Guosheng Securities: Silicon photonics technology reconstructs the optical module industry chain, focusing on investment directions in front-end chip design and wafer manufacturing.

Guosheng Securities released a research report stating that the rise of silicon photonics technology is a profound restructuring of the underlying logic and value chain of the entire industry, shifting the investment focus and value core of the optical module industry from the backend "packaging" to the frontend "chip design and wafer manufacturing." At the same time, the investment paradigm based on silicon photonics perspective will also undergo changes, with core focus on four directions: silicon photonics chip design companies - Fabless light asset model to improve ROE, the most core link; silicon modulator chip FAB manufacturers - rely on wafer manufacturers to increase capacity, but with low process requirements; silicon photonics support chips/devices - core including CW light source, FA, isolator and other links; semiconductor equipment required for silicon photonics - coupling/testing, etc. for Fab and module factories. Guosheng Securities' main points are as follows: Silicon photonics redefines the core competitiveness of optical communication: from packaging dominance to fabless In traditional solutions, the manufacturing process of optical modules can be summarized as "procurement of discrete components -> precision assembly and packaging," with the performance, cost, and yield of optical modules highly dependent on the packaging process. Silicon photonics technology is a new generation technology based on silicon and silicon-based substrate materials, using existing CMOS processes for the development and integration of optical devices, achieving single-chip integration of most optical components such as optical waveguides, modulators, detectors, etc. on a single wafer. Through standard semiconductor processes such as photolithography, etching, deposition, the entire optical routing system is "carved" on the silicon wafer, essentially chip manufacturing. The core performance and function of silicon photonics modules are determined in the chip design and wafer manufacturing stages, simplifying the core task of packaging to electrical interface connection and optical source integration. Silicon photonics technology has advantages in low power consumption, low latency, high bandwidth, and high integration, with the potential to gradually replace traditional optical modules. According to LightCounting's prediction, the market share of silicon photonics technology in the optical module market will gradually increase from 30% in 2025 to 60% in 2030. Limited capacity in traditional solutions creates room for the development of silicon photonics amidst EML shortages. EML chip manufacturing relies heavily on III-V compound semiconductor materials and complex manufacturing processes, with large investments and long cycles for capacity expansion. The explosion of AI computing has led to a surge in demand, and this structural shortage is difficult to resolve in the short term. Silicon photonics technology takes a different technological path - using silicon-based modulators with external CW lasers to replace EML chips. In the context of EML structural shortages, silicon photonics technology has become the mainstream alternative, gradually increasing market share. Advantages of Silicon photonics: Cost, performance, and capacity Silicon photonics technology has advantages in cost, performance, and capacity The tipping point has arrived, establishing advantages in cost and performance for silicon photonics. Performance advantages: In high-speed scenarios such as 800G, 1.6T, traditional discrete solutions face bottlenecks in power consumption, size, and signal integrity. Silicon photonics chips integrate multiple optical elements on a single chip, achieving shorter internal interconnects, lower transmission loss, and higher bandwidth density. Cost advantages: Silicon photonics technology is essentially a semiconductor manufacturing technology. Once designed, its production process can utilize the global CMOS wafer fab infrastructure for wafer-level batch manufacturing and standardized packaging. At the same time, silicon photonics technology simplifies the structure of optical modules, reduces the number of discrete devices and complexity of packaging, leading to a decrease in total system cost. Capacity flexibility: Strategic advantages of silicon photonics mode. The root of the capacity flexibility of silicon photonics technology lies in its reliance on the CMOS manufacturing ecosystem, with global capacity support. The production process of silicon photonics chips can leverage the vast production capacity network of CMOS wafer fabs globally, surpassing the capacity and efficiency of dedicated III-V chip production lines. Additionally, Foundries with silicon photonics capabilities can dynamically allocate capacity between different process nodes and products based on market demand, enhancing the overall supply chain resilience. The core lies in chip design and silicon photonics Fab: Silicon photonics technology is not just a technological path replacement, but also a redistribution of production relations and industrial power, pulling the optical module industry from the paradigm of "precision device assembly" into the paradigm of "semiconductor integrated circuits." Leading optical module companies expand their advantages through chip design capabilities and access to advanced wafer manufacturing capacity. Overall prosperity of the optical module industry remains unchanged, overseas optical module and optical chip manufacturers continue to outperform expectations Coherent released its latest quarterly financial report, with multiple core indicators exceeding market expectations, reaching quarterly revenue of $1.58 billion, surpassing the market's expected $1.54 billion. Lumentum's latest quarterly revenue reached $534 million, exceeding the consensus expectation of $526 million, with a year-on-year growth of 58.4%. The strong performance of leading optical communication companies reflects the growth in demand for optical components in AI data centers and data center interconnection, benefiting from the continued expansion of AI computing infrastructure. Silicon photonics technology will bring about fundamental changes in the optical module industry, with its impact extending far beyond process improvements. The core value of silicon photonics technology lies in chip design and wafer manufacturing, shifting the industry paradigm from "packaging-led" to "chip design-led." Amidst shortages of traditional EML chips, silicon photonics, with its performance advantages such as high integration and low loss, as well as capacity flexibility and cost advantages, will gradually increase its market share. Forward-looking layout and excellent chip design capabilities of leading optical communication companies will continue to expand their advantages, fully benefiting from the high prosperity of computing power. In conclusion, the firm continues to be optimistic about the computing power sector and strongly recommends companies in the computing power industry chain such as leading optical module companies Zhongji Innolight and Eoptolink Technology Inc., while also suggesting to pay attention to the "big five small" optical device companies such as Suzhou TFC Optical Communication, Henan Shijia Photons Technology, T&S Communications, EverProX Technologies, Wuxi Taclink Optoelectronics Technology, and Hubei DOTI Micro Technology. It is also recommended to focus on domestic computing power industry chains, such as the liquid cooling sector with companies like Shenzhen Envicool Technology and Guangdong Hec Technology Holding. Suggested focuses: Computing power - 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, Hubei DOTI Micro Technology. Copper links: Shenzhen Woer Heat-shrinkable Material, Tongling Jingda Special Magnet Wire. Computing power equipment: ZTE Corporation, Unisplendour Corporation, Ruijie Networks, Shengketongxin, Shenzhen Phoenix Telecom Technology, Foxconn Industrial Internet, Wus Printed Circuit, Cambricon, 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. IDC: Range Intelligent Computing Technology Group, Beijing Sinnet Technology, Guangdong Aofei Data Technology, Kehua Data Co., Ltd., RunJian Co., Ltd. Busbars: Wetown Electric Group, etc. Data elements - 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 falling short of expectations, computing power demand falling short of expectations, market competition risks.