Pluggables first, new architecture later

中际旭创(300308)
    Innolight’s share price has experienced heightened volatility yesterday (down 5%on 4 Feb), driven by a combination of market concerns around NPO/CPOadoption, hyperscaler network roadmap evolution, upstream suppliers’ capacityexpansion, etc., prompting mgmt. to hold an investor Q&A session to addressthese issues. We believe the core investment theme remains intact thatpluggable modules will continue to dominate hyperscaler scale-out/scale-acrossdeployments through 2026-27E, with the Company retaining a structurallyirreplaceable role. Recent earnings from Lumentum (LITE US, NR) and Coherent(COHR US, NR) also reinforced a demand-driven industry backdrop, whilepractical constraints suggest that meaningful CPO adoption is unlikely beforelate-2027. Reiterate BUY on Innolight with TP unchanged at RMB707.
    Innolight's structural role in pluggable optical transceivers is intact,with optionality in NPO/CPO but no near-term displacement risk. Permgmt., high-speed pluggable modules continue to be the confirmeddeployment standard for hyperscaler scale-out/scale-across networks, withcustomer roadmaps clearly centered on 800G/1.6T through 2026-27E. Whilethe Company is actively engaged in NPO-like solutions or future CPOdevelopment, these efforts are complementary rather than substitutive,awaiting further reliability validation, serviceability, and ecosystem maturitywhich could all constrain early adoption, supporting our view that meaningfulCPO adoption is a late-2027 event instead of a 2026 risk.
    Upstream capacity expansion eases supply-chain constraints. Recentearnings from Lumentum and Coherent point to faster-than-expectedexpansion of upstream InP capacity, specifically EML and high-speed CWlasers, driven primarily by sustained demand from 800G and 1.6T pluggablemodules. Lumentum outlined a plan to expand InP capacity by ~40% by1H26E last year, noting that over 20% of this expansion has already beenrealized ahead of schedule, while Coherent indicated its InP wafer capacityexpansion, supported by a transition to 6-inch wafers, which is alsoprogressing faster than planned. Despite this accelerated ramp-up, neithercompany expects supply-demand balance to normalize in 2026-2027, asincremental capacity continues to be absorbed by end-market demand.Importantly, both companies characterized CPO as a constructive but stagedopportunity, reiterating that material contribution is unlikely before 2027 orbeyond.
    Maintain BUY on Innolight with TP unchanged at RMB707 (28x 2026EP/E). The Company's earnings preview showed a 108% YoY net profitincrease to RMB10.8bn (mid-point), in-line with our forecast of RMB10.9bn.Innolight remains the dominant supplier of 1.6T pluggable modules, withshipments set to accelerate through 2026-2027, while its SiPh solutions(already accounting for ~50% of 2025 shipments per mgmt.) will continue tosupport structural margin expansion. With order visibility extending into nearto-mid term, we see no structural risk in the company's earnings potential.