Innolight delivered exceptionally strong 2Q25 results. Quarterly revenue

was a record RMB8.1bn, up 36%/ 22% YoY/QoQ, driven by robust demand for high-end optical modules. Net profit surged to RMB2.4bn, up 79%/52% YoY/QoQ, beating BBG consensus by 28%. Both GPM and NPM hit record highs at 41.5%/29.7%, outperforming consensus by 5.7ppt/7.2ppt. Innolight announced its first interim dividend of RMB0.4 per share, boosting shareholder returns. Maintain BUY and raise TP to RMB415, based on 30x rollover 2026E P/E (previously 27x 2025E P/E), as we revise up earnings forecasts to reflect our positive outlook on the company, indicating sustained momentum in AI- driven demand and mgmt.’s superior execution.

Sequential revenue improvement driven by optical transceivers’ sales

increase (up 40%/98% YoY/QoQ). Mgmt. highlighted strong shipments of 800G products, with 1.6T commencing ramp-up in 2Q and shipment to accelerate through 2H25. Notably, the company’s silicon photonics (SiPh) based 1.6T solutions are gaining traction with leading cloud customers.

AI capex cycle to support sustained growth. Overseas revenue (86% of

1H25 sales) remained the primary growth driver. Per Bloomberg consensus, combined capex from key hyperscalers (Amazon/Google/Meta/Microsoft) is projected to grow 53%/17% YoY to US$329/350bn in 2025/26E, revised up by 5.7%/5.6% vs. consensus in May 2025. We raise our 2025/26E revenue forecasts by 5%/5%, respectively, factoring in stronger-than-expected AI infrastructure investments. We project 2025E revenue to increase 60%/32% YoY.

Significant margin expansion due to robust 800G/1.6T shipments and

SiPh adoption. In 1H, optical transceivers’ GPM rose 6.1ppt YoY to 40.0%, while NPM increased by 5.8ppt YoY to 29.7%. The record margins were driven by 1) a higher sales contribution of 800G/1.6T products, 2) increasing adoption of higher-margin SiPh solutions, and 3) efficient supply-chain management (raw material inventory rose 17% QoQ in 2Q). 1.6T products, predominantly shipped in SiPh form, yield a better margin than earlier generations. We lift 2025/26E GPM projections to 43.0%/42.7% from 39%/38%, anticipating further margin expansion as 1.6T shipments scale up and SiPh solutions increase. Mass production of 1.6T products in 2H should support sequential margin improvements.

Maintain BUY, with TP adjusted to RMB415, based on 30x rollover 2026E

P/E, equivalent to 1-SD above 5-year historical avg, justified by Innolight’s leadership in a fast-growing AI optical market. Our NP forecasts for 2025/26E are revised up by 28%/30%, on higher revenue and GPM assumptions. Key risks include lower-than-expected AI capex, geopolitical/tariff uncertainties, supply chain disruptions and intensified competitions, etc.