Goldman Sachs remains firmly optimistic about Innolight: "Black swan" in exchange rates suppresses single-quarter profits, while capacity expansion and other factors will support performance in the coming quarters.

Goldman Sachs remains firmly optimistic about Innolight: "Black swan" in exchange rates suppresses single-quarter profits, while capacity expansion and other factors will support performance in the coming quarters.

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Optical module leader Eoptolink saw a significant increase in revenue in the first quarter, but foreign exchange losses dragged net profit below expectations. Goldman Sachs maintains a Buy rating, believing that capacity expansion, product mix upgrades, and other factors will drive continued quarter-on-quarter revenue growth in the coming quarters.

Eoptolink’s Q1 revenue was 8.338 billion RMB, up 106% year-on-year, but net profit of 2.774 billion RMB was about 12% lower than Goldman Sachs’ forecast. Affected by the earnings report, Eoptolink’s trading volume on Friday reached 40 billion RMB, falling more than 11%.

According to WindChase Trading Desk, Goldman Sachs analyst Ting Song pointed out in the report that the main reason for the net profit shortfall was that foreign exchange losses pushed up financial expenses, which is a non-operating disturbance and does not change the outlook on the company's fundamentals going forward.

Citi also stated in its report that the Q1 earnings do not affect Eoptolink’s solid outlook. Citing company comments, it said that flat quarter-on-quarter revenue mainly stemmed from raw material and capacity constraints, which are expected to gradually improve from Q2 onward. Both institutions are aligned in their mid-term outlook for the company.

Q1 Earnings: Revenue Exceeds Expectations, Net Profit Hit by FX Losses

Eoptolink’s Q1 revenue was about 10% above earlier forecasts; gross margin edged up from 48.9% to 49.2%, with improvements attributed to manufacturing process optimization and product mix upgrades.

On the net profit side, there was a clear gap. The quarterly net profit of 2.774 billion RMB still rose 76% year-on-year but fell about 13% quarter-on-quarter and was 12% below forecast. The report directly points out that higher-than-expected FX losses were the main driver, lifting financial expenses and causing the market’s expectation that “profit will grow in line with revenue” to fall short.

Quarterly FX volatility does not affect assessments of the company's future growth path; the key concern is whether quarter-on-quarter growth can be maintained in coming quarters.

Four Key Drivers: Growth Logic Shifting to Structural Factors

Quarter-on-quarter revenue growth in coming quarters will be driven by four key factors: continued improvement in optical module chip supply, product mix upgrade to 1.6T and above solutions, rising share of Silicon Photonics-based solutions in revenue, and accelerated capacity expansion to support rapid shipment growth.

Among these, the ongoing scale-up of 1.6T optical modules and upgrades to higher-speed solutions, along with increased contributions from Silicon Photonics, are seen as more structural incremental sources and are positioned as the core drivers of Q2–Q4 sequential growth. The report does not disclose the specific revenue proportions from 1.6T or Silicon Photonics solutions, but they have started to ramp up in Q1, with their contributions set to increase further over the next several quarters.

Accelerated Capacity Expansion: Thailand Phase II Advances, Supply Constraints Easing

On the supply side, Goldman Sachs singles out capacity expansion as one of the growth drivers. The report notes that management stated the Phase II plant construction in Thailand is progressing as expected, and capacity expansion is set to speed up further.

Combined with ongoing improvement in optical chip supply, previous shipment growth bottlenecks are easing. The steady progress of Thai capacity is also corroborated by sharp increases in company inventories and prepayments, supporting the ramp-up in shipments for Q2–Q4.

Additionally, compared to profit and loss statements affected by FX disturbances, balance sheet changes better reflect the company’s preparation for future shipments. At the end of Q1, Eoptolink’s inventory rose to about 9 billion RMB, up significantly from 7.2 billion RMB at the end of last quarter; prepayments climbed to 682 million RMB from just 17 million RMB in the previous quarter, a substantial increase quarter-on-quarter. These changes reflect the company’s “advance preparations” in supply chain and capacity—in proactive deployment for larger-scale optical module production ramp-up.

Despite a generally optimistic view on fundamentals, the report maintains a 12-month target price of 518 RMB, based on a 27x 2026E P/E ratio, broadly in line with the company’s average forward P/E of 29x since 2018. The current share price has about 5% downside to the target. Goldman’s stance is more about betting on “continued growth trends” rather than endorsing the current valuation level.

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