Innolight released its 3Q results. Revenue went up by 115.2% YoY/9.4% QoQ, while net profit went up by 104.4% YoY/3.3% QoQ, in-line with our expectations.

Mgmt. attributed the slower sequential revenue growth (9.4% in 3Q24 vs. 31.3%/23% in 1Q/2Q24) to two main factors: 1) supply chain bottlenecks of key components (like DSPs & EMLs), and 2) unfavorable fluctuations in the USD/RMB exchange rate during 3Q. Excluding the impact of exchange rate movements, the company still achieved double-digit revenue growth in 3Q. GPM remained steady at 33.3% in 3Q24 (vs. 33.4%/33.5% in 2Q24/3Q23), while NPM was 21.4% (vs. 22.7%/22.5% in 2Q24/3Q23). We remain confident in the company’s growth trajectory, driven by the ramp-up in 400G/800G shipments and the upcoming production ramp-up of 1.6T products. Maintain BUY, with an adjusted TP of

RMB186, reflecting 26.9x rollover 2025E P/E (previously 30x 2024E P/E).

Sequential slowdown due to exchange rate and supply chain issues:

The company highlighted that 3Q performance was negatively impacted by unfavourable USD/RMB exchange rate fluctuations. Excluding this impact (~RMB100mn), the company still posted double-digit sequential growth, continuing the strong growth momentum seen in previous quarters.

Additionally, supply chain challenges related to key components constrained shipment growth, with mgmt. noting that order growth outpaced shipment growth, contributing to the slower-than-expected sequential revenue increase.

Demand intact, 400G/800G shipments to ramp through 4Q24: Mgmt.

reiterated strong demand for the company’s high-speed optical products, particularly 400G & 800G, which remain key growth drivers. Looking ahead to 2025, the company expects faster adoption of 800G products compared to 400G as customers progress towards newer tech. Additionally, mass shipments of 1.6T products will begin in the coming months. Mgmt. emphasized strong demand from overseas hyperscalers, which contributed to over half of the company's 400G/800G orders in 2024..

Price increases in the optical supply chain driven by AI demand: The

recent announcement (link) by Marvell (MRVL US, NR) of price hikes across its entire product line due to sustained AI-driven demand could lead to higher raw material costs for Innolight. However, we believe the company is well- positioned to mitigate these impacts by passing on price increases to its customers, given the strong demand for its products that gives company the bargaining power.

Maintain BUY, with TP adjusted to RMB186, corresponding to rollover 26.9x 2025E P/E, the same as its 5-year historical avg. The stock is

currently trading at 22.5x 2025E P/E. Risks: 1) China-US trade tensions, 2) rising raw material costs, and 3) weaker-than-expected ramp-up speed.