Pluggables first, new architecture later

Pluggables first, new architecture later Innolight’s share price hasexperiencedheightened volatilityyesterday(down 5%on4 Feb), driven by a combination of market concerns around NPO/CPOadoption, hyperscaler network roadmap evolution,upstream suppliers’ capacityexpansion, etc., prompting mgmt. to hold an investor Q&A session to addresstheseissues.We believe the core investment theme remains intact thatpluggable modules will continue to dominate hyperscaler scale-out/scale-acrossdeployments through 2026-27E,with the Company retaining a structurallyirreplaceable role. Recent earnings from Lumentum (LITE US, NR) and Coherent(COHR US, NR) also reinforced a demand-driven industry backdrop, whilepractical constraints suggestthatmeaningful CPO adoption is unlikely beforelate-2027. Reiterate BUY on Innolight with TP unchanged at RMB707.Innolight's structural role in pluggable optical transceivers is intact, Target PriceRMB707.00Up/Downside26.3%Current PriceRMB560.00 China Semiconductors Kevin ZHANG(852) 3761 8727kevinzhang@cmbi.com.hk Stock Data with optionality in NPO/CPO but no near-term displacement risk.Permgmt.,high-speed pluggable modules continue to be the confirmeddeployment standard for hyperscaler scale-out/scale-across networks, withcustomer roadmaps clearly centered on 800G/1.6T through 2026-27E. Whilethe Company is actively engaged in NPO-like solutions or future CPOdevelopment, these efforts are complementary rather than substitutive,awaiting further reliability validation, serviceability, and ecosystem maturitywhich could all constrain early adoption, supporting our view that meaningfulCPO adoption is a late-2027 event instead of a 2026 risk.Upstream capacity expansion eases supply-chain constraints.Recent earningsfrom Lumentum and Coherent point to faster-than-expectedexpansion of upstream InP capacity, specifically EML and high-speed CWlasers, driven primarily by sustained demand from 800G and 1.6T pluggablemodules.Lumentum outlined a plan to expand InP capacity by ~40% by1H26E last year, noting that over 20% of this expansion has already beenrealized ahead of schedule, while Coherent indicated its InP wafer capacityexpansion,supported by a transition to 6-inch wafers,which is alsoprogressing faster than planned. Despite this acceleratedramp-up, neithercompany expects supply-demand balance to normalize in 2026-2027, asincrementalcapacity continues to be absorbed by end-market demand.Importantly, both companies characterized CPO as a constructive but stagedopportunity, reiterating that material contribution is unlikely before 2027 orbeyond.Maintain BUY on Innolight with TP unchanged at RMB707 (28x 2026E Source: FactSet P/E).The Company's earnings preview showed a 108% YoY net profitincrease to RMB10.8bn (mid-point), in-line with our forecast ofRMB10.9bn.Innolight remains the dominant supplier of 1.6T pluggable modules, withshipments set toaccelerate through 2026-2027, while its SiPh solutions(already accounting for ~50% of 2025 shipments per mgmt.) will continue tosupport structural margin expansion. With order visibility extending into near-to-mid term, we see no structural risk in thecompany's earnings potential. Source:Company data,CMBIGMestimates Source:Company data,CMBIGMestimates Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible forthe content of this research report, in whole or in part, certifies that with 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 (asdefined 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 days prior to thedate 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 next 12 monthsSELL: Stock with potential loss of over 10% over next12 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 next 12 months:Industry expected to underperform the relevant broad market benchmark over next 12 months Address: 45/F, Champion Tower, 3 Garden Road,Hong K