China Galaxy Securities: AI optical chip production expansion and upgrade starts a cycle of transformation and innovation

The Zhitong Finance App learned that China Galaxy Securities released a research report saying that recently, a number of core optical chip companies issued announcements to expand production, increase production, or invest in the construction of new projects. The optical communications industry chain is the most flexible circuit in the AI arms race. High-tech barriers are building moats, and some upstream materials are still scarce, amplifying the benefits of domestic substitution. It is recommended to focus on targets related to the optical industry chain.

The main views of China Galaxy Securities are as follows:

The expansion of optical communications production has moved from the planning stage to substantial capital expenditure, and the prosperity of the optical industry continues to rise

The optical communication industry chain has ushered in a new round of intensive capital expenditure cycles, covering core links such as upstream optical chips, optical devices and optical fiber prefabricated rods, and midstream optical modules. Yuanjie Technology plans to use its own capital of 4.27 billion yuan to build a science and technology industrial park project, covering laser chip production lines, production plants and supporting facilities. The aim is to break through existing production capacity bottlenecks and expand large-scale production capacity for high-end laser chips. Shijia Photonics plans to raise no more than 2.8 billion yuan in total. The capital will be used for high-speed AWG chips (750 million yuan), CW optical chips and COC industrialization projects (1.4 billion yuan), and high-density optical interconnect devices (MPO/MMC) capacity expansion projects (170 million yuan). Continuously increasing existing production capacity and high-end manufacturing capacity is facing bottlenecks. Juguang Technology plans to raise no more than 1,021 billion yuan in total, covering chip substrates, optical components, high-end equipment and liquidity support, forming a complete industrial chain layout. At the same time, leading optical module companies such as Zhongji Xuchuang have intensively landed in Hong Kong stocks, and the scale of capital raised has enabled the continuous expansion of global production capacity. With continued breakthroughs in high-end optical chip technology, the optical communication industry chain is expected to start a new boom cycle of volume and price increases.

The profitability of optical communications continues to increase, production capacity implementation enables high growth, and the performance side is expected to be fully realized

According to the performance forecast for the first half of 2026, the core leaders in the optical communications industry chain, Xinyisheng, Yuanjie Technology, and Shijia Photonics achieved significant performance growth exceeding expectations, and continued to implement on the performance side. The release of future production capacity is expected to empower the fundamentals of the industry to improve in the medium to long term. Optical chips have the highest technical barriers in the optical communication industry chain and are the core link of domestic substitution. Judging from the global supply and demand pattern, there is a large gap in production capacity for high-end EML optical chips, high-power CW light sources, high-precision lenses, and more upstream indium phosphide (InP) substrate materials. High-tech barriers to optical chips are building moats. Some upstream materials are still in short supply, and domestic substitution continues to advance. Along with 800G/1.6T batch shipments in the second half of the year, the proportion of silicon optical solutions shipments increased, and the profitability of the optical communications sector is expected to improve marginally.

CPO/NPO, EML → Silicon Light CW, technology continues to be iteratively upgraded, domestic substitution opens up new space

With the rapid development of emerging application scenarios such as AI computing power infrastructure, data center interconnection, silicon light, and CPO, there are many marginal changes in the evolution of optical interconnection technology. Co-packaged optics (CPO) packages optical devices such as ASIC chips and optical engines on the same high-speed motherboard, and is suitable for direct connection between in-cabinet and cross-cabinet chips in Scale-Up and in some scenarios in Scale-Up. Near package optics (NPO) is a practical transition solution between traditional pluggability and CPO. The leading domestic CSP has completed full system verification, marking the technology from the laboratory to the implementation of large-scale projects. In this round, leading optical communication manufacturers are expanding production irregularly, but instead they are iteratively upgrading technology (pluggable optical module → CPO/NPO, EML → silicon light CW), superimposing domestic alternatives to open up new growth space. Overall, companies that have mastered upstream chip research and development capabilities are expected to reap excess profits in the new cycle, and their profitability is expected to continue to increase.

Risk warning: risk of fluctuations in overseas industries and trade policies; risk of AI application development falling short of expectations; risk of major CSP companies' CAPEX decline; risk of optical communication technology path changes, etc.