Innolight has recently released results for FY23 and 1Q24, exceeding both our and market’s expectations. For FY23, the company's revenue grew by 11.2% YoY to RMB10.7bn, with net profit soaring by 77.6% YoY to RMB2.2bn. 1Q saw even more impressive growth, with revenue up by 163.6% YoY to RMB4.8bn and net profit increasing by an astonishing 303.8% YoY to RMB1.0bn. we attribute the impressive results largely to strong demand for its high-speed optical transceivers (esp. 400G & 800G), making up over 90% of its total revenue in FY23. We revise up our earnings forecasts and raise TP for Innolight to RMB183, corresponding to the same 30x 2024E P/E. Maintain BUY.

Accelerated 1Q growth due to higher 400G shipments; 800G is expected to ramp up production and contribute greater revenue in the following quarters. 1Q24 revenue grew 164% YoY and 31% QoQ, partially due to higher-than-expected shipments of 400G transceivers, driven by strong overseas demand (particularly from Ethernet). We expect 800G shipments to accelerate starting in 2Q24, as production capacity expands on schedule (supply) and investment in AI infrastructure continues (demand). Mgmt. also noted that the company’s 1.6T product is currently undergoing certification at clients and is expected to begin production in 2H.

Innolight’s accelerated 1Q24 growth suggests 1) the impact from supply chain bottleneck was milder-than-anticipated and high-speed transceivers were delivered on time, and 2) the demand from AI continues to be strong. Therefore, we raise our revenue forecasts by 25%/44% for 2024/25E. We slightly revise down GPM forecasts by 0.2ppt and 0.3ppt, as 1Q24’s GPM was lowered by 1) an unfavourable mix in high-speed transceivers revenue (i.e., higher share of 400G revenue) and 2) a regular pricing adjustment. Overall we expect GPM to improve QoQ as 800G shipments pick up pace. We are optimistic that GPM will sustain a robust level of 33.8% in 2024E.

Maintain BUY, with new TP at RMB183. We revise up revenue forecasts by 25%/44% and NP forecasts by 35%/59% for 2024E/2025E. The new TP is based on the same 30x 2024E P/E, which is close to 5-year historical average of forward P/E (29x). We maintain a positive outlook on Innolight, given 1) the strong 400G/800G demand from hyperscalers, 2) the company is effectively scaling up 800G production with improved supply of key components, 3) pricing adjustment is better-than-feared (no severe margin erosion due to competition, demonstrating the company’s dominant industry leadership), and 4) USD/RMB tailwind (85% revenue from overseas markets). We think Innolight will remain the industry leader in high-speed optical transceivers and continue to ride the tailwind of the AI boom. Risks: 1) Intensified geopolitical tensions, 2) slower-than-expected new product ramp-up speed, and 3) further delay in US interest rate cut.