Solid results despite supply chain constraints; expect for another strong year in 2025

中际旭创(300308)
    Innolight released its FY24 prelim. results. The company expects NP to go upby 111.6%-166.9% to RMB4.6bn-5.8bn. Mid-point value of RMB5.2bn implies139.2% YoY growth and is largely in-line with consensus and our estimate(3.2%/1.4% below, respectively). We continue to view Innolight as a keydomestic beneficiary amid the ongoing AI infra. investment cycle driven byresilient demand for more computing power globally. Recent additional AIspending developments (i.e., $60-65bn from Meta, $12bn from ByteDance, andup to $500bn Stargate project) show intensifying capex in AI. We also believethe recent fear of CPO solution becoming mainstream is overly concerned.Recent share price pullbacks provide excellent buying opportunities. MaintainBUY on Innolight with TP unchanged at RMB186.0.
    4Q24 NP is expected to improve sequentially on margin expansionwith favourable product mix, which is partially offset by the impactfrom supply chain bottleneck. The company’s mid-point NP grew by64.9% YoY/3.8% QoQ in 4Q24, compared to 33.7%/3.3% QoQ in 2Q/3Q24.We think the sequential slowdown in growth in 2H24 was mainly due to EMLshortage that caused a delay to shipments, while the demand for 400/800Goptical transceivers remained strong. The impact of component shortage on2H24 earnings was offset by margin upside (favourable product mix plushigher yield). Mgmt. expects this issue will be largely alleviated in 2H25.
    800G to be the main growth driver in 2025, while 1.6T to ramp upsequentially. In FY24, Innolight saw strong demand for its 400/800Gproducts with product mix leaning heavier towards 400G. We anticipate amore favourable product mix with a higher portion of 800G sales in 2025,with additional contribution from 1.6T products. Mgmt. expects highervolume to come in 2026 as more cloud companies deploy 1.6T products.The company has also ramped up its 400G SiPh products throughout FY24,with 800G SiPh products expected to begin volume shipments in 1Q25.
    Multiple major AI spending developments fuel AI infra. buildoutmomentum： 1） $500bn AI initiative Stargate Project in the next fouryears, 2) $60-65bn capex planned by Meta for 2025E, up as much as 70%YoY compared to 2024 (Bloomberg), largely driven by AI spending increaseand deployment of a new datacenter. ByteDance also considered US$12bnin AI capex for 2025. Reliance is reported to build the world’s largestdatacenter. These spending sprees indicate that demand for AI computepower is still in full swing with robust outlook. AI networking products,such as optical transceivers, should continue to enjoy the AI tailwind.
    Imminent ramp-up + adoption of CPO solution seem to be overlyconcerned. Admittedly, CPO normally reduces power consumption by over30%, there are still several technical hurdles to overcome to make itmainstream (i.e., low yield, high repair cost). From our communication withindustry experts, we believe networking players are exploring LRO/LPO toachieve some power savings as at least one DSP is typically removed inthese technical approaches. Maintain BUY, with TP unchanged atRMB186, corresponding to ~27x FY25E P/E. The stock is currentlytrading at 18.5x FY25E P/E, which we believe underestimates thecompany’s future growth potential. Potential risks include: 1) China-UStrade tensions, 2) rising raw material costs, and 3) slower-than-expectedramp-up speed.