Computer Industry: How to View the Computer Sector at Current Location

1. Strong industry beta attribute

1.1 Industry trends are highly consistent with valuation trends, with beta attributes stronger than alpha in industries

We believe that the main reason is that China's computer software and hardware industry is relatively backward compared to developed countries, with a low overall productization rate and poor business models for most companies. Coupled with the impact of China's economic and policy cycles, the sustainability and predictability of sector performance growth are relatively weak.

1.2 Historical Review, Index Reaches Peak in July 2020 and Continues to Shake Downward

From a historical perspective, the complete cycle of the computer sector takes about 5 years, with a typical period of decline or rise lasting 24-36 months. In the past 15 years, the sector has experienced a total of 3 significant increases, especially in the first half of 2015 when it rose strongly by 217%, outperforming the market significantly. After reaching its peak in July 2020, the sector continued to fluctuate downwards. As of March 16, 2022, the low point was 38% lower than the high point of 6736.41 on July 10.

1.3 Valuation situation at three historical lows

The computer sector has experienced three historical lows in the past fifteen years, and the valuation situation of the sector is very similar during these three historical lows.

Bottom date of computer history: October 16, 2018

I have experienced the complete reversal of the computer sector at the end of 2018, so I have a more intuitive understanding. In February 2018, the sector showed a bottom characteristic and generated a wave of market trend, but it did not truly reverse. Subsequently, due to factors such as the China US trade war, it continued to adjust for six months until it truly bottomed out at the end of 2018. (Report source: Future Think Tank)

The core logic of growth: technology+policy driven

2.1 Computer Core Logic: Technological Change+Policy Promotion

As a typical upstream industry, the main demand source of the computer industry downstream is the informatization demand of the G end (government) and the B end (large and medium-sized enterprises), and the informatization demand of the G end and the B end is affected by technological change and policy promotion. Therefore, the logic of the continuous growth of the computer industry in the past 15 years is: on the one hand, policies accelerate the improvement of localization rate and informatization rate, on the other hand, technological change leads to new business models and market demand (such as Internet and cloud, of which Internet has been falsified 15 years later).

The introduction of national policies often has a certain periodicity, and each cycle has a direction supported by policy priorities. Although the development of technology is continuous, for the computer industry, the speed of technological change is slow and unintentional, often requiring a long time to form substantial breakthroughs. Therefore, the demand of the computer industry also forms a certain periodicity with the periodicity of policies and technology. The fundamental factor of demand side cyclical changes is the transformation of technology and industry, and the driving force and signal of market launch are policies. The variables of market fluctuations include the 3-8-year update and replacement cycle of products in various sub sectors.

In the past 15 years, the technological transformation of the computer industry has mainly gone through several major times, such as hardware popularization, software informatization rate improvement, Internet mobile Internet, cloud computing, and so on. In the next five to ten years, we expect that the focus of technological transformation will continue to iterate in the fields of 5G, AIOT, and artificial intelligence. Although the technological changes in the computer industry are slow and unintentional, each technological revolution can bring new business models and new demand spaces, which may trigger significant changes in the industry landscape and thus bring long-term investment opportunities.