The Zhitong Finance app learned that Guosheng Securities released a research report saying that the optical module industry is expected to experience continued high growth under the impetus of AI. The faster pace of industrial upgrading places higher demands on the delivery capacity of optical module manufacturers and the cost/power consumption of optical module products, and the requirements for materials have further increased. However, with multiple advantages such as power consumption/cost/performance, thin-film lithium niobate modulators are expected to experience a marked increase in share as the rate is upgraded. In addition, thin-film lithium niobate modulators are expected to replace some InP and silicon-based SiPH market shares. In the future, markets above 1.6T/3.2T are expected to be driven by AI and usher in a period of rapid development.

Guosheng Securities's views are as follows:

Driven by AI, the optical module industry is expected to experience continued high growth. The progress of transmission rate upgrades and intergenerational improvements has accelerated markedly. The faster pace of industrial upgrading places higher demands on the delivery capacity of optical module manufacturers and the cost/power consumption of optical module products, and the requirements for materials have further increased.

Thin film lithium niobate — “optical silicon”. Lithium niobate materials are the best choice for electro-optical coefficients among reliable materials (considering Curie point and electro-optical coefficient). The thin-film process pulls in the electrode distance, reduces the voltage boosts the bandwidth-to-voltage ratio. Compared to other materials, it has many advantages most needed by optoelectronics, such as large bandwidth/low loss/low driving voltage.

In the AI era, complementing the “communication wall” and increasing the transmission rate has become a top priority. Driven by AI, the upgrade iteration rate on the network side is expected to accelerate significantly. There are two reasons:

1. Acceleration of computing power chip upgrades. Demand for AI may have exploded due to model-side upgrades and application layer advancement. At the same time, fierce competition for “GPU-computing core” will further promote the upgrading and iteration of computing power chips.

2. When computing power clusters operate, the requirements for communication transmission are even higher than the growth of computing power itself. In the next few years, the progress of 800G to 1.6T/3.2T is expected to be significantly faster than market expectations.

There are obvious differences in material characteristics after the rate upgrade, and thin-film lithium niobate is expected to achieve a jump in share. Currently, 800G mainstream solutions include DR8/SR8/2FR4 and other solutions. Regardless of single mode or multi-mode, a single channel 100 Gbps rate is mostly used. However, when switching to the 1.6/3.2T stage, it is expected to evolve to single-wave 200/400G. The large bandwidth advantages of TFLN (thin film lithium niobate) will be even more prominent. In the future, requirements for cost, power consumption, performance, etc. will be higher and higher, and thin-film lithium niobate modulators are expected to experience a marked increase in share as the rate is upgraded with multiple advantages such as power consumption/cost/performance.

The thin-film lithium niobate modulator market space is vast and is expected to exceed 10 billion dollars. Coherent optical communication networks continue to sink, and the market size is expected to expand rapidly. According to CignalAI's forecast, global high-speed coherent optical modulator shipments will reach 2 million ports in 2024. According to the average requirement of 1 to 1.5 modulators for each port, if the penetration rate of the thin-film lithium niobate modulator can reach 50%, the corresponding market space is about 82-11 billion yuan.

Thin-film lithium niobate modulators are expected to replace some InP and silicon-based SiPh market shares. In the future, markets above 1.6T/3.2T are expected to be driven by AI and usher in a period of rapid development.

The technical process is difficult, the participating manufacturers are limited, and the competitive pattern is considerable. The design of lithium niobate modulators is difficult, the process is complicated, and the technical threshold is high. The main players include Japan's Fujitsu (Fujitsu) and Sumitomo (Sumitomo), the US Lumentum's lithium niobate modulator production line (acquired by Guangku Technology in 2019), and high-quality domestic manufacturers Niobao Optoelectronics and Ningbo Yuanxin.

Investment suggestions: Thin-film lithium niobate modulators: Optical Library Technology (300620.SZ), etc. TFLN thin film lithium niobate solution optical module manufacturers: Zhongji Xuchuang (300308.SZ), Xinyisheng (300502.SZ), Liante Technology (301205.SZ), DeColi (688205.SH), etc.

Risk warning: AI development falls short of expectations, computing power demand falls short of expectations, and related technology development progress risks.