INNOLIGHT(300308)：FUNDAMENTALS REMAIN STRONG DESPITE RECENT MARKET VOLATILITY REITERATE BUY-格隆汇

机构：招银国际
研究员：Lily YANG/Kevin ZHANG

　　CSP3 (Three Cloud Service Providers, namely Google, Microsoft and Amazon) plus Meta have announced their earnings recently. The Big Four spent an aggregate of US$52.9bn in capex in 2Q24 (vs. previous Bloomberg consensus est. of US$50.6bn), representing a surge of 57.1% following 30.4% growth in 1Q24. The growth is on an already-high base after three years of growth hikes in capex (38%/34%/19% YoY) from 2020-22 and reaching a nearly historical peak (US$148bn) in 2023. Like Sundar Pichai said on Alphabet’s 2Q24 earning call, “the risk of under-investing is dramatically greater than the risk of over- investing.” The Big Four confirmed that they will continue to make heavy investments to meet the rising AI compute demand.
　　A number of investors have shown concern about the recent market turmoil in the tech sector, which we believe was driven primarily by 1) mixed earnings results, 2) fear of a US recession, and 3) uncertainty over the upcoming US presidential election. Market sell-offs intensified even further after the unexpected interest rate hike by the Bank of Japan as carry trades of USD and yen unwind.
　　Despite those noises, we remain positive on the longer-term AI investment theme as growth of major CSPs’ capex remained intact in 2Q24. As a key beneficiary, Innolight remains our top pick. We think Innolight’s current valuation (22.8x/15.3x 2024/25E P/E) appears attractive amid the recent market pull-back (35%+ decline since peak in July). Reiterate BUY with new TP at RMB150.8. Previous target price of RMB130.71 had already accounted for the effects of ex-rights and ex-dividends.
　　The impact of Nvidia’s design flaws in new chips should be limited. Another concern on Innolight is Nvidia’s recent design flaws on its new GPU chip (link). Investors worry this may lead to delay or even cancellations of Nvidia’s products, which may negatively affect the revenue outlook of Innolight’s supply chain. However, the impact should be limited in our view, given that this issue has been identified in the early stage and is a solvable technique difficulty. The mass production of Blackwell chips will begin in 4Q24 and the majority of revenue contribution is expected to be in 2025. In addition, any impact of new chip shipment should be offset by an extended lifecycle of H series.
　　Reiterate BUY with adjusted TP at RMB150.76. We revise up revenue forecasts by 6%/11% and NP forecasts by 11%/23% for 2024/25E, on stronger capex outlook of cloud companies (16%/21% increase in 2024/25E capex forecasts from Feb and 5%/8% increase from May). Based on recent earnings calls, hyperscalers will continue to invest in AI infrastructure (39%/13% capex growth for the Big Four in 2024/25E by Bloomberg consensus). As a key beneficiary, Innolight‘s strong product portfolio (400G/800G/1.6T coming by 2024 year-end) is well-positioned to capitalize on this AI momentum. The new TP is based on the same 30x 2024E P/E, which is 9% higher than 5-year historical avg. of forward P/E (27.4x), implying a PEG ratio close to 1x (vs. 32% 2024-26E EPS CAGR). Therefore, we think Innolight’s current valuation (22.8x/15.3x 2024/25E P/E) looks attractive. Reiterate BUY. Potential risks include: 1) intensified geopolitical tensions, 2) slower-than-expected new product ramp-up progress, 3) slowdown in cloud capital spending and 4) supply chain bottlenecks.