A clear beneficiary of global AI infrastructure capex; remains our top pick in 2026

A clear beneficiary of global AIinfrastructurecapex;remains our top pick in 2026 Target PriceRMB707.00(Previous TPRMB591.00)Up/Downside21.5%Current PriceRMB582.00 2025 has proven a standout year for optical transceiversuppliers with highAIexposure, withdomesticindustry leader Innolight delivering stellar 9M25results: Revenue and net profit soared44%/90% YoY, while 3Q25gross marginexpanded9pptto 43% froma year ago.Strong financials fueled a share pricerally, with Innolight’s stock surging380%+ YTD as of Dec 11.Lookingaheadinto 2026,we double down on AI asone of our key themes,underpinnedby anunabated AI infrastructure investment cycle andasustained mix shift to higher-value solutions(i.e.,1.6T).Wereiterate our BUY rating for InnolightandliftourTP toRMB707,driven byan upgraded hyperscalercapex outlook. China Semiconductors Lily YANG, Ph.D(852) 3916 3716lilyyang@cmbi.com.hk Capex outlook:upward revisions in consensuscontinue.The US BigFourhyperscalers(Google,Microsoft,Meta,Amazon)ramped capexaggressively:US$230bn in 2024 (+55% YoY),US$259bn in 9M25 (+65%YoY), with 2025 full-year capexprojectedby Bloomberg consensusto reachUS$367bn (+59% YoY).Bloomberg consensuspoints to another35% YoYgrowth in 2026, pushing capex to US$495bn.Despite a modest 14%consensusgrowthfor 2027 andlingeringAI bubbledebates, we remainbullishthatAI infrastructure investment will continue to grow, with upward revisionpotentials:2025 Big Fourcapex growthconsensus was 33% in Janandrevised to59%in Nov. Historically,post-earningsquarterly adjustments haveconsistently lifted consensus estimates asspendingvisibilityimproves.Supply chaincapacity expansion underway.Mgmt.previouslyflagged Kevin ZHANG(852) 3761 8727kevinzhang@cmbi.com.hk Jiahao Jiang(852) 39163739JiangJiahao@cmbi.com.hk Stock Data tightsupplyofkey optical components such as EMLs(electro-absorptionmodulated lasers).Although we expect the tightness to continue into 2026,we believe Innolight iswellpreparedforthe challenges,givencapacityexpansionsof EMLsand rising SiPho adoptions:Lumentum toincreaseunit output by 40% over the coming quarters, despite already being soldoutthroughlong-term agreementswith downstream leaders. TheUS allowedthe exports of Nvidia’s H200to Chinaon Dec 8:Acatalyst for next AI compute upcyclein China.PerReuters, the H200delivers ~6x the performanceas H20, lifting the compute ceiling for Chinesehyperscalers. This should translate into structurally higher requirements fornetworking components,with Innolight and other leading domestic AI infravendorsstanding out as key downstream beneficiaries of the highercompute baseline. ReiterateBUY on Innolight,with TP adjusted to RMB707,based onthesame28x2026E P/E,at a premiumto historical 5-year avg (27x)given itsabsolute leadership in theoptical transceiver industry.Wereviseup ourrevenue forecasts by 14% for 2026on higher consensus capex fromprevious updates (21% upward revision in November). We alsoliftGPM to46.2% (vs. prior 44.3%), givenafavorable mixshifttowards 1.6T and risingadoption of SiPho and margin resilience given persist tightnessof supplychain.Potentialrisksinclude lower capex, geopolitical uncertainties, andlower price due to competition.Earnings Summary Source: FactSet Source: Company data, CMBIGMestimates Source: Company data, CMBIGM estimates Source: Company data, Bloomberg consensus, CMBIGM Source: Company data, Bloomberg consensus, CMBIGM Disclosures& Disclaimers AnalystCertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar daysprior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industry expected to perform in-line with the relevant broad market benchmark over n