Innolight (300308 CH)

Pluggables first, new architecture later

Innolight's share price has experienced heightened volatility yesterday (down 5% on 4 Feb), driven by a combination of market concerns around NPO/CPO adoption, hyperscaler network roadmap evolution, upstream suppliers' capacity expansion, etc., prompting mgmt. to hold an investor Q&A session to address these issues. We believe the core investment theme remains intact that pluggable modules will continue to dominate hyperscaler scale-out/scale-across deployments through 2026-27E, with the Company retaining a structurally irreplaceable role. Recent earnings from Lumentum (LITE US, NR) and Coherent (COHR US, NR) also reinforced a demand-driven industry backdrop, while practical constraints suggest that meaningful CPO adoption is unlikely before late-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. Per mgmt., high-speed pluggable modules continue to be the confirmed deployment standard for hyperscaler scale-out/scale-across networks, with customer roadmaps clearly centered on 800G/1.6T through 2026-27E. While the Company is actively engaged in NPO-like solutions or future CPO development, these efforts are complementary rather than substitutive, awaiting further reliability validation, serviceability, and ecosystem maturity which could all constrain early adoption, supporting our view that meaningful CPO adoption is a late-2027 event instead of a 2026 risk.

Upstream capacity expansion eases supply-chain constraints. Recent earnings from Lumentum and Coherent point to faster-than-expected expansion of upstream InP capacity, specifically EML and high-speed CW lasers, driven primarily by sustained demand from 800G and 1.6T pluggable modules. Lumentum outlined a plan to expand InP capacity by ~40% by 1H26E last year, noting that over 20% of this expansion has already been realized ahead of schedule, while Coherent indicated its InP wafer capacity expansion, supported by a transition to 6-inch wafers, which is also progressing faster than planned. Despite this accelerated ramp-up, neither company expects supply-demand balance to normalize in 2026-2027, as incremental capacity continues to be absorbed by end-market demand. Importantly, both companies characterized CPO as a constructive but staged opportunity, reiterating that material contribution is unlikely before 2027 or beyond.

Maintain BUY on Innolight with TP unchanged at RMB707 (28x 2026E P/E). The Company's earnings preview showed a 108% YoY net profit increase to RMB10.8bn (mid-point), in-line with our forecast of RMB10.9bn. Innolight remains the dominant supplier of 1.6T pluggable modules, with shipments set to accelerate through 2026-2027, while its SiPh solutions (already accounting for ~50% of 2025 shipments per mgmt.) will continue to support structural margin expansion. With order visibility extending into near-to-mid term, we see no structural risk in the company's earnings potential.

Earnings Summary

(YE 31 Dec)

FY23A

FY24A

FY25E

FY26E

FY27E

Revenue (RMB mn)

10,718

23,862

38,054

83,794

112,154

YoY growth(%)

11.2

122.6

59.5

120.2

33.8

Gross margin(%)

33.0

33.8

42.0

46.2

46.3

Net profit (RMB mn)

2,173.5

5,171.5

10,950.3

27,774.1

38,357.3

YoY growth(%)

77.6

137.9

111.7

153.6

38.1

EPS(Reported)(RMB)

2.00

4.72

9.95

25.23

34.85

P/E(x)

280.0

118.6

56.3

22.2

16.1

Source: Company data, Bloomberg, CMBIGM estimates

BUY (Maintain)

Target Price RMB707.00

Up/Downside 26.3%

Current Price RMB560.00

China Semiconductors

Kevin ZHANG

(852) 37618727

kevinzhang@cmbi.com.hk

Stock Data

Mkt Cap (RMB mn)

622,216.0

Avg 3 mths t/o (RMB mn)

18,922.1

52w High/Low (RMB)

649.00/71.99

Total Issued Shares (mn)

1111.1

Source: FactSet

Shareholding Structure

Shareholding Structure

Shandong Zhongji Investment Holdings Co.

10.9%

Wang Weixiu

6.3%

Source: Bloomberg

Share Performance

Absolute

Relative

1-mth

-8.2%

-13.5%

3-mth

17.2%

8.5%

6-mth

168.7%

119.4%

Source: FactSet

12-mth Price Performance


Source: FactSet


Figure 1: PE band


Figure 2: PE chart

Source: Company data, CMBIGM estimates


Source: Company data, CMBIGM estimates

Figure 3: Peers valuation

Mkt Cap

US$(mn)

Price

(LC)

P/E

Performance(%)

Company

Ticker

FY25E

FY26E

FY27E

Daily

YTD

Domestic players

Innolight

300308CH

89,729

560.99

56.3

22.2

16.1

0.18

-8.20

Eoptolink

300502CH

55,115

385.18

41.0

22.9

17.7

-3.51

-7.35

TFC

300394CH

28,233

252.17

89.3

57.7

42.5

-5.39

31.34

CIG

603083CH

4,844

104.37

141.0

20.8

11.1

-2.58

-20.28

Accelink

002281CH

7,926

68.23

50.2

37.0

28.4

-2.07

-0.36

HG Tech

000988CH

10,989

75.91

42.5

34.3

27.3

-0.71

-3.62

70.0

32.5

23.8

(2.3)

(1.4)

Overseas players

Lumentum

LITE US

33,240

465.54

236.0

64.5

36.4

7.00

18.04

Coherent

COHR US

39,559

211.00

60.2

40.5

32.4

-7.93

24.17

Marvell

MRVL US

64,344

73.73

47.2

26.0

20.8

-2.40

-11.04

Broadcom

AVGO US

1,460,549

308.05

45.6

30.7

21.8

-3.83

-7.45

97.2

40.4

27.9

(1.8)

5.9

Source: Bloomberg data, CMBIGM estimates Note: Data as of 4 Feb


Financial Summary

INCOME STATEMENT

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec (RMB mn)

Revenue

9,642

10,718

23,862

38,054

83,794

112,154

Cost of goods sold

(6,816)

(7,182)

(15,796)

(22,060)

(45,109)

(60,218)

Gross profit

2,826

3,536

8,067

15,995

38,685

51,936

Operating expenses

(1,499)

(1,042)

(2,017)

(2,334)

(3,626)

(3,646)

Selling expense

(63)

(51)

(47)

(84)

(140)

(168)

SG&A expense

(598)

(558)

(879)

(1,032)

(1,474)

(1,707)

R&D expense

(767)

(739)

(1,244)

(1,535)

(2,281)

(2,730)

Others

(71)

306

153

317

270

960

Operating profit

1,327

2,494

6,050

13,661

35,059

48,290

Other income

28

2

5

7

16

22

Other expense

(4)

(4)

(2)

(8)

(18)

(24)

Pre-tax profit

1,352

2,492

6,052

13,660

35,057

48,287

Income tax

(118)

(285)

(681)

(2,040)

(5,597)

(7,709)

After tax profit

1,234

2,208

5,372

11,620

29,460

40,579

Minority interest

10

34

200

670

1,686

2,221

Net profit

1,224

2,174

5,171

10,950

27,774

38,357

BALANCE SHEET

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec (RMB mn)

Current assets

9,587

11,319

18,196

30,189

62,685

101,898

Cash & equivalents

2,831

3,317

5,054

10,637

23,776

49,077

Account receivables

1,509

2,581

4,604

7,907

17,346

22,600

Inventories

3,888

4,295

7,051

10,475

19,185

27,009

Prepayment

64

59

80

111

245

328

Other current assets

1,295

1,067

1,407

1,058

2,134

2,884

Non-current assets

6,970

8,687

10,671

13,443

16,928

21,731

PP&E

3,217

3,948

5,820

6,429

8,089

10,452

Right-of-use assets

11

27

34

127

323

554

Deferred income tax

48

82

222

629

1,147

1,782

Intangibles

322

401

378

351

375

447

Goodwill

1,949

1,939

1,939

1,939

1,939

1,939

Other non-current assets

1,422

2,291

2,279

3,968

5,055

6,558

Total assets

16,557

20,007

28,866

43,633

79,614

123,629

Current liabilities

3,264

4,360

6,497

8,928

15,243

19,963

Short-term borrowings

385

62

1,426

598

1,099

1,088

Account payables

1,136

1,857

2,991

5,470

9,360

12,087

Tax payable

93

213

244

1,138

2,077

3,225

Other current liabilities

1,349

2,039

1,545

1,552

2,395

3,083

Contract liabilities

22

3

10

10

22

30

Accrued expenses

279

187

282

159

290

450

Non-current liabilities

1,224

872

2,076

2,657

4,042

5,735

Long-term borrowings

696

319

606

979

979

979

Bond payables

0

0

0

0

0

0

Deferred income

264

216

270

288

526

816

Other non-current liabilities

264

337

1,200

1,391

2,537

3,940

Total liabilities

4,488

5,232

8,573

11,586

19,285

25,698

Share capital

801

803

1,121

1,111

1,111

1,111

Retained earnings

3,893

5,870

10,624

20,892

47,165

82,098

Other reserves

7,251

7,589

7,388

8,216

8,538

8,987

Total shareholders equity

11,945

14,261

19,134

30,218

56,814

92,195

Minority interest

124

513

1,159

1,829

3,515

5,736

Total equity and liabilities

16,557

20,007

28,866

43,633

79,614

123,629


CASH FLOW

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec (RMB mn)

Operating

Profit before taxation

1,352

2,492

6,052

13,660

35,057

48,287

Depreciation & amortization

493

525

713

733

600

787

Tax paid

(118)

(285)

(681)

(2,040)

(5,597)

(7,709)

Change in working capital

291

(830)

(3,210)

(4,526)

(14,070)

(9,957)

Others

432

(6)

290

451

1,081

1,458

Net cash from operations

2,449

1,897

3,165

8,277

17,072

32,866

Investing

Capital expenditure

(792)

(1,704)

(2,866)

(2,707)

(3,571)

(4,556)

Acquisition of subsidiaries/ investments

(5,967)

(3,971)

(2,725)

0

0

0

Net proceeds from disposal of short-term investments

5,167

4,435

2,619

0

0

0

Others

40

65

37

441

115

144

Net cash from investing

(1,553)

(1,176)

(2,935)

(2,266)

(3,456)

(4,411)

Financing

Dividend paid

(233)

(207)

(399)

(620)

(1,237)

(3,040)

Net borrowings

(699)

(884)

1,685

(506)

500

(11)

Proceeds from share issues

33

(109)

246

696

0

0

Others

(742)

884

(40)

(0)

1

1

Net cash from financing

(1,641)

(316)

1,492

(430)

(735)

(3,051)

Net change in cash

Cash at the beginning of the year

3,489

2,809

3,234

4,988

10,587

23,726

Exchange difference

64

20

39

(10)

(10)

(10)

Others

(745)

405

1,715

5,610

13,149

25,311

Cash at the end of the year

2,809

3,234

4,988

10,587

23,726

49,027

GROWTH

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec

Revenue

25.3%

11.2%

122.6%

59.5%

120.2%

33.8%

Gross profit

43.6%

25.1%

128.1%

98.3%

141.9%

34.3%

Operating profit

37.9%

87.9%

142.6%

125.8%

156.6%

37.7%

Net profit

39.6%

77.6%

137.9%

111.7%

153.6%

38.1%

PROFITABILITY

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec

Gross profit margin

29.3%

33.0%

33.8%

42.0%

46.2%

46.3%

Operating margin

13.8%

23.3%

25.4%

35.9%

41.8%

43.1%

Return on equity (ROE)

10.4%

16.6%

31.0%

44.4%

63.8%

51.5%

GEARING/LIQUIDITY/ACTIVITIES

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec

Current ratio (x)

2.9

2.6

2.8

3.4

4.1

5.1

VALUATION

2022A

2023A

2024A

2025E

2026E

2027E

YE 31 Dec

P/E

509.1

280.0

118.6

56.3

22.2

16.1

P/E (diluted)

509.1

284.1

121.0

56.3

22.2

16.1

Source: Company data, CMBIGM estimates. Note: The calculation of net cash includes financial assets.



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CMBIGM Ratings

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NOT RATED : Stock is not rated by CMBIGM

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months

MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months

UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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