26 August 2025 | 5:50PM CST Optical Transceiver Incremental strength on scale advantage/supply tightness; raise Innolight/Eoptolink TPs; Buy Three key factors prompt us to raise our EPS estimates for Innolight/Eoptolink: 1) The tight capacity should incrementally benefit Innolight/Eoptolink given their scale advantages and lead in silicon photonics (Innolight in particular); 2) the removal of near-term tariff overhang makes us more confident of the shipment outlook; and 3) a slower ASP decline than our prev ...

Summary of Conference Call on Optical Networking Industry Industry Overview - The optical networking industry is expected to experience a super upcycle driven by the adoption of ASIC (Application-Specific Integrated Circuit) and SiPh (Silicon Photonics) technologies, with significant demand growth anticipated for 800G and 1.6T transceivers in 2026, projected at 45 million and 8 million units respectively [1][2][13]. Key Companies Discussed 1. **Innolight (300308.SZ)** - Top pick in the sector due to strong market share and margin upside from technology upgrades [1][4]. - Expected gross/net margin could reach approximately 45% due to BOM (Bill of Materials) optimization and lower costs associated with SiPh technology [39][41]. - Revised earnings estimates for FY25-27E show an increase of 25%-85% due to higher shipment numbers and margin improvements [41][43]. 2. **Eoptolink (300502.SZ)** - Anticipated to gain market share with a significant shift towards SiPh technology, expected to reach a mix of ~40% in 2026 [32][69]. - Target price raised to Rmb321 based on a 20x FY26E PE, reflecting strong growth in 800G and 1.6T segments [33][70]. - Earnings estimates for FY25-27E increased by 5-25% due to higher revenue and margin assumptions [33][43]. 3. **Suzhou TFC Optical Communication (300394.SZ)** - Focus on acquiring new customers for passive optical components and optical engines, with a target price raised to Rmb140 [46]. - Earnings estimates for FY25-27E increased by 6-42% based on stronger demand for 1.6T optical engines [46][48]. Core Insights and Arguments - The ASIC uptrend is expected to solidify the demand for optical transceivers, particularly with the increasing attach rate per AI accelerators [2][11]. - The market has underappreciated the gross/net margin upside from SiPh migration, which is projected to drive sector EPS revisions and re-ratings [2][3][11]. - Despite concerns about AI capex peaking, the inference AI capex is viewed as more sustainable, supporting ongoing growth in the optical networking sector [3][28]. - Customer preference remains strong for Tier-1 suppliers like Innolight and Eoptolink, which is expected to enhance their market positions [40][30]. Additional Important Points - The anticipated adoption of LPO (Linear-drive Pluggable Optics) for scaling up ASICs could represent an upside risk for long-term demand [12]. - The actual mass adoption of co-packaged optics (CPO) is not expected until 2029-2030, allowing for continued strength in the 800G market in 2026 [30]. - The gross margin for 800G/1.6T SiPh transceivers is expected to reach 45-50%, driven by ongoing technology upgrades and increased industry penetration [30][31]. Conclusion - The optical networking industry is poised for significant growth driven by technological advancements in ASIC and SiPh, with leading companies like Innolight and Eoptolink positioned to capitalize on these trends. The market's current valuation may not fully reflect the potential earnings growth, presenting a favorable investment opportunity.

Summary of HG Tech Conference Call Company Overview - **Company**: HG Tech (000988.SZ) - **Industry**: Communications and Electronics Devices Key Points Optical Transceiver Segment - **Strong Momentum**: Optical transceiver shipments are expected to ramp up to 800k-900k units per month in 3Q25, primarily consisting of 400G products [2] - **Revenue Contribution**: Datacom transceivers generated Rmb2.2 billion in revenue in 1H25, with expectations of Rmb1.7 billion to Rmb2 billion in sales for 3Q and 4Q25E respectively [2] - **Profitability Improvement**: The optical networking segment's net margin improved to 7.4% in 2Q25 from 5.3% in 1Q25, driven by a better product mix and scale benefits [3] Laser Equipment Segment - **Revenue Decline**: Laser equipment sales decreased by 3% YoY in 1H25, attributed to the lumpiness of revenue recognition, particularly in project-based sales [4] - **Shipbuilding Orders**: New orders from the shipbuilding industry reached Rmb1 billion year-to-date, indicating potential for future revenue growth despite current declines [4] Financial Performance - **Net Profit Estimates**: The networking segment's net profit is projected to reach approximately Rmb600 million and Rmb976 million in 2025 and 2026 respectively, compared to Rmb30 million in 2024 [3] - **Revenue Growth**: Revenue estimates for 2025E-2027E have been raised by 7%-12% due to stronger-than-expected performance in the networking segment [9] Investment Thesis - **Expansion into High-End Products**: HG Tech's focus on high-end optical transceivers (800G and 400G modules) is expected to drive margin improvement and accelerate net profit growth in 2025E-2026E [15] - **Valuation**: Current valuations are at the lower end of historical trading ranges, making it an attractive investment opportunity [15] - **Target Price**: The 12-month target price is set at Rmb62, based on a 24x 2026E P/E [16] Risks - **Key Risks Identified**: Potential risks include slower ramp-up in 400G/800G shipments, lower-than-expected margins, and geopolitical tensions affecting supply chains [16] Additional Insights - **Profit Mix by Segment**: In 1H25, the profit mix was 26% from laser tools, 29% from networking, and 45% from sensor/imaging [8] - **Future Outlook**: As customers transition to 800G technology in 2026, further profitability improvements are anticipated [3] This summary encapsulates the essential insights from the conference call, highlighting HG Tech's current performance, future outlook, and investment considerations.

Summary of Eoptolink Conference Call Company Overview - **Company**: Eoptolink (300502.SZ) - **Industry**: Optical Transceivers Key Points and Arguments 1. **Positive Shipment Outlook**: Eoptolink's shipment outlook has improved due to the removal of certain tariff overhangs, including the reciprocal tariffs on Thailand and continued exemptions for optical transceivers [1][2][3] 2. **Tariff Impact**: The reciprocal tariff on Thailand is set at 19%, but optical transceiver products remain exempt. This is similar to the situation in Malaysia, indicating that tariffs will not significantly affect cost competitiveness among peers [3] 3. **Limited Impact from Section 232 Tariffs**: Initial assessments suggest that Section 232 tariffs on semiconductors will have a limited impact on the supply of key components for transceivers, such as laser chips and DSP chips [4][5] 4. **Revised Shipment Forecasts**: Shipment forecasts for 800G and 1.6T transceivers have been increased by 10% and 20% for 2026E, and by 9% and 14% for 2027E, reflecting a more positive outlook [5] 5. **Financial Projections**: Revenue estimates for Eoptolink have been revised upwards by 12% for 2026 and 2027, with net profit projections also increased by 14% [9][10] 6. **Valuation**: Eoptolink is currently trading at an attractive valuation of 15x 2026E P/E compared to its historical average of 21x, with a 12-month target price raised to Rmb222 from Rmb195 [1][14] 7. **Growth Drivers**: The company is expected to benefit from the ramp-up of 400G/800G optical transceivers driven by AI infrastructure deployments in 2025E, with the 800G ramp being a primary earnings driver [13] 8. **Risks**: Key risks include slower-than-expected ramp-up of 800G products, geopolitical issues affecting the supply chain, and increased competition leading to price erosion [16] Additional Important Information - **Financial Performance**: The gross margin is projected to improve to 52.0% in 2026E from 49.5% previously, indicating better profitability [10] - **Market Context**: Eoptolink is positioned as a key player in the optical transceiver market in China, with products covering up to 1.6T [13] - **Analyst Contact Information**: Analysts from Goldman Sachs involved in the report include Jin Guo and Allen Chang [6] This summary encapsulates the essential insights from the conference call regarding Eoptolink's current position, future outlook, and associated risks in the optical transceiver industry.

Investment Rating - The report assigns a "Buy" rating for Innolight with an updated 12-month target price (TP) of Rmb182, increased from Rmb160 [1][4]. Core Insights - Innolight's net profit for Q2 reached Rmb2.4 billion, marking a 79% year-over-year increase and a 53% quarter-over-quarter increase, indicating a re-acceleration in growth [1]. - The company anticipates strong demand for its products, particularly in the 800G and 1.6T segments, driven by cloud service providers and AI applications [2][11]. - Margin expansion is attributed to a better product mix and improved yields, contributing significantly to the strong Q2 performance [3][10]. Summary by Sections Financial Performance - Revenue estimates for 2025E-2027E have been revised up by 6% to 12%, and net profit estimates have been increased by 12% to 22% following better-than-expected Q2 results [4][8]. - The gross margin is projected to improve to 40.1% in 2025E, up from a previous estimate of 38.5% [8]. Demand Outlook - The company has reaffirmed a strong demand outlook from US cloud service providers for 800G products heading into the second half of 2025 and 2026, with some customers increasing orders to support AI applications [2][11]. - Innolight plans to expand its production capacity in Thailand to meet the anticipated demand [2]. Margin Improvement - The report highlights that margin improvement is driven by a shift towards higher-margin products such as 800G/1.6T optical transceivers and silicon photonics modules [3][10]. - The company is experiencing better yields, which further supports margin expansion [3]. Competitive Position - Innolight is positioned as a leading supplier in the optical transceiver market, particularly benefiting from the growth in AI and data center expansions [10][11]. - The company's strong execution in ramping up capacity and developing new products is seen as a key competitive advantage [11][13].

Investment Rating - The investment rating for Eoptolink is "Buy" with an updated 12-month target price (TP) of Rmb195, increased from Rmb177 [1][10][17]. Core Views - Eoptolink is positioned to benefit from the ramp-up of 400G/800G optical transceivers, driven by key customers' deployments in AI infrastructure expected in 2025 [17]. - The company's strong second-quarter performance, with a net profit of Rmb2.38 billion, represents a 340% year-over-year increase and a 51% quarter-over-quarter increase, exceeding expectations [1][2]. - Eoptolink's valuation is currently at a discount of approximately 20% compared to its larger peer Innolight, which is expected to converge as both companies share similar net profit growth outlooks [2][8]. Summary by Sections Financial Performance - Eoptolink's 2Q net profit was Rmb2.38 billion, significantly above the guidance range of Rmb2.13 billion to Rmb2.63 billion, driven by strong 800G shipments and margin expansion [1]. - Revenue estimates for 2025-2027 have been revised upwards by 6% to 14%, and net profit estimates have been increased by 9% to 20% following the better-than-expected 2Q results [10][11]. Market Position - Eoptolink is a key player in the optical transceiver market in China, with products that include up to 1.6T optical transceivers [17]. - The stock has underperformed relative to peers recently, but the strong profit beat is expected to act as a catalyst for share price recovery [3][2]. Valuation Metrics - The current 12-month forward P/E for Eoptolink is seen as attractive in a historical context, with expectations for further convergence in valuation with Innolight [8][10]. - The updated target price of Rmb195 is based on a 17x multiple of the 2026 estimated earnings [10][17].

Investment Rating - The investment rating for Accelink Technologies is "Sell" with a target price of Rmb24.6, indicating an expected share price return of -46.7% [2][5]. Core Insights - Accelink Technologies expects a net profit growth of 55%-95% YoY for 1H25, with guidance of Rmb323 million to Rmb407 million, driven by strong optical transceiver demand and an improved product mix [1][4]. - The mid-point of the 2Q25 earnings guidance at Rmb215 million is slightly below expectations, suggesting potential downside risk to the share price, which is currently trading at a high valuation of 37x FY25 PE compared to peers at around high-teens [1][5]. - The valuation of Accelink is considered demanding due to lower profitability in the domestic transceiver market and relatively lower earnings growth compared to competitors like Innolight and Eoptolink [1][5]. Summary by Sections Earnings Guidance - For 2Q25, Accelink's net profit guidance is Rmb215 million, a 64% increase from Rmb131 million in 2Q24, while for 1H25, the guidance is Rmb365 million, a 75% increase from Rmb209 million in 1H24 [4]. Valuation - The target price of Rmb24.6 is based on a P/E multiple of 20.0x 2025E EPS, which is one standard deviation below the stock's five-year historical forward PER [5]. Market Capitalization - Accelink Technologies has a market capitalization of Rmb37,228 million (approximately US$5,196 million) [2].

Investment Rating - The report maintains a "Buy" rating for both Innolight and Eoptolink, with a 12-month price target of Rmb115 for Innolight and Rmb136 for Eoptolink, indicating potential upside of 19.2% and 26% respectively [30][34]. Core Insights - The optical transceiver demand outlook for 2025 remains firm, driven by AI infrastructure needs, with key customers maintaining their transceiver volume expectations [1][16]. - Supply constraints are expected to ease as new laser capacity comes online around the end of 2Q25, which could support a faster shipment cadence in 2H25 [8][15]. - The 1.6T shipment ramp is anticipated to concentrate in 2H25, with initial demand forecasts for 2026 expected to be communicated by customers in mid-2025 [14][3]. Summary by Sections Demand Outlook - The demand for optical transceivers is primarily driven by AI infrastructure, with a robust outlook for 800G transceiver orders in 2025 [1][13]. - Concerns regarding 2026 demand persist, but clarity is expected as customers begin to communicate their forecasts [3][20]. Supply Chain Dynamics - The supply chain is experiencing tightness in laser components, but improvements are anticipated as new capacities are introduced [15][8]. - The ongoing ramp of 800G products is expected to be a key growth driver, with significant shipments anticipated in 2H25 [4][11]. Earnings Revisions - Earnings estimates for Innolight and Eoptolink have been revised upward, reflecting improved supply conditions and steady demand [17][22]. - Innolight's revenue estimates for 2025-2027 have been increased by 3%-8%, while Eoptolink's estimates have been raised by 4%-9% [21][22]. Competitive Positioning - Innolight is positioned as a leader in the 800G/1.6T optical transceiver market, benefiting from strong relationships with major customers [26][28]. - Eoptolink is also well-positioned to capitalize on the ramp-up of 400G/800G transceivers, with a focus on AI infrastructure [31].