In recent conversations surrounding the rapid advancements in the artificial intelligence (AI) sector, one company has caught the attention of both analysts and investors: Industrial FulianA leading player in the global server Original Design Manufacturer (ODM) market, Industrial Fulian has reported a notable contradiction in its financial performanceWhile its revenue experienced a modest decline, the net profit, particularly the net profit after deducting non-recurring gains and losses, saw a remarkable increaseThis divergence has prompted speculation regarding the company's future prospects amid the burgeoning demand for AI infrastructure, especially high-performance servers and switches.

At the forefront of this narrative is the phenomenal rise of AI technologies showcased by the likes of ChatGPT, which has set the benchmark for large models that require extensive pre-training

This shift has sparked a corresponding surge in demand for computing power, bandwidth, Graphics Processing Units (GPUs), high-capacity storage solutions, and advanced cooling and energy-saving technologiesThe significance of servers in this ecosystem cannot be understated, as they represent the backbone of data centers, essentially driving the computational capabilities necessary for AI applications.

Despite the overall narrative of slowing revenue growth—with Industrial Fulian witnessing a revenue figure of 476.34 billion yuan in 2023, a dip of 6.94% compared to the previous year—its net income attributed to shareholders rose by 4.82% to 21.04 billion yuanThis growing divergence has led to polarized market perceptions regarding the company's growth trajectorySome analysts express concern that the company may be losing its growth impetus, while others maintain optimism about the potential boom in demand for servers tailored for AI applications.

Delving into the numbers reveals that the slowdown in general-purpose server shipments is largely attributed to an adjustment in capital expenditures by global cloud service providers

Yet, the erosion in general-purpose server sales is seemingly counterbalanced by the increasing penetration and robust growth of AI server demandsThis dichotomy markedly elucidates the current landscape of Industrial Fulian's financials, as they pivot to adapt to changing market dynamics.

The analysis of the revenue structure at Industrial Fulian is crucial in understanding this evolving scenarioThe company's portfolio comprises three primary product categories: telecommunications and mobile network devices, cloud computing solutions, and industrial internet applicationsThe first two categories are the primary revenue and profit generators, making up over 90% of the total sales.

Historically, the growth of Industrial Fulian’s cloud computing segment has been closely tied to the expansion of its Cloud Service Provider (CSP) clientele who procure essential hardware for building data centers, including enterprise servers and storage solutions

However, the last three years have seen global cloud service providers ramping up their investments in data centers—with capital expenditures reaching a staggering $241 billion in 2022—a 15% increase over the previous yearHowever, as a result of the ensuing economic downturn, these providers have become more judicious with their spending, leading to a slowdown in capital outlays and a reduction in server shipments, which was down to 13.38 million units globally, representing a 6% year-over-year decline.

Against this backdrop, Industrial Fulian's cloud computing revenue fell by 8.54% to 194.31 billion yuan in 2023, highlighting the pressure faced by even the largest ODM server manufacturerNevertheless, the stagnation in revenue does not imply a complete halt in progress; data reflects a shift toward CSP products, which now account for close to 50% of the total revenue, with AI servers comprising 30% of the cloud computing revenue

alefox

This pivot signals a significant evolution in Industrial Fulian's revenue mix that is likely to have longevity.

It's noteworthy that AI servers command much higher prices than standard serversFor instance, reports indicate that an AI server boasting NVIDIA's A800 GPU could range between 1.4 to 1.5 million yuan per unit, while higher configurations with multiple GPUs can escalate prices closer to 2.8 million yuanThis premium pricing strategy indicates that despite the downturn in general server revenue, the rise in AI server sales could still bolster the company's financial health despite declines in other areas.

Even as cloud computing revenue cools, the segment's gross margin rose by 1.12 percentage points to 5.08%, marking the first time since the company's IPO in 2018 that this segment broke the 5% gross margin barrier

This improvement partially mitigates the impact of revenue decline on overall performance, demonstrating resilience amidst shifting market conditions.

The telecommunications and mobile network segment faced challenges similar to those in cloud computing, reporting a revenue of 278.98 billion yuan in 2023—a downturn of 5.81%. However, the expansion of data traffic and the increasing need for high-bandwidth operations have catalyzed demand for related networking equipment, leading to double-digit revenue growth in the high-speed switch and router sector within Industrial Fulian.

The company has successfully secured a growing market share among top-tier clients, now peaking over 75%. Product advancements have also seen the production of 100G, 200G, and 400G switches reach mass production

Notably, the shipment volumes for 200G and 400G switches have shown significant enhancement, with the 800G model also entering the New Product Introduction (NPI) stage, expected to start contributing to revenues in 2024.

Moreover, revenue from high-speed switches and routers has favorably impacted the telecommunications segment’s gross margin, which increased by 0.55 percentage points to 9.80%. An additional facet contributing to the gross margin enhancement is Industrial Fulian's designation as a "lighthouse factory" within the World Economic Forum, recognized for its use of AI technology to significantly improve production efficiency.

The South Qing factory of Industrial Fulian has showcased impressive statistics, reporting a 73% increase in production efficiency due to AI intervention in various operational processes—from order forecasting to warehouse logistics, product design, and quality testing

With a drastic reduction of 97% in product defect rates and a 39% cut in manufacturing costs, these figures testify to the transformative power of AI technology in facilitating Industrial Fulian's digital transition.

Given the explosive demand for AI compute resources spanning various sectors, the growth trajectory of Industrial Fulian may hinge on whether this trend remains sustainableOther domestic competitors, like Inspur and H3C, are also positioned to benefit from this technological surge.

Research from the China Academy of Information and Communications Technology suggests that the total global computing power reached 615 exaFLOPS in 2021, showcasing an impressive growth rate of 44%. By 2030, this figure is expected to surge to 56 zettaFLOPS, which implies a staggering yearly compound growth rate of around 65% from 2022 to 2030.

This projection indicates that both research establishments and server manufacturers are optimistic about sustained expansion in computing capabilities

However, as server technology is critical for delivering this computational capacity, the demand landscape remains crucial to understand.

According to TrendForce data, global shipments of AI servers reached 860,000 units in 2022, and projections suggest this number may exceed 2 million by 2026, representing a 29% compound annual growth rateIn contrast, IDC reports that AI server shipments in mainland China were 284,000 units in 2022, and are expected to rise to 650,000 units by 2027, sustaining a compound growth rate of 17.90%.

From a macro perspective, the global server market is seeing equipment lifespan reaching record highs, exceeding seven years, which hints at an impending renewal cycle that could further stimulate AI server demand.

In terms of the competitive landscape, the server industry is predominantly shaped by both brand-name companies, such as Dell and Lenovo, and ODM manufacturers like Industrial Fulian

In China, the foremost server vendors include Inspur, H3C, and Huawei, with Inspur holding a substantial global market share as the second-largest server supplier and the top player in the Chinese segment, claiming over 28% of the market share.

Inspur's AI servers have received accolades in prestigious international AI performance benchmarking competitions such as MLPerf, where they won 49 first-place titles, establishing a strong foothold in AI implementations across leading tech firms globally.

H3C, slightly behind Inspur, captured approximately 18.20% of the domestic market, ranking second, also continues to innovate by introducing private domain models that blend seamlessly with their ICT infrastructure to bolster efficiency and data security.

Additionally, other formidable players, such as Huawei and Lenovo, are intensifying their investments in AI servers