Innolight released its FY24 prelim. results. The company expects NP to go up by 111.6%-166.9% to RMB4.6bn-5.8bn. Mid-point value of RMB5.2bn implies 139.2% YoY growth and is largely in-line with consensus and our estimate (3.2%/1.4% below, respectively). We continue to view Innolight as a key domestic beneficiary amid the ongoing AI infra. investment cycle driven by resilient demand for more computing power globally. Recent additional AI spending developments (i.e., $60-65bn from Meta, $12bn from ByteDance, and up to $500bn Stargate project) show intensifying capex in AI. We also believe the recent fear of CPO solution becoming mainstream is overly concerned. Recent share price pullbacks provide excellent buying opportunities. Maintain BUY on Innolight with TP unchanged at RMB186.0.

4Q24 NP is expected to improve sequentially on margin expansion with favourable product mix, which is partially offset by the impact from supply chain bottleneck. The company’s mid-point NP grew by 64.9% YoY/3.8% QoQ in 4Q24, compared to 33.7%/3.3% QoQ in 2Q/3Q24. We think the sequential slowdown in growth in 2H24 was mainly due to EML shortage that caused a delay to shipments, while the demand for 400/800G optical transceivers remained strong. The impact of component shortage on 2H24 earnings was offset by margin upside (favourable product mix plus higher yield). Mgmt. expects this issue will be largely alleviated in 2H25.

800G to be the main growth driver in 2025, while 1.6T to ramp up sequentially. In FY24, Innolight saw strong demand for its 400/800G products with product mix leaning heavier towards 400G. We anticipate a more favourable product mix with a higher portion of 800G sales in 2025, with additional contribution from 1.6T products. Mgmt. expects higher volume to come in 2026 as more cloud companies deploy 1.6T products. The company has also ramped up its 400G SiPh products throughout FY24, with 800G SiPh products expected to begin volume shipments in 1Q25.

Multiple major AI spending developments fuel AI infra. buildout momentum： 1） $500bn AI initiative Stargate Project in the next four years, 2) $60-65bn capex planned by Meta for 2025E, up as much as 70% YoY compared to 2024 (Bloomberg), largely driven by AI spending increase and deployment of a new datacenter. ByteDance also considered US$12bn in AI capex for 2025. Reliance is reported to build the world’s largest datacenter. These spending sprees indicate that demand for AI compute power is still in full swing with robust outlook. AI networking products, such as optical transceivers, should continue to enjoy the AI tailwind.

Imminent ramp-up + adoption of CPO solution seem to be overly concerned. Admittedly, CPO normally reduces power consumption by over 30%, there are still several technical hurdles to overcome to make it mainstream (i.e., low yield, high repair cost). From our communication with industry experts, we believe networking players are exploring LRO/LPO to achieve some power savings as at least one DSP is typically removed in these technical approaches. Maintain BUY, with TP unchanged at RMB186, corresponding to ~27x FY25E P/E. The stock is currently trading at 18.5x FY25E P/E, which we believe underestimates the company’s future growth potential. Potential risks include: 1) China-US trade tensions, 2) rising raw material costs, and 3) slower-than-expected ramp-up speed.