Guosheng: Revaluation of the domestic substitution value of indium phosphide; bullish on the sector's long-term allocation value.

Guosheng issued a research report stating that on the supply side, the preparation of large-size indium phosphide substrates and customer certification are highly difficult, making large-scale release difficult in the short term. On the demand side, optical communications are expected to continue contributing incremental demand, driving steady medium- to long-term growth in indium phosphide demand. The bank believes that the tight supply situation for indium phosphide will be difficult to alleviate in the short term and is bullish on the long-term allocation value of the indium phosphide sector. Guosheng's main views are as follows: Indium phosphide (InP) is a core material of second-generation III-V compound semiconductors With its high saturated electron drift velocity and relatively low luminescence transmission loss, indium phosphide has formed a unique competitive advantage among substrate raw materials for optoelectronic chips. Since then, indium phosphide has begun commercial deployment in the optical communications track, becoming a key preparation material for semiconductor lasers and receivers inside optical modules. In addition, relying on material characteristics such as high frequency, low noise, and relatively high breakdown voltage, along with the increasing frequency of applications for high-voltage and high-power devices, indium phosphide has gradually been put into the production of radar laser devices and RF devices since 2010. Indium phosphide production relies on high-purity indium and high-purity phosphorus, both of which are scarce raw materials 1) High-purity indium: As a typical dispersed metal, indium combines scarcity and by-product characteristics. Primary indium is produced as a by-product during the processing and refining of other metal minerals, so its supply resources are naturally constrained and supply elasticity is very small. At present, China, as the largest resource country for indium, is gradually tightening export controls, further constraining indium supply. At the same time, indium phosphide production requires high-purity indium of 6N grade or above, and currently only a small number of companies worldwide have the capability for large-scale production of high-purity indium. Sumitomo Electric, U.S.-based AXT, and JX Metals, the three global leading indium phosphide substrate manufacturers, generally have no primary indium resources and rely on imported crude indium for deep processing, with their willingness to expand production clearly constrained by raw materials. 2) High-purity red phosphorus: High-purity red phosphorus directly determines the crystal quality and dislocation density of indium phosphide substrates. In particular, 7N-grade high-purity red phosphorus, as a necessary material for 6-inch indium phosphide substrates, is the most difficult to prepare. According to official reports from the Qingdao Dongjiakou New Material Technology Innovation Base, global demand for 7N red phosphorus is about 800-1,000 tons, overseas effective 7N capacity is 400-450 tons, domestic effective 7N capacity is <40 tons, the domestic localization rate is <5%, and import dependence exceeds 90%. In 2026, overseas quotas for China will tighten, and most domestic companies can only secure supply through long-term agreements to lock in goods, while some small and medium-sized manufacturers without long-term agreements are forced to cut production. Size upgrading is the general trend, and overseas manufacturers have already locked in 6 inches 6-inch indium phosphide substrates are high-end core materials specially customized for AI high-speed computing scenarios. Compared with small- and medium-sized substrates, 6 inches offers the advantages of more chips produced per wafer, higher consistency, lower cost, and suitability for high-density integrated packaging, making it the absolute mainstream demand specification for the current and future AI computing industry. Overseas leading manufacturers Coherent and Lumentum have fully laid out 6-inch indium phosphide production lines, and market demand for 6-inch substrates is expected to grow rapidly soon. According to Yole data, in 2026 the global share of demand for 6-inch high-end substrates has exceeded 62%, and over the next three years the share will continue to rise to more than 80%. The tight supply situation for indium phosphide is difficult to alleviate in the short term The global shortage gap for indium phosphide substrates exceeds 2 million wafers, orders from leading companies have been scheduled to 2028, and long-term agreements have locked in capacity for the next several years. Coupled with the simultaneous entry of emerging fields such as 6G fronthaul, automotive LiDAR, and quantum computing to compete for capacity, indium phosphide demand is expected to continue growing. On the supply side, indium phosphide has no effective buffer channels: First, the substrate segment is highly monopolized, with global effective capacity for high-end 4/6-inch indium phosphide substrates at only 600,000-750,000 wafers per year, and the three overseas manufacturers AXT, Sumitomo Electric, and JX Metals occupying more than 85% of market share, with the release cycle for new capacity as long as 18-36 months; second, core raw materials high-purity indium and high-purity red phosphorus resources are scarce, and there are very few mass-production lines capable of purification to 7N grade, with capacity expansion cycles exceeding 3 years; third, overseas delivery cycles for indium phosphide single-crystal growth equipment exceed 12 months, and equipment supply itself has bottlenecks. Risk warnings: technology iteration risk, risk that yield ramp-up falls short of expectations, customer certification failure risk, risk of industry supply release exceeding expectations, and risk that downstream computing capital expenditure falls short of expectations.