The Zhitong Finance App learned that Guojin Securities released a research report saying that in the future, Ethernet is expected to benefit from large-scale AI clusters and inference needs. The bank said that manufacturers that are optimistic about white box switches, switching chips, PCBs, and Ethernet high-speed connection solutions will fully benefit from the data center's high-speed Ethernet switch volume, and believes that commercial switching chip manufacturers are expected to fully benefit from the white box switch trend, and that the increase in switch capacity may drive an increase in the number of layers of a single PCB board. The bank pointed out that the increase in switch speed has led to an increase in the penetration rate of new connection solutions. It believes that active cable AEC is expected to replace DAC in high-speed networks, and that ACC applications are also expected to expand to Ethernet in the future.

Investment logic:

Ethernet is the most common LAN technology in the world. It is mainly used in traditional cloud computing in data centers. The bank believes that non-Nvidia manufacturers have formed a Super Ethernet Alliance to explore Ethernet AI applications, and Nvidia has also launched an Ethernet switch chip for AI Ethernet applications. The trend of traditional cloud computing bandwidth upgrades is clear, and inventory elimination is over, driving market recovery. From January to September of this year, Xinhua, the leader in server BMC chips, had revenue of NT$4.36 billion, an increase of 102.96%.

The Ethernet switch industry is expected to benefit from: 1) the boom in AI and the increase in the share of Ethernet in the AI field; 2) speed upgrades and market recovery in traditional data centers. According to Arista, the data center Ethernet switch market is expected to experience accelerated growth starting in '25, mainly driven by the top five North American cloud vendors (Amazon, Apple, Meta, Google, and Microsoft). The global data center Ethernet switch market is expected to be around 23 billion US dollars in 2024 and nearly 40 billion US dollars in 2028. 800G Ethernet switches are expected to usher in rapid growth. 650 Group expects 800G switch shipments to be 0.077 million units in 2024 and 1.8 million units in 2028, with a CAGR of 120%.

The bank is optimistic that manufacturers of white box switches, switching chips, PCBs, and Ethernet high-speed connection solutions will fully benefit from the data center's high-speed Ethernet switch volume.

1) White box switch: With the general trend of data center switch software and hardware decoupling, the share of white box switch manufacturers continues to grow. Leading manufacturer Arista has shipped 45% of the 100G and higher speed Ethernet switch market in '23, which is 2 times higher than Cisco's market share. The main customers of white box switch manufacturers are leading cloud vendors. The total capital expenses of Microsoft, Amazon, Google, and Meta in 24Q1 and 24Q2 were 44.289 and 52.852 billion US dollars respectively, +30.5% and +57.8% compared to the same period last year. It is believed that Arista, the leading manufacturer of Ethernet high-speed switches, is expected to maintain its share and is expected to benefit from high capital expenditure growth in Meta and Microsoft. Furthermore, white-label switch vendors are also expected to benefit from high capital expenditure increases from leading cloud vendors.

2) Switch chip: The switch chip is the core chip of the switch. The bank believes that commercial switching chip manufacturers are expected to fully benefit from the white box switch trend. Currently, the commercial switching chip market is highly concentrated. In addition to leading manufacturers, the bank believes that Marvell's 51.2T switch chip is also highly competitive, which is expected to help Marvell achieve downstream customer adoption. Among domestic manufacturers, Shengke Communications switching chips are progressing rapidly. Currently, samples of 25.6T products have been sent, and they are expected to benefit from the domestic substitution trend in the future.

3) PCB: The increase in switch capacity has led to an increase in the number of layers of a single PCB board. Currently, switches mainly use multi-layer PCBs. According to Yangming Circuit, the PCB board of the 800G switch using Marvell Teralynx 10 is designed 12+12+12, which is the higher-end specification product among PCBs. According to the semi-annual report of Shanghai Electric Power Co., Ltd., the global output value of PCBs with 18 layers or more is expected to increase by more than 20% in 24 years. The bank believes that the rapid launch of 800G switches is expected to open up space in the high-end PCB market.

4) High-speed connection scheme: The increase in switch speed has led to an increase in the penetration rate of new connection solutions. Currently, traditional copper DAC connections face large signal attenuation problems in high-speed networks. The bank believes that active cable AEC is expected to replace DACs in high-speed networks. According to Lightcounting, the AOC, DAC, and AEC markets totaled 1.2 billion US dollars in 23, and are expected to reach 2.8 billion US dollars in 28. The CAGR for AOC, DAC, and AEC from 23 to 28 was 15%, 25%, and 45%, respectively, indicating that AEC is growing at a higher rate. Currently, AEC's main vendor Credo's products have been imported to Microsoft and Amazon, and contacts have begun with other North American cloud vendors. One of them is about to be shipped in batches. In addition, Nvidia launched an active copper ACC solution, and the bank believes that future ACC applications are also expected to expand to Ethernet.

Investment advice and valuation

Ethernet white box switch manufacturers, Ethernet switching chip manufacturers, PCB manufacturers with high multi-layer capabilities, and high-speed connection manufacturers are expected to fully benefit. The bank is optimistic about: Arista (ANET.US), Credo (CRDO.US), Lixun Precision (002475.SZ), and it is recommended to focus on Marvell (MRVL.US), Shengke Communics-U (688702.SH), leading white brand switch manufacturers, leading manufacturers of Ethernet switching chips, PCB/CCL and upstream raw material manufacturers with an in-depth layout in high-speed communication, and chip and connector manufacturers with high-speed connections.

Risk warning:

The progress of Ethernet AI networking fell short of expectations; industry competition intensified; downstream demand fell short of expectations.