Guosheng Securities: CPO program becoming increasingly mature, domestic leading companies may further benefit from their first-mover advantage.

Guosheng Securities released a research report stating that NVIDIA will launch a new CPO switch at the GTC conference in March. It is expected that trial production will proceed smoothly and mass production can begin in August. Currently, CPO solutions are being promoted by major manufacturers such as NVIDIA and Broadcom, and the progress of sample machines is accelerating. The valuation of the entire industry is being restored. The firm believes that there is a general expectation gap among domestic manufacturers regarding participation in CPO, and domestic leading companies are expected to become important participants in the core industry chain based on their years of accumulation in the CPO field. The firm remains optimistic about the computing power sector, with domestic leading manufacturers having a clear first-mover advantage and the potential for further benefits. Guosheng Securities' main points are as follows: Event: According to Taiwan's Commercial Times, NVIDIA will launch a new CPO switch at the GTC conference in March. It is expected that trial production will proceed smoothly, and mass production can begin in August. This news has raised market expectations for the progress of CPO technology, leading to a rebound in the overall performance of related sectors on Thursday, with many stocks experiencing significant gains, including Suzhou TFC Optical Communication hitting the limit up. Divergence of CPO: The pattern of optical module manufacturers and the pace of landing. The market is generally concerned about the unclear CPO supply chain and ecosystem, whether existing domestic optical module manufacturers can continue to maintain a global leading position, and whether market share can remain at high levels or even continue to increase. However, this week saw domestic optical module manufacturers playing an important role in the new era of CPO, and CPO solutions are being promoted by major manufacturers such as NVIDIA and Broadcom, with the progress of sample machines accelerating. The firm believes that there is a general expectation gap among domestic manufacturers regarding participation in CPO, and domestic leading companies are expected to become important participants in the core industry chain based on their years of accumulation in the CPO field. Technological barriers drive changes in competitive landscape, with a shortened landing time expected. CPO has the advantages of high integration, low latency, compact design, and low power consumption, and is considered one of the most important evolutionary ways in optical communications. Yole Intelligence predicts that the compound annual growth rate of the CPO market is expected to reach 65% during the period 2020-2032. The firm believes that as an important technological direction for reducing power consumption and storage costs, CPO technology may drive two major marginal changes in the optical communication industry: Changes in the industry chain pattern: The traditional optical module plus electrical switch method has been used for many years, while all components in the CPO design are newly customized, leading to changes in the related industry chain pattern and further raising the technological barrier. The firm believes that the ultimate competitors will compete based on the technological, manufacturing, and product strengths. Companies that have already laid out related technologies are expected to gain market share first based on their first-mover advantage. Accelerated technological progress: CPO solutions rely on small and high-density optical engines, which currently require customized design and have an immature supply chain, requiring multiple rounds of iterative optimization to improve performance and yield. Therefore, the market generally believes that it will take a long time for CPO solutions to land. The firm believes that although the technological complexity required for CPO solutions, the development of product solutions in the AI-related industry chain has entered an accelerated stage: silicon photonics technology is accelerating, active optical cable interconnect solutions (AEC) and linear drive pluggable optical module (LPO) solutions are quickly entering the mainstream vision of optical communication, indicating that cost reduction and power consumption reduction directions have driven relevant manufacturers to accelerate the development of related products. Furthermore, companies such as Broadcom and NVIDIA have already launched first-generation CPO complete machine solutions. Therefore, the firm believes that the progress of CPO solutions will be faster than market expectations. Domestic leading manufacturers have a clear first-mover advantage and are expected to benefit further. The integration of CPO switches has been further improved, leading to further improvements in packaging, communication bandwidth, stability, and heat dissipation. The firm believes that the corresponding supply chain threshold has been further raised compared to traditional solutions. The domestic optical communication industry chain has a clear advantage globally, with companies such as Zhongji Innolight, Suzhou TFC Optical Communication, Eoptolink Technology Inc., and other companies engaging in long-term in-depth communication with major overseas clients such as Google and ZTE Corporation, jointly developing and promoting product innovation, and already having accumulated years of experience in the CPO field. ?Zhongji Innolight, as a global leading provider of optical module solutions, has major customers such as Google, the leader in global cloud computing centers, and ZTE Corporation, a telecommunications equipment giant; Eoptolink Technology Inc., as a leading provider of optical module solutions and services, has deep involvement in the market competition of silicon photonics modules through its acquisition of overseas shareholding company Alpine in 2022 and Suzhou TFC Optical Communication, as the leader in the optical fiber connection sub-market, has deep ties with its partner Fabrinet, a contract manufacturer for industry leaders such as Cisco, Lument. CPO (Co-Packaged Optics, optical-electrical hybrid packaging) technology integrates optical components (such as lasers, detectors) and circuit boards (such as switch chips) into the same package, solving the limitations of traditional optical-electrical separation packaging technology through tighter integration. The increasing maturity of CPO solutions means that optical communication has begun to shift from the long-distance market to the short-distance market and has laid a technological foundation for the future landing of OIO optical switches and optical computing. The core components of CPO mainly include optical engines, fiber arrays, wiring solutions, and external laser sources. Optical Engine: The core component of the CPO system, responsible for converting electrical signals to optical signals and then converting optical signals back to electrical signals. It usually includes EIC (Electronic Integrated Circuit) and PIC (Photon Integrated Circuit). EIC is responsible for electro-optical conversion and managing the interaction between electronic signals and optical signals. PIC is responsible for modulating, routing, and distributing optical signals, ensuring the transmission of optical signals between different channels.Signal transmission. In the CPO system, the role of the FAU is to integrate multiple optical signal channels into one module to improve data transmission density and efficiency.Shuffle wiring scheme: In CPO, shuffle technology optimizes the path and allocation of optical signals to achieve low latency and efficient signal transmission, ensuring that optical signals can be quickly and stably transmitted from the optical engine to other optical components or devices, reducing transmission losses. External Laser Source (ELS): The commonly used laser source is CW light, which provides stable and continuous light output, suitable for applications requiring long-distance transmission and high bandwidth. In summary, the company continues to be optimistic about the computing power sector in the long term, with core recommendations for Zhongji Innolight (300308.SZ), Eoptolink Technology Inc., (300502.SZ), Suzhou TFC Optical Communication (300394.SZ) as leading manufacturers with significant advantages in optoelectronic conversion, CPO packaging, and optical devices, as well as T&S Communications (300570.SZ) making a breakthrough in the field of optical interconnection. It also recommends Yuanjie Semiconductor Technology (688498.SH) and Henan Shijia Photons Technology (688313.SH) in the field of light sources. Recommended focus areas: Computing power sector Optical communication: Zhongji Innolight, Eoptolink Technology Inc., Suzhou TFC Optical Communication, T&S Communications, Optowide Technologies, Advanced Fiber Resources, Accelink Technologies, Wuxi Taclink Optoelectronics Technology, Linktel Technologies, Huagong Tech, Yuanjie Semiconductor Technology, Cig Shanghai, Dongguan Mentech Optical & Magnetic. Copper connections: Shenzhen Woer Heat-shrinkable Material, Tongling Jingda Special Magnet Wire. Computing equipment: ZTE Corporation, Unisplendour Corporation, Ruijie Networks, Shenzhen Phoenix Telecom Technology, Foxconn Industrial Internet, Wus Printed Circuit, Hanwei Ji, Hygon Information Technology. Liquid cooling: Shenzhen Envicool Technology, Guangdong Shenling Environmental Systems, Guangzhou Goaland Energy Conservation Tech. Edge computing platform: MeiG Smart Technology, Fibocom Wireless Inc., Quectel Wireless Solutions. Satellite communication: China Satellite Communications, China Spacesat, Genew Technologies, Guangzhou Haige Communications Group Incorporated. Data elements sector Telecom operators: China Telecom Corporation, China Mobile Limited, China United Network Communications. Data visualization: Beijing Haohan Data Technology, EmbedWay Technologies, Shenzhen Sinovatio Technology. Risk Warning: AI development falls short of expectations, computing power demand falls short of expectations, market competition risks.