Record revenue and earnings coupled with significant margin expansion; Maintain BUY

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk 1 MN 29 Aug 2025 CMB International Global Markets | Equity Research | Company Update Innolight (300308 CH) Innolight (300308 CH) - Record revenue and earnings coupled with significant margin expansion; Maintain BUY Record revenue and earnings coupled with significant margin expansion; Maintain BUY Innolight delivered exceptionally strong 2Q25 results. Quarterly revenue was a record RMB8.1bn, up 36%/ 22% YoY/QoQ, driven by robust demand for high-end optical modules. Net profit surged to RMB2.4bn, up 79%/52% YoY/QoQ, beating BBG consensus by 28%. Both GPM and NPM hit record highs at 41.5%/29.7%, outperforming consensus by 5.7ppt/7.2ppt. Innolight announced its first interim dividend of RMB0.4 per share, boosting shareholder returns. Maintain BUY and raise TP to RMB415, based on 30x rollover 2026E P/E (previously 27x 2025E P/E), as we revise up earnings forecasts to reflect our positive outlook on the company, indicating sustained momentum in AI-driven demand and mgmt.’s superior execution.  Sequential revenue improvement driven by optical transceivers’ sales increase (up 40%/98% YoY/QoQ). Mgmt. highlighted strong shipments of 800G products, with 1.6T commencing ramp-up in 2Q and shipment to accelerate through 2H25. Notably, the company’s silicon photonics (SiPh) based 1.6T solutions are gaining traction with leading cloud customers.  AI capex cycle to support sustained growth. Overseas revenue (86% of 1H25 sales) remained the primary growth driver. Per Bloomberg consensus, combined capex from key hyperscalers (Amazon/Google/Meta/Microsoft) is projected to grow 53%/17% YoY to US$329/350bn in 2025/26E, revised up by 5.7%/5.6% vs. consensus in May 2025. We raise our 2025/26E revenue forecasts by 5%/5%, respectively, factoring in stronger-than-expected AI infrastructure investments. We project 2025E revenue to increase 60%/32% YoY.  Significant margin expansion due to robust 800G/1.6T shipments and SiPh adoption. In 1H, optical transceivers’ GPM rose 6.1ppt YoY to 40.0%, while NPM increased by 5.8ppt YoY to 29.7%. The record margins were driven by 1) a higher sales contribution of 800G/1.6T products, 2) increasing adoption of higher-margin SiPh solutions, and 3) efficient supply-chain management (raw material inventory rose 17% QoQ in 2Q). 1.6T products, predominantly shipped in SiPh form, yield a better margin than earlier generations. We lift 2025/26E GPM projections to 43.0%/42.7% from 39%/38%, anticipating further margin expansion as 1.6T shipments scale up and SiPh solutions increase. Mass production of 1.6T products in 2H should support sequential margin improvements.  Maintain BUY, with TP adjusted to RMB415, based on 30x rollover 2026E P/E, equivalent to 1-SD above 5-year historical avg, justified by Innolight’s leadership in a fast-growing AI optical market. Our NP forecasts for 202