Morgan Stanley raises Zhongji Innolight earnings forecasts, bullish on better-than-expected AI optical module demand

Overview

This report is Morgan Stanley's earnings review and valuation forecast update on Zhongji Innolight Co Ltd. The core conclusion is that, driven by strong investment in AI and computing infrastructure, the company's 1Q26 results significantly exceeded expectations, and demand in the AI optical module industry is stronger than previously expected. Therefore, the report raises the company's 2026-2027 revenue, gross margin, and net profit forecasts, and adds a new 2028 forecast.

Core views

The report's core views include: first, broader adoption of scale-out, scale-up, and scale-across architectures is accelerating demand for AI optical modules; second, the company is a pioneer in the commercialization of 800G and 1.6T, and, with long-term cooperation with global CSPs, joint R&D, and new product introduction capabilities, it outperforms peers in time-to-market, time-to-volume, and time-to-cost; third, demand for 1.6T is the main reason for the sharp upward revision in industry forecasts for 2027-2028; fourth, 3.2T, NPO, and OCS may continue to contribute growth after 2027 and alleviate market concerns about CPO substitution risk.

Analysis framework

The report uses a combination of earnings review, industry shipment forecasting, TAM estimation, product generation migration analysis, company competitive advantage assessment, and financial model updates. It first verifies how much 1Q26 actual revenue, gross margin, and net profit exceeded previous forecasts, and then incorporates AI optical module industry shipment assumptions, product mix improvement, and a higher share of high-end products into forecasts for 2026-2028 revenue, gross margin, net profit, and valuation metrics.

Methodology notes

• financial_modelMorgan Stanley ModelWare

  Earnings forecasts and financial model updates

  The report states that, unless otherwise noted, all metrics are based on the Morgan Stanley ModelWare framework, under which it updates forecasts for 2026-2028 revenue, EBITDA, net profit, EPS, P/E, P/BV, and EV/EBITDA, among others.

• industry_forecastTAM and shipment forecast

  AI optical module industry demand estimation

  The report raises AI optical module industry shipment forecasts for 2026, 2027, and 2028 to 73mn, 141mn, and 150mn units, respectively, and accordingly forecasts industry TAM to increase from US$18bn in 2025 to US$102bn in 2028.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhongji Innolight Co Ltd (300308.SZ, 300308 CS)

  The company covered by the report is affected by demand for AI optical modules, commercialization of 800G/1.6T, and future technology evolution in 3.2T, NPO, and OCS.

  Strengths

  The company is a pioneer in the commercialization of 800G and 1.6T, maintains long-term cooperation and joint R&D with global CSPs, and has faster yield improvement, cost reduction, and new product introduction capabilities.

  Weaknesses

  The report does not provide a valid target price or current rating; future growth is highly dependent on demand for high-end optical modules and the sustainability of capex by major CSPs.

  Comparison

  The report believes the company is more competitive than peers on key metrics such as time-to-market, time-to-volume, and time-to-cost.

  Risks

  CPO substitution risk, competitive intensity, insufficient customer diversification, geopolitics, tariffs, and supply chain volatility.

• AI transceiver industry

  Upward revisions in industry demand are the main backdrop for the company's earnings forecast upgrades.

  Strengths

  Broader adoption of scale-out, scale-up, and scale-across architectures has driven significant upward revisions to AI optical module shipment and TAM forecasts for 2026-2028.

  Weaknesses

  Industry growth is highly dependent on the AI infrastructure investment cycle and the pace of high-end product iteration.

  Comparison

  Demand for 1.6T has become the key variable behind the sharp upward revision in 2027-2028 forecasts, making the outlook more optimistic than before.

  Risks

  Changes in new technology paths, potential CPO substitution, and supply chain and geopolitical disruptions.

Key data

• 1Q26 revenueRmb19,496mnUp 192% YoY and 47% QoQ, 39% above Morgan Stanley's forecast.
• 1Q26 gross margin46.1%Up 9.4ppt YoY and 1.6ppt QoQ, 0.5ppt above forecast.
• 1Q26 net profitRmb5.7bnUp 262% YoY and 56% QoQ, 31% above the previous forecast.
• 2026e net profit forecast upgrade33%Reflects solid 1Q26 results and a more optimistic industry demand outlook.
• 2027e net profit forecast upgrade180%Mainly driven by stronger 1.6T demand and upward revisions to high-end optical module shipment forecasts.
• 2026-2028 revenue CAGR53%The report's forecast revenue CAGR for 2026-2028.
• 2026-2028 earnings CAGR66%The report's forecast earnings CAGR for 2026-2028.
• AI optical module TAMUS$18bn in 2025 to US$102bn in 2028More than 4x expansion in three years.
• 2028E revenueRmb251,279mnNewly added 2028 forecast in the financial summary.
• 2028E net profitRmb92,107mnNewly added 2028 forecast in the financial summary.

Impact & implications

This report reinforces the growth narrative of Zhongji Innolight as a leader in AI optical modules: in the short term, supported by 1Q26 results above expectations and upward revisions to 2026-2027 earnings forecasts; in the medium term, driven by ramp-up of 800G and 1.6T; and in the long term, focused on whether new technologies such as 3.2T, NPO, and OCS can sustain the growth curve. However, since the current stock rating and target price are unavailable, investment judgment should focus more on changes in earnings forecasts, industry shipment assumptions, and risk factors rather than inferring conclusions from the rating itself.

Risks

• CPO disruption risk, including its timing and impact magnitude.
• Rising competitive intensity and customer diversification risk.
• Geopolitics, tariffs, and supply chain volatility.
• If AI infrastructure investment is below expectations, demand for high-end optical modules may be affected.
• If commercialization of 1.6T, 3.2T, NPO, or OCS is slower than expected, growth realization after 2027 may be affected.

What to watch

• Whether AI optical module industry shipments in 2026-2028 approach the upgraded forecasts of 73mn, 141mn, and 150mn units.
• The ramp-up pace of 1.6T products and changes in their share of the company's revenue mix.
• Technology progress and commercial order validation for 3.2T, NPO, and OCS.
• Whether the company's gross margin continues to be supported by a rising share of high-end products.
• Global CSP capex and the intensity of investment in AI computing infrastructure.
• The timing and magnitude of substitution of traditional optical module demand by the CPO technology path.
• The impact of geopolitics, tariffs, and supply chain constraints on delivery and costs.