China Galaxy Securities: Leading performance of optical communication exceeds expectations, industry growth potential further strengthened.

China Galaxy Securities released a research report stating that the growth logic of the optical communication industry is evolving with the dual driving forces of "rising quantity and price" and "intergenerational technological dividends". The upgrade of product structure will drive the continuous increase of average selling price, opening up a new round of growth space for top enterprises. The improvement in the penetration rate of silicon photonics technology will also drive the high-speed growth of upstream optical chip demand. Computing power infrastructure has long-term certainty, and companies with high-end production capacity, deep binding with global top customers, and mastery of core technology positioning may benefit first. China Galaxy Securities' main points are as follows: Better-than-expected performance, optimistic about AI driving the high-speed optical module shipment volume and CPO development trend Overall, Eoptolink Technology Inc. is expected to achieve a net profit attributable to the parent of 7-8 billion yuan in 1H26, an increase of 77.569%-102.93%. Suzhou TFC Optical Communication is expected to achieve a net profit attributable to the parent of 1.124-1.304 billion yuan in 1H26, an increase of 25%-45%; on a quarterly basis, Eoptolink Technology Inc. is expected to achieve a net profit attributable to the parent of 4.22-5.22 billion yuan in 2Q26, an increase of 78.10%-120.3%, with a quarter-on-quarter increase of 51.80%-87.77%; Suzhou TFC Optical Communication is expected to achieve a net profit attributable to the parent of 632-812 million yuan in 2Q26, an increase of 12.46%-44.47%, with a quarter-on-quarter increase of 28.47%-65.02%. Eoptolink Technology Inc. is benefiting from the continuous growth of AI-related computing power investment, optimization of product structure, and is expected to achieve a significant increase in sales revenue and net profit compared to the same period last year; Suzhou TFC Optical Communication has benefited from the accelerated development of the global artificial intelligence industry and global data center construction, driving the sustainable growth of demand for high-speed optical components, exceeding market expectations. High demand for computing power drives structural upgrade and value restructuring of optical modules The current optical communication industry is undergoing a profound structural change driven by the explosion of AI computing power demand. The industry outlook has shifted from traditional cyclical fluctuations to a long-term expansion channel supported by technological iteration and capital expenditure resonance. Major global cloud providers and AI companies continue to increase their investment in computing power infrastructure, directly driving nonlinear growth in demand for high-speed optical modules. The report believes that starting in 2026, the penetration rate of high-speed products in the data communication field is accelerating, with 1.6T products entering the mass delivery cycle. The high demand provides a solid fundamental support for capacity release and profit realization at all levels of the industry chain; as demand for high growth continues to increase certainty, capacity release has also been improving quarter by quarter since the beginning of the year. Although the current shortage of upstream raw materials still exists, the report believes that as the process of domestic substitution continues to deepen, the degree of shortage may continue to narrow. Demand-driven, CPO gradually enters the commercialization cycle, core components have the foundation for rising quantity and price The commercialization of new packaging solutions such as CPO and NPO is reshaping the value distribution pattern of the industry chain. Traditional plug-and-play optical modules are gradually approaching physical limits in power consumption and transmission density, while CPO technology, by co-packaging optical engines with switching processors, significantly reduces power consumption and increases bandwidth density, becoming a key solution to the bottleneck in interconnection of AI computational clusters. With top manufacturers such as NVIDIA entering full-scale production of CPO switches, the value proportion of core components such as optical engines, FAU, and ELS has significantly increased, shifting the industry chain focus from simple module assembly to a high-barrier, high-value-added core optical component sector. This enables companies with the vertical integration capability of upstream core components to have stronger pricing power and counter-cyclical capabilities. Recommended focus: optical module manufacturers Zhongji Innolight/Eoptolink Technology Inc./Accelink Technologies/Hgtech/Cig Shanghai {Linktel Technologies, etc., optical chip Yuanjie Semiconductor Technology/Henan Shijia Photons Technology/Suzhou Everbright Photonics, etc., optical device Suzhou TFC Optical Communication/Focuslight Technologies Inc./T&S Communications/EverProX Technologies, etc. Risk warnings: risks of changes in the international environment; risks of AI infrastructure construction falling short of expectations; risks of tight supply of upstream raw materials, etc.