The landscape of technology is evolving rapidly, prominently influenced by the surging demand for artificial intelligence (AI) and the necessary cloud infrastructure to support itAs AI server requirements soar, a pivotal shift is occurring within the data center sector, prominently spotlighting network switches as core devices witnessing technological innovation and growth opportunityRecently, Industrial Fulian, a prominent player in the tech world, has seen its cloud computing business eclipse traditional telecommunications and mobile network equipment, marking a new era of revenue generation driven by AI servers.

Among the early reporters of their semi-annual results in the A-share market, Industrial Fulian posted impressive figures for the first half of 2024. Their revenue surged by an impressive 28.7% year-over-year, while their net profit, excluding extraordinary items, grew by 13.2%. Notably, the second quarter alone shattered historical revenue records, climbing 46.11% compared to the previous year and 24.19% quarter-over-quarter

The revenue from AI servers skyrocketed an astounding 270% annually and by more than 60% sequentiallyThis dramatic rise is interlinked with the broader narrative surrounding Hon Hai Precision Industry and its collaboration with NVIDIA to build AI manufacturing plants.

The rapid advancements in AI technology have catalyzed a frenzy among North American cloud service providers, all vying to unveil open-source models and substantially increasing their capital investments for the yearThis corporate arms race is spurring a widespread upgrade of cloud infrastructure and data center capacitiesIn a noteworthy development, AI servers constituted 43% of Industrial Fulian's total server revenue in the first half of 2024. Increased demand for AI-driven data centers and high-speed connections has been a boon, causing a consistent rise in revenue from high-speed switches and routers

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The company has begun shipping its 800G switches, with significant contributions to revenue anticipated to ramp up in the latter half of 2024.

Despite operating with low profit margins, Industrial Fulian has strategically bound itself to large customers in a bid to thrive.

The first half of 2024 saw Industrial Fulian achieving revenues of 266.09 billion yuan, representing a notable 28.7% increase year-over-yearCloud computing revenues climbed a staggering 60%, with cloud service provider contributions swelling to 47%, a five-point increase from the previous yearBy the second quarter, cloud computing revenues constituted 55% of total income, registering year-over-year growth exceeding 70% and sequential growth surpassing 30%. AI server revenue growth was striking, exceeding 270% year-on-year and over 60% sequentially

Overall server revenue showed an impressive 16% increase.

With contract liabilities reaching a historical high of 2.69 billion yuan, Industrial Fulian is in the midst of robust product demandThe turnover period for inventory has decreased to 57 days, down from 71 days the previous yearTheir fixed asset scale has reached 17.893 billion yuan, a 15.89% increase compared to last year, showing a more than double increase over the past three yearsDespite improvements in fixed asset turnover, it remains below the historical peak, indicating that the company's production capacity is still in the process of being fully utilized.

Global network communication manufacturing services typically fall into two distinct models: one depends primarily on electronic engineering, often via EMS and ODM frameworks; the other leans towards a mechanical engineering background

Industrial Fulian has developed an integrated service business model that encompasses electronic components and module-level optical integrationThis enables them to offer comprehensive solutions, ranging from design to manufacturing and global assemblyDespite their overarching strategy, the company has struggled with profit margins, which have remained below 10% in recent yearsAs of the first half of 2024, the gross margin stood at 6.73%, reflecting a modest decline from the prior year.

Transitioning from OEM to ODM in recent years, Industrial Fulian has increased its focus on cloud service providersIts latest report boasted increased capabilities in AI server production, reflecting a high visibility of downstream ordersIn 2023, the company began large-scale production of NVIDIA's high-performance H100 and H800 AI servers, which contributed to a dramatic surge in AI server revenue—crossing approximately 30% of total cloud income

By securing over 50% share of the NVIDIA HGX AI server chip substrate supply, it has positioned itself as a key supplier in the high-performance computing landscape.

Key executives have publicly emphasized that Industrial Fulian not only serves as a pivotal supplier of NVIDIA's chipsets but is also designing and producing their GPU high-performance computing platformsPartnerships with NVIDIA extend to projects like the establishment of AI factories, potentially broadening applications across diverse industries.

Despite previously relying heavily on its wholly-owned subsidiary in Henan for profit generation, recent hiring announcements from the Zhengzhou Foxconn facility have caught considerable attentionThe current construction balance for Industrial Fulian stands at a historic high of 2.734 billion yuan, reflecting intensified activity in Zhengzhou.

The telecommunications and mobile network equipment sector has maintained its leading position historically, consistently contributing over 50% of total revenue prior to 2023. Their offerings include high-speed switches and routers, serving a clientele that includes industry titans like Apple and Cisco

In the second quarter of 2024, revenues in the AI server segment related to high-speed switches exhibited a 70% year-over-year growth.

As generative AI continues to proliferate, the enormity of data generated from model training has ignited a surge in demand for large-scale networking in data centersThe requirements for high bandwidth and low latency are at an all-time high, as top carriers in China reassess capital expenditures amidst a pivot toward investments in computing power and industrial digitalizationSwitches used in data center networks are on the cusp of a fresh technological evolution and growth trajectory.

The telecommunications and network equipment legacy market for Industrial Fulian has been a mainstay of its revenue stream, showcasing solid growth patterns in recent quarters

The introduction of 400G and 800G switches is expected to further advance revenue streams, creating synergies across their high-speed equipment offerings.

Covering a wide scope within network devices, Industrial Fulian's product portfolio includes fiber optics, high-speed switches, and routers among othersBenefiting from the demand for AI-driven data centers and high-speed connections, rapid growth in this sector has become evident as their revenue climbs quarter by quarter.

The phenomenon of booming demand in AI represents a blue ocean of opportunities for industrial stakeholders.

Positioned midstream within the industry, Industrial Fulian counts a substantial roster of global clients, including NVIDIA, Amazon, Microsoft, and local giants like Alibaba and Tencent

Their strategic focus includes high-performance servers and cloud-related productsWith predicted allocations from leading cloud infrastructure service providers reaching an astounding $798 billion in expenditures for 2024, opportunities abound.

As the race for AI infrastructure intensifies, significant progress is expected across data centers globallyAccording to projections, cloud infrastructure service spending will continue to rise in 2024, building upon a robust 18% year-over-year growth seen in 2023, with AI server shipments expected to surpass 1.67 million units.

As customers upgrade their product capabilities, the energy consumption of single GPUs can reach remarkable heights, necessitating innovations in cooling solutionsIndustrial Fulian has collaborated with clients to develop advanced technologies, significantly reducing energy use through liquid cooling systems.

In a related development, global smartphone shipments have rebounded, marking a 6.5% increase, largely attributable to the integration of AI features into consumer devices