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Source: STCN   Author: Li Shisheng


Due to COVID-19's adverse impact on the macro-economy, the "new infrastructure" that is intended to stimulate the economy is gaining popularity. The "new infrastructure" requires 5G and data centers, and the construction of which will drive the development of upstream enterprises, such as the optical module industry. As the leading provider of optical transceivers in China, Zhongji Innolight will directly benefit from this wave.


Base Station Construction Boom Are Favorable for the Optical Module Industry

Compared with 2019, a consortium composed of China Mobile, China Unicom and China Telecom has procured more than 480,000 stations, triple or quadruple the scale of its previous procurement. Calculating at a minimum price of RMB 200,000 each, it is an investment of hundreds of billions of yuan.

Moreover, the coronavirus outbreak has caused a surge in the demand for big data center construction and an explosive growth of remote online industries, such as cloud-based offices, gaming, and education.

Tang Haiqing believes that in 2020, the optical module industry will embrace opportunities from both telecom and data communications sectors, in which the domestic telecom sector and international data communications sector prosper even further. In the telecom market, with the commencement of large-scale construction of 5G infrastructure, there is a rising demand for optical modules. In the data communications market, the next-generation 400G products are moving forward with wide-scale launch plans, and capital expenditure continues to grow for global cloud computing companies, bringing about a rise in both the quantity and prices of the data communications industry. Looking ahead, the construction of the 5G network will drive the continuous growth of 5G applications and network traffic, and the telecom market is facing continuous demand for upgrades and capacity expansion due to the high traffic volume. The data communications market will grow along with global cloud computing, of which the optical modules are showing noticeable growth and are expected to maintain long-term rapid growth.


Zhongji Innolight, the Leader of Data Communications, will Benefit from the Wave

Zhongji Innolight is primarily engaged in the manufacturing of high-end optical transceivers and intelligent equipment. Of these, the optical transceivers constitute the company's main source of revenue and profit. Zhongji Innolight's wholly-owned subsidiary, InnoLight Technology (Suzhou), is the leading supplier of high-end optical transceivers, offering a broad range of products that cover optical modules designed for different rates, such as 10G/25G/40G/100G/400G.

According to the previously disclosed 2019 Performance Forecast, the company witnessed a slight decrease in revenue and profit. In this regard, the company explained that due to the slowdown in the growth of capital expenditures and destocking of some customers, the company's annual sales revenue and net profit have dropped compared to the same period last year.

With the recent increase in capital expenditure in downstream industries, the prosperity of optical modules has recovered, and there is an expectation of rapid growth in the industry.

From the quarterly results of Zhongji Innolight, we can also see that the company's performance declined during the first quarter of 2019 but steadily rose after entering the second quarter. The moving MoM growth rate of net profit attributable to the parent company was respectively -29.75%, 8.36% and 39.66% in the first three quarters of 2019. In the fourth quarter of 2019, the company achieved a revenue of RMB 1.474 billion, indicating a year-on-year increase of 86.15% and a month-on-month increase of 18.01%. The company also achieved a net profit of RMB 155 million, indicating a year-on-year increase of 9.15% and a month-on-month increase of 2.65%, with single-quarter revenues hitting a record high.

The downstream applications of optical modules are mainly data communications, wireless access, and telecommunication transmission. Tang Haiqing believes that Zhongji Innolight is currently the world's largest enterprise in the data communications market for the following reasons. On one hand, the company is taking the lead in launching high-end and high-speed products. On the other hand, its leading shipment volume allows the company to acquire upstream chips and components at a lower cost. In the meantime, the company has accumulated years of technology and production lines to deliver products, allowing its product yield rate to overtake its rivals and creating a cost advantage. Finally, the company has worked closely with major customers for many years and has therefore developed strong customer loyalty and wields a powerful brand impact in the market. In the wireless access and the entire telecommunication market, the company's market share of high-value products is expected to increase as it continues to invest heavily in technological research and development and to make breakthroughs in high-end and high-speed products.


Proposing to Acquire Chengdu Tsuhan to Create Synergy

Chengdu Tsuhan boasts a complete industrial chain of photoelectric devices and unique advantages in terms of product R&D, production capacity, and processing equipment. Following the transformation of its production line, Chengdu Tsuhan is now capable of producing 50 million photoelectric devices annually. In addition, photoelectric modules are a new area of growth for the company. The company has established an R&D team of photoelectric devices, covering chip packages, photoelectric device components, and complete business modules of photoelectric products. It has a strong competitive advantage in R&D, application, and promotion of automated production platform and equipment, as well as the domestically-leading process technology.

Zhongji Innolight believes that both the company and the target company belong to the optical communication industry, and they have different priorities in terms of R&D direction, production, product application areas, customer groups, and market areas. However, some of the supply chains are overlapping. Therefore, the integration of the companies from the same industry will enable them to form synergies in technological advancement, customer resource sharing, large-scale delivery capabilities, cost control, market share improvement, and supply chain integration, which will help further enhance the company's competitive edge in the global data center and telecommunication optical modules sectors. It will also have a positive impact on the company's long-term development and matches the company's development strategy and the interests of all shareholders.

Tang Haiqing analyzed in detail that Zhongji Innolight used to rely on data communications products and non-hermetic packaging technology, and its technology is ahead of the industry. However, as breakthroughs are being made in the telecom market and the optical modules for telecom require hermetic packaging, the company therefore proposes to acquire Chengdu Tsuhan, which is a leading enterprise in both hermetic packaging (TO-CAN) technology and production capacity, with the hope of further strengthening the company's capabilities for cost control and industrial chain control. In the meantime, Chengdu Tsuhan has relatively stable and mature shipment in the broadband access PON market, which will bring additional market resources to the company.