Innolight announced 1H25 preliminary earnings. 1H25 NP is guided to be RMB3.6bn-RMB4.4bn, up 53%-87% YoY. 2Q NP alone is estimated to be RMB2.0bn-RMB2.8bn, up 50%-107% YoY/27%-78% QoQ. 2Q NP beat Bloomberg consensus of RMB1.9bn by 9%-52%. According to the company, the strong results were driven by 1) robust topline growth on sustained AI demand (report) and 2) margin increases due to a favorable product mix (higher contribution from 800G and silicon photonics products) and yield improvement. Reiterate BUY with TP raised to RMB225.

Sequential revenue growth in recent quarters driven by robust AI infrastructure spend. Innolight's revenue grew by 38% YoY/2% QoQ in 1Q. We expect 2Q NP to grow QoQ again, driven by 1) strong capex from overseas CSPs and new entrants, 2) strong demand for 400G/800G transceivers from ASIC/Ethernet datacenter needs. By data rate, revenue contribution from 800G/SiPh products continues to grow. Looking ahead, mgmt. expects AI-driven demand to remain elevated through 2026 with 800G volumes continuing to rise and 1.6T adoption accelerating. We noticed that Eoptolink (300502 CH, NR) also preannounced significant 2Q NP growth of 293%-386% YoY/35%-67% QoQ. In addition, FII (601138 CH, NR) pre- announced 2Q NP growth of 48%-52% YoY/29%-32% QoQ. FII’s mgmt. highlighted that AI server sales growth exceeded 60% YoY in 2Q, and 800G switch sales alone nearly tripled full-year sales in 2024. BBG consensus forecasts major overseas hyperscalers' (MSFT/AMZN/GOOG/META) capex to grow by 43% YoY and domestic Big Three’s (Alibaba/Tencent/Baidu) capex to grow by 44% YoY in 2025E. As a key beneficiary riding the AI tailwind, we forecast Innolight's revenue to increase by 52.5% in 2025E.

Further margin expansion on favourable product mix and better yields. With higher 800G sales and incremental contribution from 1.6T, we expect Innolight’s GPM to maintain sequential growth in 2Q/2H25 (3Q24/4Q24/1Q25: 33.6%/35.1%/36.7%). SiPh demand is growing, offsetting the impact of EML shortage and contributing to GPM. Innolight will provide SiPh solutions for 1.6T products as well, per mgmt., and we estimate NPM to reach a historical high in 2Q while remaining at a high level going forward (CMBI est.: 25%+). We expect the company's GPM to reach 38.7% in 2025E (vs. prev. 35.3%), due to better-than-expected GPM in 2Q. We have also revised up 2025E NP to RMB9.2bn (77% YoY vs. prev. 49% YoY).

Reiterate BUY with TP raised to RMB225, based on 27x 2025E P/E (peers’ avg. 2025E P/E is 28.1x), close to 0.5SD above its 5-yr avg. hist. forward P/E (21.8x). We have raised our revenue/NP growth forecasts to 52.5%/77.3% YoY in 2025 on 1) higher 800G shipment volume, 2) milder annual ASP adjustments and 3) an enhanced GPM. We lift our target P/E to 27x vs. prior 21.5x given little impact from earlier tariffs. Key risks include slower-than-expected shipments, geopolitical uncertainties, supply chain shortage, etc.