Huayuan Securities: The continuous upgrading of optical interconnection technology accelerates the scaling of NPO/CPO.

Huayuan Securities has released a research report stating that the AI computing power infrastructure continues to expand, with rapidly increasing demand for high-speed optical interconnects. Core components such as 800G, 1.6T optical modules, as well as upstream optical chips and lasers, have become key beneficiaries in the industry chain. The ongoing expansion of AI computing clusters, coupled with bandwidth and power consumption bottlenecks, is driving data center interconnection to upgrade towards a high-density optoelectronic integration architecture. The firm believes that the growth in AI optical interconnect demand is pushing core optical devices into a stage of supply-demand equilibrium, and manufacturers with the capability to expand production, capacity reserves, and customer validation advantages are likely to benefit first; thus, it rates the communications industry as "positive." The main points from Huayuan Securities are as follows: Overseas optical communication companies are experiencing sustained high growth, with AI data center demand rapidly transmitting to high-speed interconnection segments. The AI computing power infrastructure continues to expand, with high-speed optical interconnect demand growing rapidly. Core components such as 800G and 1.6T optical modules, as well as upstream optical chips and lasers, have become critical beneficiaries in the industry chain. Overseas optical communication companies are seeing continuous high growth in their performance, driven by AI demand, which is enhancing the prosperity of high-speed optical modules and core optical devices. 1) Lumentum achieved revenue of $1.006 billion in FY26 Q4, a year-on-year increase of 109.3%, with component business revenue at $649 million, up 102.7% year-on-year, driven by strong demand for core components such as high-power CW lasers and EML; 2) Coherent recorded a 59% year-on-year growth in its data center business in FY26 Q4, with 800G and 1.6T optical transceivers becoming major growth drivers; 3) AOIs FY26 Q2 financial report shows that data center business revenue grew by 140.4% year-on-year, with revenue from 800G products increasing more than tenfold year-on-year. AI infrastructure is upgrading to high-density interconnection, and NPO/CPO is expected to accelerate implementation. AI computing clusters continue to expand, with bandwidth and power consumption bottlenecks promoting an upgrade of data center interconnection to a high-density optoelectronic integration architecture. NVIDIA has launched products such as Spectrum-X Ethernet Photonics based on silicon photonics technology, pushing CPO from technological validation towards industrial application. From an industrial pathway perspective, NPO is expected to serve as a more certain transitional solution in the short term, while CPO represents the long-term evolution direction. Lumentums CEO stated during the FY26 Q4 earnings call that the company has received its first external light source (ELS) module order, expected for delivery in the second half of 2027. The demand for ultra-high-power laser chips is anticipated to ramp up starting in the second half of 2027, preceding the clients large-scale deployment of CPO in 2028. Coherent also mentioned that customer participation in NPO/CPO projects has significantly increased between FY26 Q3 and Q4, with nearly all major strategic clients advancing relevant projects; the companys PhotonLink platform supporting NPO/CPO is expected to start generating initial revenue in FY27 Q2, while the Scale-Up CPO is expected to begin contributing revenue in the second half of 2027. The supply and demand for core optical devices is tightening, with manufacturers locking in orders to drive industry chain expansion. NPO/CPO is gradually entering the industrial introduction phase, with bottlenecks in the industry chain shifting from traditional optical module manufacturing to upstream core optical devices. High-power CW lasers, InP chips, and optical engines are expected to become key segments. Lumentum stated during the FY26 Q4 public communication that demand from AI data centers continues to increase, and the supply-demand for high-power lasers remains tight, with the companys market share for pump lasers reaching 70%-80%. The company is actively advancing expansion plans for its two InP wafer fabrication plants in Japan, and the transformation of the Greensboro plant in the U.S. from gallium arsenide to indium phosphide is progressing smoothly. Coherent reported that its 6-inch InP production lines in Texas and Sweden are continuously expanding, with the companys InP laser output growing by approximately 80% year-on-year in FY26 Q4. The internal InP production capacity is expected to double year-on-year by the end of FY26 Q4, surpassing initial plans by one quarter, and the company plans to further increase it by more than double by the end of 2027. The firm believes that the growth in AI optical interconnect demand is pushing core optical devices into a state of supply-demand equilibrium, and manufacturers with the capability to expand production, capacity reserves, and customer validation advantages are likely to benefit first; thus, it rates the communications industry as "positive." Recommended stocks to watch: Optical modules: Zhongji Innolight, Eoptolink Technology Inc., Suzhou Dongshan Precision Manufacturing, Accelink Technologies; Optical devices: Suzhou TFC Optical Communication, Yuanjie Semiconductor Technology, T&S Communications, Advanced Fiber Resources, Suzhou Everbright Photonics; Connectors: Dongguan Dingtong Precision Metal Co., Ltd., Suzhou Recodeal Interconnect System, HONG RI DA Technology. Risk warnings: Risks related to overseas cloud service providers' capital expenditures falling short of expectations, global economic fluctuations, and upstream raw material price volatility.