As a leading optoelectronic device manufacturer in China, Taclink focuses on optical transceiver module, optical amplifier, optical transmission subsystem products. The Company has long-term cooperation with well-known manufacturers such as ZTE and Infinera, and also serves operators and specialized network customers such as State Grid. Against the backdrop of the surge in computational demand driven by artificial intelligence (AI) and the upgrading of optical transmission networks, the global optical module market exhibits robust growth momentum. Taclink, leveraging years of expertise in the telecommunications sector, is strategically shifting its focus to the field of data communications. It actively introduces 400G/800G high-speed optical module products, poised to benefit from the sector development driven by AI. Meanwhile, with AI and the “Eastern Data and Western Computing” project, Taclink is set to benefit from the trend and fully exert its advantages in data center interconnect (DCI). We assign 50x 2024E PE to derive a target price of Rmb65 and initiate coverage with a “BUY” rating.
Company profile: Focusing on optoelectronic devices and leading in the field.
Founded in 2000, Taclink Optoelectronics, formerly known as ZTE Optoelectronics, has now established three major product platforms of optical transceiver modules, optical amplifiers, and optical transmission subsystems, after more than two decades of development. It possesses the vertical design and manufacturing capabilities, covering links of chip testing, device packaging, module manufacturing, optical transmission subsystems.
Currently, the Company has customers from more than 20 countries and regions worldwide, covering various sectors including telecommunications equipment manufacturers, data communication equipment manufacturers, telecommunications operators, and specialized networks. In terms of earnings, as the Company was greatly affected by the Covid-19 pandemic, it achieved operating revenue of Rmb731mn/714mn, (+9.99%/-2.31% YoY) in 2021/22, respectively. In 1H23, due to the cyclical fluctuations in the telecommunications transmission industry, demand growth showed a slowdown. To secure stable orders, Taclink proactively lowered the selling prices of some mature products, leading to a decline in revenue and profit in 1Q-3Q23. However, with ample orders in hand, the Company has laid a solid foundation for future growth, with an evident positive trend in fundamentals.
Market expansion: Benefiting from the upgrade of 400G transmission networks and DCI expansion driven by AI.
According to LightCounting data, the global optical module market is likely to reach US$12.1bn in 2023 and will be driven by telecommunications and data communication. 1) Telecom market is benefiting from the upgrade of 400G optical transmission networks. Domestic operators are advancing the large-scale application of 5G, and the “dual gigabit” catalyzes the access network market and propels the construction and upgrade of optical fiber fixed transmission networks, access networks and core networks; 2) Data communication market driven by AI and “Eastern Data and Western Computing” project: The substantial demand for computing power from artificial intelligence generated content (AIGC) is fueling a global competition in foundational computing capabilities, stimulating the continuous growth of optical module demand. According to LightCounting data, AI is likely to be a major growth driver in the data communication optical module market. The market size of AI-related data communication optical modules will likely reach US$3.41bn in 2025, with a 44.9% CAGR from 2022 to 2025. By 2025, the proportion of AI-related data communication optical modules is likely to significantly increase to 40%. Additionally, the application of AI and “Eastern Data and Western Computing” project will likely accelerate the implementation of DCI scenarios. As a leading player in long-distance communication transmission in the domestic market, Taclink has accumulated abundant experience in the field of optical communication and is poised to fully benefit from these trends.
Company analysis: Originated from ZTE Optoelectronics, Taclink has deeply engaged in long-distance optical communication technology.
Formerly known as ZTE Optoelectronics, Taclink possesses industry-leading technological expertise and advantages in customer resources. It is a rare player in the industry, covering both high-speed coherent and non-coherent optical modules, and poised to fully benefit from the dividends brought about by the accelerated penetration and expansion of the application scenarios of coherent optical modules. Simultaneously, with years of dedication to long-distance transmission optical module technology, the Company’s matching advantages among the three major products of optical modules, optical amplifiers and photon systems are evident, coupled with the capabilities of vertical integration design and manufacturing, the Company’s technological accumulations in the telecommunications field is capable of being translated into a technological advantage for entering the data communication field. Taclink has also seized the demand in the data communication market, strategically positioning itself in the mid-to-high-end segment, developing 200G, 400G, and actively researching and developing 800G and above optical module products. It is fully embracing the explosive opportunities in the data communication optical module market catalyzed by AIGC.
Potential risks: Less-than-expected demand growth in the optical module industry; intensified industry competition; recovery of telecommunications market falling short of expectations; New product development not up to expectations; slower-than-expected progress of overseas production capacity projects; less-than-expected capex of operators; key account risks; macroeconomic recovery not up to expectations.
Investment strategy: Taclink is a leading domestic manufacturer of optoelectronic devices, focusing on optical transceiver modules, optical amplifiers, and optical transmission subsystem products. It is a leader in long-distance optical modules and the telecommunications side of the optical module industry. The Company faces short-term earnings pressure, however, as it holds ample orders in hand, the fundamental reversal is visible. In the medium to long term, amidst the surge in demand for computing power driven by AI and the backdrop of network upgrades, Taclink will leverage its advantages in the telecommunications field built over the years and shift its focus to the data communication market. It actively researches and releases 400G/800G high-speed optical module products, expecting to benefit from the dividends of the data communication optical module catalyzed by AI. Additionally, under the background of “Eastern Data and Western Computing”, the Company will fully utilize its strengths in the DCI field, as a leader in long-distance optical communication. We forecast its attributable net profit (ANP) to be Rmb93mn/130mn/199mn in 2023E-25E.
Comparable companies, namely Accelink Technologies (002281.SZ), Zhongji Innolight (300308.SZ), Advanced Fiber Resources (300620.SZ) and Shijia Photons (688313.SH) in the domestic optical module and optical communication industry are trading at 47x 2024E PE and 1.0X 2024 PEG (based on Wind consensus estimates). Considering the growth stage and industry position of the Company, we assign 50x 2024E PE and 1.1x 2024E PEG to derive a target price of Rmb65 and Rmb66, respectively. And we put the final target price at Rmb65 out of prudence and initiate coverage with a “BUY" rating.
