Investment Rating - The report maintains a "Buy" rating for key companies in the optical module sector, including Zhongji Xuchuang, Xinyi Sheng, and Tianfu Communication [14]. Core Insights - The optical module sector has rebounded strongly since early May, with significant increases in stock prices for major companies, indicating a return of mainstream capital [25][20]. - The report emphasizes the need to adjust overly optimistic expectations regarding the rapid upgrade cycles from 400G to 800G and then to 1.6T, suggesting a more rational approach to market growth [26][27]. - The report identifies four key areas of focus: product iteration cycles, coexistence of CPO technology with pluggable solutions, undervaluation of passive components, and the industry's competitive landscape [25]. Summary by Sections 1. Product Iteration and Market Dynamics - The 800G optical module is expected to remain the mainstream product, with 1.6T expected to start scaling in 2026, following a more gradual adoption cycle [26][27]. - The market size for 800G is projected to reach approximately $750 million in 2024, with a CAGR of about 31% expected until 2027 [26]. - The report notes that the industry typically requires 2-3 years for technology iterations, which may not align with market expectations for rapid advancements [27]. 2. CPO Technology - CPO is positioned as one of several solutions rather than a complete replacement for existing technologies, with significant advantages in reducing power consumption and size, but still facing challenges in mass commercialization [31][32]. 3. Passive Components Growth - The passive components market is experiencing a resurgence, with significant growth expected in the AWG chip market, projected to grow from $1.13 billion in 2023 to $2.89 billion by 2032, reflecting a CAGR of 11.1% [32][9]. - Companies like Tongchuang Technology and Shijia Photon are rapidly increasing production capacity, indicating strong demand for high-density interconnect solutions [34]. 4. Industry Structure and Competitive Positioning - The report highlights a stable industry structure with high concentration among downstream CSPs and a few dominant upstream suppliers, which allows companies to carve out competitive advantages in niche markets [35][36]. - Major cloud service providers are expected to significantly increase capital expenditures, driving demand for optical modules [35]. - The report recommends focusing on leading companies in the optical module sector and related components, emphasizing their strong market positions and growth potential [12][36].

Core Viewpoint - The optical module industry is entering a critical period of technological iteration and demand restructuring, with 800G remaining the mainstream product while the mass production cycle for 1.6T is longer than previously expected. CPO technology is unlikely to replace pluggable solutions in the short term, and the passive components market is undergoing a value reassessment [1]. Group 1: Product Iteration and Market Dynamics - The 800G optical module will maintain its mainstream status, while the 1.6T trend is confirmed but will not see significant volume until 2026 and beyond. The market size for 800G is projected to reach approximately $750 million in 2024, growing to $1.7 billion by 2027, with a CAGR of about 31% [2]. - The industry typically follows a 2-3 year iteration cycle for product upgrades, with the transition from 400G to 800G taking about three years. The expectation for rapid advancement to 1.6T has not accounted for the necessary maturity in materials, packaging, and testing [3]. Group 2: Market Expectations and Performance - The second quarter of 2025 saw significant profit increases for companies like NewEase, which reported a net profit of 1.57 billion yuan, up 385% year-on-year, primarily due to the large-scale rollout of 800G modules. This indicates a correction in market expectations regarding 1.6T [4]. Group 3: CPO Technology and Market Positioning - CPO technology is one of many solutions rather than a complete replacement for pluggable options. While CPO offers advantages such as reduced interface loss and lower power consumption, challenges in packaging, heat dissipation, and cost remain, indicating that pluggable solutions will continue to meet mainstream demands in the near term [5]. Group 4: Passive Components Market Growth - The passive components market is experiencing a new wave of high-elasticity growth, with the value and complexity of these components increasing alongside optical module speed upgrades. The AWG chip market is expected to grow from $1.13 billion in 2023 to $2.89 billion by 2032, with a CAGR of 11.1% [7]. Group 5: Industry Structure and Competitive Positioning - The industry structure is solid, with high concentration among downstream CSPs and an oligopolistic landscape among upstream suppliers. Major cloud providers are significantly increasing their capital expenditures, which will drive demand for optical modules [8]. - Companies like NewEase and Zhongji Xuchuang are leveraging their expertise in niche markets to establish competitive advantages, making it difficult for new entrants to disrupt established players [9].