AI Expert Call #56: CPO market updates Quick Note We hosted our AI Expert Call Series #56 today (20 January), with an expert from a leading global AI networking company. We discussed CPO technology roadmaps, CPO application in scale-out and scale-up network, commercialization timeline, and CPO supply-chain dynamics. Below are the key takeaways: CPO penetration might rise from 2H27E, while NPO could be transitional in 2026E Broadcom vs NVIDIA CPO solution Broadcom and NVIDIA (NVDA US, Not rated) have differe ...

Summary of TFC Optical (300394.SZ) Conference Call Company Overview - **Company**: TFC Optical (300394.SZ) - **Market Cap**: Rmb154.9 billion / $22.0 billion - **Enterprise Value**: Rmb152.7 billion / $21.7 billion - **Current Price**: Rmb199.30 - **Target Price**: Rmb271.00 - **Upside Potential**: 36.0% [1][7] Key Industry Insights - **Optical Engines**: TFC Optical is expected to benefit from the ramp-up of 1.6T optical engines in 2026, driven by increased demand for Co-Packaged Switch (CPO) switches and long-term opportunities in scale-up architecture [1][2]. - **Mass Production**: The company has commenced mass production of 1.6T optical engines in the second half of 2025, with projected shipments of 585k, 1.9 million, and 2.3 million units for 2025, 2026, and 2027 respectively [2][3]. Core Arguments and Projections - **Revenue Growth**: Revenue projections have been revised upwards, with estimates of Rmb5,629 million for 2025, Rmb9,666 million for 2026, and Rmb13,069 million for 2027, reflecting a growth rate of 73.1% in 2025 and 71.7% in 2026 [7][24]. - **Earnings Growth**: Net income estimates have been increased by 2% for 2025, 23% for 2026, and 32% for 2027, primarily due to higher revenues and improved gross margins [24][26]. - **Gross Margin Improvement**: Gross margins are expected to improve due to a product mix shift towards higher-margin 1.6T solutions [24][26]. Catalysts for Growth - **Increased Demand**: Rising demand for 1.6T optical engines and large-scale Gen-AI applications requiring higher throughput [3]. - **CPO Switches**: Gradual ramp-up of scale-out CPO switches, which offer lower latency and better power efficiency [22]. - **Scale-Up Architecture**: Long-term opportunities in scale-up architecture to enhance GPU interconnections, providing incremental growth for optical engines [23]. Financial Metrics - **Earnings Per Share (EPS)**: Projected EPS of Rmb2.72 for 2025, Rmb5.19 for 2026, and Rmb7.24 for 2027 [7][16]. - **Price-to-Earnings (P/E) Ratio**: Expected P/E ratios of 39.5x for 2024, 73.3x for 2025, and decreasing to 27.5x by 2027 [7][13]. - **Free Cash Flow**: Projected free cash flow of Rmb1,121.6 million in 2025, increasing to Rmb4,197.6 million by 2027 [16][30]. Risks and Challenges - **Demand Fluctuations**: Potential slower-than-expected demand for high-speed transmissions, particularly in Gen-AI applications [31]. - **Geopolitical Issues**: Risks related to supply chain disruptions due to geopolitical tensions [32]. - **CPO Adoption**: Slower-than-expected adoption of CPO switches could impact earnings [32]. - **Market Competition**: Increased competition from new entrants or suppliers of in-house optical transceiver solutions [32]. Conclusion - **Investment Rating**: TFC Optical is upgraded to a "Buy" rating with a target price of Rmb271, reflecting a strong outlook driven by the ramp-up of 1.6T optical engines and favorable market conditions [1][36].

Core Viewpoint - The CPO (Co-Packaged Optics) technology is gaining traction in the optical communication sector, with significant stock price increases for companies involved in this field, indicating a growing market interest and potential investment opportunities [1][2]. Group 1: Stock Performance - Tianfu Communication (300394.SZ) saw a price increase of 12.12%, reaching 76.20, with a market capitalization of 591.2 billion [2]. - LianTe Technology (301205.SZ) experienced a 10.66% rise, with a current price of 80.47 and a market cap of 54.7 billion [2]. - Zhongji Xuchuang (300308.SZ) reported a 7.93% increase, with a price of 116.54 and a market cap of 1288.5 billion [2]. - Bochuang Technology (300548.SZ) increased by 6.35%, reaching 56.07, with a market cap of 150.5 billion [2]. - Dekeli (688205.SS) rose by 6.32%, with a price of 67.00 and a market cap of 59.1 billion [2]. - Guangxun Technology (002281.SZ) saw a 5.58% increase, with a price of 45.61 and a market cap of 352.6 billion [2]. Group 2: CPO Technology Developments - Broadcom announced the delivery of the Tomahawk 6 (TH6) switch chip, which supports both conventional and CPO versions [3]. - TSMC is accelerating its co-packaged optical technology, expecting to have production lines ready by June 2025, with small-scale production in the second half of 2025 and mass production starting in 2026 [3]. - NVIDIA introduced co-packaged optical switches at the GTC conference, with InfiniBand CPO expected to launch in the second half of 2025 and Ethernet CPO planned for the second half of 2026 [3]. Group 3: Market Insights - CPO technology enables miniaturization and integration of high-speed optical modules, reducing chip packaging size and improving system integration [4]. - The technology facilitates direct connections from CPUs and GPUs to various devices, enhancing resource pooling and memory disaggregation while minimizing signal transmission loss and power consumption [4]. - The CPO market generated approximately $3.8 million in revenue in 2022, projected to reach $2.6 billion by 2033, with a compound annual growth rate (CAGR) of 46% from 2022 to 2033 and 80% from 2028 to 2033 [5].