Guosheng: The demand for high-speed optical modules in the downstream market is exploding, highlighting the quantity and value of isolators.

Guosheng released a research report stating that in the global optical module industry's wave of upgrading to 800G/1.6T, optical isolators, as key components for protecting laser diodes, have become a bottleneck restricting production capacity due to a global shortage of the upstream core material Faraday rotator. The material has high technological barriers, production is monopolized by a few manufacturers in the United States and Japan, and the surging demand for high-speed optical modules has led to a serious mismatch between supply and demand as the usage of single-module isolators increases with the number of channels. Isolators are benefiting from the increasing market demand while also enjoying price increases, with usage and value continuously highlighting their importance. Companies that enter this field are expected to benefit from their scarcity, sufficient production capacity, and technological barriers. Guosheng's main points are as follows: Isolators: Essential components for high-speed optical modules Optical isolators are critical passive components in optical communication systems, with their core function being to allow light to propagate in a forward direction only and block backward reflections, acting as an "optical one-way valve." They allow optical signals to transmit forward with low loss, while producing strong attenuation for reverse transmission light, isolating reflected light in the optical path non-reciprocally to prevent adverse effects on the light source (laser diode) and optical system. Based on the Faraday magneto-optical effect, isolators are mainly composed of a polarizer, Faraday rotator, and analyzer: under the influence of an external magnetic field, linearly polarized light passing through the Faraday rotator will have its polarization direction rotated by a fixed angle non-reciprocally (typically 45), with backward light having its polarization direction blocked by the polarizer, creating an isolation effect. Isolators are essential components for high-speed optical modules, protecting core devices such as laser sources and amplifiers from interference caused by reflected light, thus enhancing the stability and reliability of optical systems. Accelerated domestic and international deployment, on the eve of a new round of capacity release The technical barriers and core value of isolators are highly concentrated in their upstream component Faraday rotator. The production of this component is extremely difficult, involving special crystal growth and precision processing technologies, with the global supply landscape highly concentrated and tight. Faraday rotators account for up to 50% of the cost of isolators, with high technological barriers: the production process of Faraday rotators mainly involves the epitaxial growth of thin-film magneto-optical crystals on wafer substrates, with the main magneto-optical crystal materials including YIG (yttrium iron garnet), TGG (terbium gallium garnet), RIG (bismuth-substituted rare-earth iron garnet) single crystals, etc. SGGG (substituted gadolinium gallium garnet) crystals have the advantages of low optical loss, high thermal conductivity, and high laser damage threshold, making them suitable as substrate materials for magneto-optical films. The industry of Faraday rotators is monopolized: the Faraday rotator core component of isolators is mainly monopolized by two companies, Coherent (II-VI) from the United States and GRANOPT (a joint venture between Mitsubishi and Sumitomo) from Japan, with a global market share of over 90% according to research by DeepTech. Domestic replacement progress: facing severe supply chain risks, domestic companies are striving to break through, but the overall domestication rate is still low. Leading the way in achieving independent production of Faraday rotators and building a complete industry chain capability from crystals to devices, a leading enterprise will have significant cost advantages and supply security potential in times of global supply chain tensions. Surging demand for downstream high-speed optical modules, highlighting the usage and value of isolators Overseas giants are gradually switching to 800G/1.6T output for optical modules, with a gradual increase in the proportion of silicon photonics, highlighting the usage and value of isolators. The usage and value of isolators in high-speed optical modules are related to the number of optical channels, which increases in line with the rising demand for high-speed optical modules. Whether using traditional EML or silicon photonics solutions, optical modules require isolators to prevent damage to laser diodes/CW light sources caused by reflected light. Typically, an 800G optical module requires 4-8 times more isolators, with the number of isolators used increasing as the number of optical channels increases. With the ongoing construction of larger computing clusters, the development trends of high-speed, high-bandwidth, and multi-channel optical modules will continue to drive the demand for isolators. Under the shortage of upstream materials due to surging demand, the value of isolators is highlighted. The rapid adoption of 800G/1.6T optical modules has led to a sharp increase in demand for isolators in the short term, while upstream raw materials such as Faraday rotators are monopolized by a few giants from Japan and the United States, leading to a significant mismatch between supply and demand in isolator capacity expansion pace and demand growth, resulting in a substantial supply-demand imbalance. Therefore, isolators are benefiting from the increasing market demand while enjoying price increases, with usage and value continuously highlighting their importance. In the wave of global optical module industry upgrading to 800G/1.6T, optical isolators, as key components for protecting laser diodes, have become a bottleneck restricting production capacity due to a global shortage of the upstream core material Faraday rotator. The material has high technological barriers, production is monopolized by a few manufacturers in the United States and Japan, and the surging demand for high-speed optical modules has led to a serious mismatch between supply and demand as the usage of single-module isolators increases with the number of channels. This has made isolators a key component in the industry chain, continuously in short supply, with price elasticity, and key advantages for companies entering this field to benefit from their scarcity, sufficient production capacity, and technological barriers, including: Hubei DOTI Micro Technology (301183.SZ), Castech Inc. (002222.SZ), Suzhou TFC Optical Communication (300394.SZ), etc. In conclusion, we continue to favor the computing power sector and firmly recommend companies related to the computing power industry chain such as the leading companies in the optical module industry Zhongji Innolight (300308.SZ), Eoptolink Technology Inc. (300502.SZ), while also suggesting to pay attention to the "one big five small" companies in the optical device sector, including Suzhou TFC Optical Communication (300394.SZ) + Henan Shijia Photons Technology (688313.SH)/T&S Communications (300570.SZ)/EverProX Technologies (300548.SZ)/Wuxi Taclink Optoelectronics Technology (688205.SH)/Hubei DOTI Micro Technology (301183.SZ), and to focus on the domestic computing power industry chain, including the liquid cooling segment such as Shenzhen Envicool Technology (002837.SZ), Guangdong Hec Technology Holding (600673.SH), etc. Risk Warning AI development below expectations, computing power demand below expectations, market competition risks.