GF SEC: CPO trend is clear, focusing on the leading capacity reserve and incremental growth of light module manufacturers in connection and light source.

GF SEC released a research report stating that the development of Co-Packaged Optics (CPO) has just begun and it will take some time for industry standards to form. Currently, it is still in the phase of technical exploration. In the Scale-out scenario, cloud vendors' demand for the next two to three years will still be mainly for testing, with large-scale commercial use requiring more time. The impact of pluggable optical modules is being overestimated, as leading optical module companies with long-term design experience, deep understanding and technical reserves in optical-electrical packaging, modulation, and testing capabilities still play an important role. It is also recommended to focus on companies with technical reserves in key areas of the CPO industry chain. GF SEC's main points are as follows: CPO (Co-Packaged Optics) technology integrates electronic integrated circuits (EIC) and photonic integrated circuits (PIC) through co-packaging, significantly reducing the distance between switching chips and optical engines - shortening the distance of high-speed electrical serializers/deserializers (SerDes) to a few millimeters, thereby reducing the total power consumption and heat generation of I/O, significantly reducing signal latency, increasing bandwidth density, and improving signal integrity. CPO can significantly reduce power consumption and signal delay. The core value links of CPO switches include: OE optical engines, ELS external light sources, FAU fiber arrays, MPO connectors, FiberShuffle flexible optical fibers, and PMF polarization-maintaining fibers. CPO switches can significantly reduce cluster power consumption. According to Broadcom's official website, Broadcom has launched a 51.2Tbps CPO switch product Bailly, using a 2.5D packaging approach, which includes 8 6.4TBailly silicon optical engines ((64x100GbpsFR4)) and Tomahawk5 switch chips, achieving a 30% reduction in power consumption. Additionally, according to Broadcom's speech at ECOC2024, compared to traditional pluggable optical module solutions, using CPO solutions can reduce the power consumption of an NVL576 (B200) architecture cluster from 16.2kW to 7.1kW, and reduce the power consumption of an AI cluster composed of 30528 GPU cards from 832kW to 366kW. CPO is an important trend in optical interconnection and is still in the stage of technical exploration. The era of 3.2T is expected to gradually penetrate. The development of CPO has just begun and it will take some time for industry standards to form. Currently, it is still in the phase of technical exploration. But with the maturity of technology, and reaching the era of 3.2T after 1.6T, the power consumption of traditional pluggable modules will gradually reach its limit, and CPO is expected to gradually start to be mass-applied in the era of 3.2T. However, in recent years, traditional pluggable modules will still dominate the market. According to LightCounting's estimate, pluggable devices will continue to dominate the market for the next five years or even longer. However, by 2027, CPO ports will account for nearly 30% of total 800G and 1.6T ports. Investment recommendations: Leading optical module companies still play an important role with their long-term design accumulation in optical know-how, deep understanding and technical reserves in optical-electrical packaging, modulation, and testing capabilities. Continued recommendations for Zhongji Innolight (300308.SZ), Eoptolink Technology Inc. (300502.SZ), Suzhou TFC Optical Communication (300394.SZ). It is also recommended to focus on relevant companies with technical reserves in key areas of the CPO industry chain, such as T&S Communications (300570.SZ), Yuanjie Semiconductor Technology (688498.SH), etc. Risk Warning: Risks of AI infrastructure construction falling short of expectations; Risks of AI application development falling short of expectations; Risks of changes in import and export policies in the AI field; Risks of reduced international cooperation.