seen in the following chart. It comes from the listing announcement of Zulong Entertainment. The gaming industry chain mainly includes IP holders, developers, game publishers, and distributors, as well as some payment channels and telecommunications operators, although their proportion is relatively small.

What is meant by the IP holder of a game? For example, if I have the IP of Donald Duck, I will give this IP to a game developer for development; I am the holder of this Donald Duck IP. The monetization of intellectual property means targeting a precise user group for precise marketing, focusing on the influence, popularity, and reputation of the IP.

Once the game is sold, if someone plays it and generates revenue, the IP holder will take a 5-10% share, while the game developer can get a 15-35% share of the revenue. The game publisher and distributor will take their respective shares. Overall, participants in this industry chain share the revenue generated by consumers, and everyone works together to increase the revenue from the game.

The competitive landscape of the gaming industry is dominated by Tencent and NetEase, which firmly hold the first and second positions in the domestic market, ranking first and seventh globally, respectively. In 2019, the revenues of these two companies were 114.7 billion and 46.4 billion yuan, respectively. The third player is Sanqi Interactive Entertainment, which performed well due to its previous success in the web game era and has also transitioned well into the mobile game era. Perfect World is currently in the second tier of domestic gaming companies, ranking 23rd and 24th globally, with revenues of 13.2 billion and 8.04 billion yuan, respectively.

Overall, the concentration of gaming players is relatively high, especially in the mobile market, where the top ten players accounted for 67% in 2016 and increased to 78% in 2018, with even higher concentration in 2019. From the perspective of industry development, the trend of e-sports becoming more like sports, the expansion of gaming overseas, and the development of the cloud gaming ecosystem are the most promising directions.

The above is a chart we extracted from iResearch Consulting, showing the corresponding growth rates and revenue scales.

As mentioned earlier, let's briefly discuss the characteristics of cloud gaming. Cloud gaming is a future trend in the gaming industry. Its main feature is that it does not require local installation. Currently, when we play games, we need to download them from apps and then open them to play. However, cloud gaming eliminates this step; it can be played directly through a link, with all the animation rendering and calculations done by remote cloud data centers and sent to our mobile terminals via 5G networks. This greatly reduces hardware requirements and lowers the cost of trying out heavy games. Sometimes I want to play a large game, but when I see that my phone only has 2GB of memory, and that large game requires 4GB, I am reluctant to spend a long time completing the download. Therefore, I believe that cloud gaming allows for a value shift in the industry, continuously moving towards the gaming production industry chain, and the ARPU value and upstream revenue will increase significantly. The development of cloud gaming also has demand; we often say that the fast speed and wide bandwidth of 5G networks are not utilized, but cloud gaming can consume a significant portion of this bandwidth. Thus, from all aspects, whether for gamers or telecommunications operators, cloud gaming is a battleground for them and a key incremental area in the future.

As mentioned earlier, we have analyzed an industry and need reliable data sources. The gaming industry has trackable data, mainly including game approvals from the National Press and Publication Administration, which we often hear about as game licenses. In 2018 and 2019, game licenses were somewhat tightened, but currently, they have entered a normal approval stage. We can see that the restrictions on licenses are not as severe, but if some games cannot apply for licenses on time, even if they run, they cannot generate revenue, so tracking licenses is very important.

Additionally, we will look at game communities like TapTap to see game evaluations. TapTap is a relatively professional gaming community where many experienced players write feedback during the trial operation of games, allowing us to see expectations and feedback on games, which is also an important point for tracking the performance of a game.

Moreover, platforms like Seven Wheat Data and SensorTower allow us to see some game revenue and relevant data to support our evaluation of a company's game development. There is also App Annie.

The investment logic for gaming is more about exploring investment opportunities across multiple links in the industry chain, with a particular focus on innovation capabilities that drive the sustainable development of the industry. In the short term, we need to look at the data performance after the pandemic, as during the pandemic, many games experienced a surge in users. However, after the pandemic gradually eases, we need to see which gaming companies and which games can retain users who have entered the system. User retention ability is a significant test. In the short term, we mainly focus on this data performance and grasp the window period of relative scarcity of works under stricter regulations, where you can launch quality games to seize user resources.

In the mid-term, we look at the micro-innovation capabilities and competitive advantages of companies across various links in the industry. Micro-innovation includes not only development capabilities but also operational capabilities, advertising to attract customers, managing traffic, and having a long product lifecycle compared to competitors. Companies with such capabilities are worth paying attention to.

Finally, we look at the long-term, which mainly involves assessing the company's development strategy and grasping industry changes. For example, if a company can effectively seize the transformation of the cloud gaming industry or excel in overseas markets, providing users with a new experience and opportunities for industrial upgrading, such companies are worth our long-term attention. This is the investment logic for the gaming industry across short, mid, and long-term dimensions.

III. Investment Research Framework of the Marketing Industry

In 2019, the domestic advertising market size was 867.4 billion, which is a very large figure, with a year-on-year growth rate of 8.5%. Looking back over the past 20 years, the advertising and marketing industry has sometimes deviated from GDP growth. In certain special periods, the popularity of new media can lead to short-term explosions in the industry, but overall, it still relies on GDP growth as a bottom line. From a structural perspective, online advertising has already become dominant, accounting for 74% in 2019, maintaining a high growth rate of over 30% for nearly five years, which is an astonishing figure. The demand for advertising in the mobile and online virtual world is growing rapidly. Coupled with technological iterations, we see more and more technologies being integrated into the advertising industry, including how to evaluate advertising effectiveness and how to make advertisers willing to invest in your advertising. The technologies behind this include artificial intelligence, precise user profiling, etc. If 5G and VR/AR technologies are applied, it will enhance the interactive experience of advertising, further boosting industry demand and growth.

Let's also take a look at the marketing industry chain. The traditional industry chain is relatively simple, involving an advertiser providing funds, and an advertising marketing company executing these actions, finally looking at the media and audience. However, in the online advertising segment, the industry ecosystem has become increasingly complex. In the context of the digital economy, programmatic and precise marketing have given rise to many intermediary links. The upstream mainly consists of advertisers and agents, while the midstream includes various technology service providers such as Demand-Side Platforms (DSP), Supply-Side Platforms (SSP), Advertising Exchange (ADX), Data Management Platforms (DMP), and surrounding service providers like verification analysis tools and programmatic creativity, as well as traffic evaluation, etc. The downstream mainly consists of streaming media and audiences, such as when browsing Douyin, where the algorithm continuously pushes similar content based on user preferences.

1. DSP: Demand-Side Platform, a comprehensive management platform for advertisers and agents, managing multiple digital advertising and data exchange accounts through a unified interface.

2. SSP: Supply-Side Platform, common platforms include Baidu SSP, 360 SSP.
3. RTB: Real-Time Bidding, a bidding technology that evaluates and bids for each user's display behavior across millions of websites using third-party technology.
4. DMP: Data Management Platform, which integrates scattered data from multiple sources into a unified technology platform, standardizing and segmenting this data, allowing users to push these segmented results into existing interactive marketing environments.
5. ADX: Advertising Exchange, an internet advertising trading platform that connects DSP (buy-side platform) and SSP (sell-side platform), collecting a large amount of media traffic through SSP, thereby collecting and processing data belonging to advertising target customers. The Ad Exchange is a trading place for precise marketing.

We see the development trend of the marketing industry, where user usage scenarios are constantly changing, and new scenarios are emerging. Platforms like Douyin and Kuaishou, and even internet celebrities, are constantly creating new user scenarios, making media increasingly diversified. Looking ahead to the arrival of the 5G era, these changes will continue to iterate and evolve. The latest model is the internet celebrity and fan economy, where influencers help with word-of-mouth recommendations and precise services, which are very innovative models in the digital age.

In the process of numerous technological iterations and promotions, marketing has two points of focus: the unchanging point is that since the emergence of advertising, the marketing purpose has never changed, which is for advertisers to sell their products better, and users pay for resonance and recognition, generating consumption motivation.
The purpose of advertising is to evoke resonance (emotion) and recognition (quality - brand).

Finally, we summarize that the investment logic of the marketing industry is to follow the new marketing trends in the digital age, clarifying the competitive advantages of relevant enterprises. In the short term, we focus on the pent-up marketing demand and the strong, multi-level consumer demand accumulated by advertisers after the pandemic. We pay attention to which companies can do this best, as they are the most likely to seize opportunities in the short term.

In the mid-term, we look at the advantages of certain companies in specific segments, including channels, data, technology, talent, and capital, etc. For example, some companies excel in elevator advertising, while others excel in short video advertising, such as Douyin and Kuaishou, which have strong competitive advantages. In the mid-term, we will observe whether these competitive advantages strengthen or weaken, thus identifying investment opportunities for certain companies.

In the long term, especially for advertising and marketing companies in the digital economy, we will see whether they can keep up with technological trends, connect with the latest carriers and media, and achieve the company's second curve of growth. These are the points we will focus on in the long term.

Product lifecycle curves can be changed through technological advancements.

IV. Investment Research Framework of the Internet Industry

In daily life, we come into contact with many internet services. As of Q1 this year, the number of internet users has reached 900 million, with mobile users accounting for 99% of the total internet users, meaning almost everyone has a mobile phone. Therefore, this dividend is nearing its end. The entire internet industry, especially mobile internet, is primarily focused on deeply tapping the value of existing users, and everyone is competing fiercely in this area. The digital economy has become an important engine for GDP growth, and the internet industry remains very prosperous and competitive, with some industries potentially achieving a winner-takes-all situation. Of course, we also need to differentiate between different industries, as some industries are naturally winner-takes-all, while others allow for several companies to thrive.

In the first half of this year, the highest revenue share in the internet sector came from e-commerce, accounting for 43.3%. The speed of growth is very fast, and everyone feels it deeply, especially during the pandemic when people turned to online shopping. Additionally, advertising accounted for 24%, gaming 14%, and paid users and live streaming accounted for 5%. The four major businesses combined account for 87% of total revenue. E-commerce is a crucial branch for us, as we are the largest single market for e-commerce, and the growth rate remains very fast.

The essence of the internet's development trend is that it is fundamentally a traffic business. How we acquire traffic and how to monetize that traffic are the two most important propositions for internet companies, and almost all competition is concentrated on these two ends to achieve revenue. In addition to advertising and gaming, paid users and live streaming value-added services are increasingly becoming growth points for major internet platforms. The main reason is that our willingness to pay for online content and services has significantly increased, and our awareness of copyright has also greatly improved. This is different from before, when people were only willing to pay for internet fees and preferred free services. Now, to enjoy better services and content, people are willing to pay a certain fee, which leads to the continuous increase in the overall internet traffic and ARPU (Average Revenue Per User) value. This is currently the most important logic.

The direct monetization of traffic is through revenue, calculated as:

MAU × Conversion Rate × ARPU Value. In the past, when the population dividend was present, the penetration of smartphones gradually increased, and MAU exploded rapidly. In the entire secondary market or investment circle, companies that can acquire higher traffic will have higher premiums, and their valuations will be significantly higher. However, now the main growth point, as I mentioned earlier, is that the growth rate of MAU is slowing down, and in terms of monetization, companies with strong monetization capabilities will be able to obtain higher premiums in the capital market.

MAU (Monthly Active User) is a statistical term for the number of active users on a website or app in a month (excluding duplicate users). The size of this number reflects user activity but cannot reflect user stickiness.

In the future, we believe that the key to increasing customer stickiness and obtaining higher ARPU values within the traffic system will be the companies that can achieve this.

In the internet sector, we can see some high-frequency data. The characteristics of the internet are that each database has some differences in its definitions. There is no absolute certainty that we see a certain data point, as different databases may have variations in the same term. However, the trends, logic, and models supported by these data can help us better analyze the quality and potential of corresponding companies. These data are mainly available on platforms like QuestMobile, iResearch, and TalkingData. If you need to conduct further in-depth research on internet companies, we can obtain active users, MAU, user stickiness, user retention rate, payment rate, and ARPU value through these databases to support our analysis.

The core investment logic in the internet industry is still to grasp core assets and explore high-growth tracks and targets. In the short term, we look at the explosive growth dividends brought about by online demand stimulation after the pandemic. We can also see that during the pandemic, some e-commerce companies in the U.S., A-shares, and Hong Kong stocks experienced significant increases before August because the pandemic stimulated online demand, and their performance was excellent. In the short term, as the pandemic gradually eases, we mainly look at the ability of e-commerce platforms and other internet platforms to retain customers. If the customer retention rate is high and the ARPU value remains stable, then this company is worth investing in in the short term.

In the mid-term, we will observe the online consumption upgrade brought about by accelerated penetration into lower-tier markets, including physical goods, virtual services, and life services. User habits have changed, leading to more serviceable and monetizable scenarios. In lower-tier markets, replicating the consumption scenarios of first- and second-tier cities will be valuable for companies that do this well.

In the long term, we will look at the core competitiveness of companies from multiple dimensions, including first-mover advantages, network advantages, replacement costs, and innovation capabilities. Ultimately, we will derive the company's economic moat, assessing whether it can maintain its moat compared to its competitors, making it difficult for others to replace it. Companies with such capabilities will have core competitiveness in the long term, allowing us to invest at the right time and hold them for a long time to achieve stable returns.

The overall strategy in the internet industry is to focus on stable core assets, which have competitive advantages in their respective tracks and high-growth potential stocks. Currently, there may not be particularly large companies, but they have already identified suitable and corresponding niche tracks. Both investment paths can be referenced.

V. Summary of Views and Risk Alerts

Earlier, we analyzed and sorted out the investment logic and high-frequency data tracking methods for the four sectors. Finally, let's summarize our views. In terms of investment logic and strategies, we can describe the industry with a sentence, focusing on which points we should pay attention to regarding a company:

1. The core of the film industry is to focus on quality content and observe marginal changes in the industry, so content is key, and marginal changes are worth tracking with high-frequency data.
2. The gaming industry focuses on discovering investment opportunities across multiple links in the industry chain, including not only game manufacturers but also game distribution, operation, and even upstream IP, etc. We look for investment opportunities in the industry based on which link's innovation capabilities can drive sustainable development.
3. The marketing industry focuses on adapting to new marketing trends in the digital age, maintaining a good competitive advantage compared to competitors, and having a clear positioning and boundaries. Such companies are worth exploring and focusing on.
4. The internet industry can grasp core assets in the competitive landscape and explore high-growth niche tracks through two investment paths.

Finally, when we analyze an industry and find a specific company, we can filter out some good companies through the above methods, but we also need to be aware of some risk points that we need to identify:

1. Policy and regulatory risks. When policy and regulatory risks increase or tighten during a certain period, companies related to content, such as films, will be significantly affected. When such regulations and policies arise, we need to be cautious and carefully analyze how these policies and regulations will impact the industry.
2. Risks of intensified competition. We often joke that when people see where business is profitable, many rush in. When you discover a very good and profitable track, you must be alert to the risk of intensified competition. Competitors may not only come from within the industry but also from outside the industry. We particularly need to be cautious of "dimensionality reduction attacks." For example, if I create a tool and Tencent finds it good, it can add such a tool option in WeChat, which may directly eliminate that tool company. Such dimensionality reduction attacks need special reminders and attention.

Risk points to pay attention to when analyzing an industry:

1. Policy and regulatory risks.
2. Risks of intensified competition (be cautious of dimensionality reduction attacks).
3. Asset impairment risks (especially goodwill impairment).
4. Risks of infringement and equity pledges, such as whether the source of content or game adaptations is reasonable and normal. Equity pledges include situations where the actual controller has pledged many shares, and once the stock price falls, the actual controller may lose control of the company.

Roadshow Audience Q&A
Audience Question: The equity pledge rate of film industry companies is currently very high. Is there a significant risk? Will the film industry recover in the next two years?
Lei Tao: Yes, many film industry companies currently have very high equity pledge rates, which requires significant attention. On one hand, we need to analyze where the funds from the equity pledges are going. If a certain actual controller has an equity pledge rate of over 90%, then the risk is very high. We also need to look at what the pledge price is. For example, if the pledge was at 10 yuan, and now it has dropped to 9 or 8 yuan, this risk must be avoided. If such situations arise, it can be very dangerous.
As for whether the film industry can recover in the next two years, I believe it certainly can. After two years of slow adjustment, the premise is that there are no major reversals in the pandemic. The growth potential of the film industry and our entertainment life will definitely return to the previous state. This does not mean it can monopolize the entire industry. We see that the industry is very large, with a value of three to four trillion. Tencent currently only accounts for over a trillion in revenue. There are still many creative game producers who can launch quality games. Although the scale of a single game may not be able to compare with Tencent, if it is good enough, it can even launch several more, which is sufficient to nurture medium to large companies. You see that Sanqi Interactive Entertainment should now be a billion-level company. The pool is large enough, and there are many fish in it, including small goldfish, sharks, and medium-sized fish, such as octopuses. Therefore, this is a rich ecosystem, and there is no need to worry about Tencent monopolizing the game field.
Audience Question: Are mobile games limited by devices and can they compete with PC games?
Lei Tao: This question can be answered with confidence. Mobile games have already surpassed PC games. The characteristics of mobile games are convenience, and the audience for mobile games is much larger. We rarely see girls or women staring at PC screens playing games, but in the mobile gaming field, many young girls are playing games. Therefore, the audience on the mobile side has increased significantly. Additionally, mobile performance is constantly improving, and many rendering and gaming capabilities are not much worse than PC games. Moreover, those who play mobile games tend to have stronger spending power than those who play PC games. Of course, there are also excellent PC games, such as "World of Warcraft," but in the mobile side, there are more people with strong spending power. Therefore, in general, the mobile market is larger than the PC market, and it is not just a little larger. There is no need to worry about the limitations of mobile games, and with the emergence of cloud gaming, the likelihood and convenience of playing heavy games on mobile will be even stronger than on PC.
Conclusion
Lei Tao: The above answers the audience's questions. We have previously discussed risk alerts, and the following is a disclaimer. Basically, my presentation is almost over. Thank you all.

3. After the Three "Armies," the Military Industry Investment Opportunity Analysis
   Author: @Zhang Chao
   Published on: 2020-09-17
   I am Zhang Chao from AVIC Securities. My presentation today mainly revolves around investment opportunities in the military industry.
   If we extend the historical cycle, our military industry has had two major development opportunities. The first was after the embassy bombing in 1999, when we truly realized the importance and urgency of investing in national defense construction. After 1999, we initiated a sustained and rapid increase in military spending for nearly 20 years. The second historical development opportunity is now, catalyzed by external stimuli, just like the first time. We are currently in a state of comprehensive decoupling with the U.S. in politics, economics, technology, military, and diplomacy. In this historical context, it also provides our military industry with the second major development opportunity in history, as well as a good and long-term investment opportunity for secondary investors.
   The title of my presentation is "After the Three Armies, All Smiles," which is a poem by Chairman Mao. The title aims to describe the past situation of the military industry and the current cyclical status, while also reflecting the market performance of our military industry in the secondary market.

The last bull market saw the military industry experience a trend decline after 2014. It was not until 2019 that the military industry first outperformed the entire market, achieving relative excess returns. As of 2020, the military industry has shown relatively good performance, rising about 41% from the beginning of the year to now, ranking fourth among all industries, only behind consumption and healthcare.

After a big surge in July, the military industry experienced a correction from August to now. Recently, many friends and investors have asked about the future market outlook and where the investment opportunities and directions lie. My report and sharing today mainly aim to answer these questions.
I. Supply and Demand

When looking at any industry, we mainly consider its demand and supply. The military industry is no exception, but it is somewhat unique in that demand determines supply. First, let's look at changes in demand. The biggest impact on the industry in recent years has been military reform. We have experienced a long-term reform over the past four to five years, and now the reform is basically in its mid-to-late stage. Many military enterprises have experienced varying degrees of order delays or even cancellations. Now, the negative impact of military reform is gradually diminishing, and many previously accumulated canceled or postponed orders will be released in a concentrated manner.

![