Innolight has announced 1Q25 results. Revenue was up 38% YoY and 2% QoQ to RMB6.7bn, driven by continued global cloud capex and growing demand for 400G/800G optical transceivers. NP was up 57% YoY and 12% QoQ to RMB1.6bn, driven by growth in orders and a better margin. GPM improved to 36.7% (vs. 32.8%/35.1% in 1Q24/4Q24), significantly above BBG consensus of 31.9% despite that 1Q GPM was normally lower due to seasonality and price adjustments. Mgmt. attributed the 1Q25 margin beat to 1) a favourable product mix (greater revenue contribution from 800G), 2) operation optimization, and 3) margin improvements from overseas factories. Maintain BUY on Innolight, as the company is a key AI beneficiary. We revise TP to RMB151 based on 21.5x 2025E P/E (vs. prior 27x), at par with the peers’ average and reflecting rising geopolitical uncertainties and lower sector sentiment.

Expect solid 400G/800G demand from overseas/domestic CSPs in 2025; 1.6T shipments to accelerate starting in 2Q. Mgmt. remains confident in 800G sales, as overseas customers have largely transitioned from 400G to 800G deployments. While 400G shipments declined temporarily, the company noted a pickup in domestic demand, supported by rising domestic cloud capex, driving a recovery in 400G shipments in the coming quarters. 1.6T contribution was lower than expected in 1Q but is forecasted to grow sequentially, per mgmt. We expect Innolight's revenue to increase by 47% in FY25 (vs. 123% YoY in FY24), driven by continued cloud spending on AI infrastructure.

We project the company's GPM to stay at around 35%-36% in FY25/26E, driven by continued 800G shipments, 1.6T ramp-up, and annual price adjustments. The company's 1Q GPM was up 1.6ppt QoQ (vs. -3.2ppt/- 2.6ppt for 1Q23/1Q24) and beat our estimate by 4.8ppt. We forecast its FY25 GPM to be 35.3%.

Tariff risks mitigated by offshore capacity. Mgmt. noted minimal tariff exposure with all shipments now coming from its 70k sqm Thailand facility, which manufactures high-end 400G/800G products and benefits from zero- tariff treatment under the current trade rules. However, we maintain a cautious stance in light of ongoing geopolitical uncertainty.

Maintain BUY with TP adjusted to RMB151. We believe Innolight's fundamentals are intact, with revenue/NP revised up slightly by 3%/1% for FY25. The company remains a key beneficiary of AI infrastructure investment and enjoys growth potential from both overseas and domestic cloud capex. New TP is based on 21.5x 2025E P/E (vs. prior 27x), which is peers avg. The company's stock is currently trading at 11.4x 2025E P/E, which is lower than 1SD-below historical 5-years avg. of 12.8x, undemanding in our view. Risks: 1) future tariff uncertainty that may affect the company’s operations; 2) rising raw material costs, and 3) slower-than-expected ramp- up speed.