While the global server market is dominated by Dell, Hewlett Packard and Taiwanese companies, in China it’s all about the dominant domestic leaders. That’s because most servers aren’t bought by private companies but instead by the government, state-owned telecom carriers and, most importantly of all, internet giants. That unique demand structure helps local brands as they can better customise products, offer low prices and strong after-sales service. Plus, Beijing is promoting homegrown IT infrastructure. In this report we explore the industry and initiate coverage on Inspur (Buy) and Unisplendour (Buy), the No.1 and No.3 server brands in China. We alsohighlight the risks as the share prices of both have dropped over 40% since this year’s peak amid a temporary slowdown in demand, providing a good entry point in our view.

Inspur, a global player. As the world’s third-largest server manufacturer and biggest in China, Inspur focuses on a strategy of making small profits but with high volumes. We think its economies of scale in low-end servers and leading position in AI servers are an opportunity for further monetisation. We forecast a 43% EPS CAGR in 2020- 22e and apply its mid-cycle PE, 36.0x, to reach our TP of RMB41.40, implying 45%  upside. Potential catalysts: GPM improvement, AI server growth, cost reductions. 

Unisplendour, an all-rounder. We like Unisplendour as it has a full product portfolio including servers, switches, routers, and small base stations which are gaining favour with telecom carriers. We think concerns about share sales related to its parent’s  debt restructuring have largely been priced in and the impact on its operations should be limited. We forecast a 29% EPS CAGR in 2020-22e and apply a mid-cycle PE, or 34.6x, to reach our TP of RMB31.50, implying 40% upside. Potential catalysts: design wins from telecom carriers, overseas expansion.