Introduction: Optical Module is the upstream core link of the optical communication industry chain, composed of optoelectronic devices, functional circuits and optical interfaces, the main function is to realize the mutual conversion of photoelectric signals. With the birth of ChatGPT, AI model parameters have been improved hundredfold, computing power and data demand has ushered in explosive growth, which will bring tens of millions of increments to the demand for optical modules, and the optical module industry will set sail against the wind. Lightcounting predicts that the global optical module market size will reach 17.6 billion US dollars in 2026, with a CAGR of 13.85% from 2021 to 2026.
First, the introduction of optical modules
1.1 What is an optical module
To understand optical modules, you first need to understand optical communications. Optical communication is a system that transmits information with optical signals as information carriers, optical fibers as transmission media, and optical signals through electro-optical conversion. Simply put, in the communication process, the transmission uses light, walking on the optical fiber, but the information in the transmitting and receiving end can not use light, need electricity, so that in the transmitting and receiving end, it is necessary to convert light and electricity, and this conversion of light and electricity belongs to the function of the optical module.
The position of optical modules in the field of optical communications
Optical Module is the upstream core link of the optical communication industry chain, composed of optoelectronic devices, functional circuits and optical interfaces, etc., the main function is to realize the mutual conversion of photoelectric signals. From the internal structure of the optical module, there are interfaces, circuit boards, lasers and detectors. The laser is the transmitter of the optical signal, where the electrical signal is converted into an optical signal and coupled into a fiber for transmission. The detector is the receiving end of the optical signal, and the received optical signal here is converted into an electrical signal.
The internal structure of the optical module
1.2 Application scenarios of optical modules
The application of optical modules is very extensive, and the main application scenarios can be divided into three blocks: 1) data center; 2) Wireless backhaul; 3) Telecommunications transmission.
The first is the field of data communication. The demand for optical transceiver modules for interconnection within data centers has increased from 25/100G to 200/400G/800, and the interconnection between data centers has driven the demand for medium and long-distance and high-rate optical transceiver modules and optical transmission subsystems.
The demand for optical transceivers in data center construction
Source: Decoli Prospectus
This is followed by wireless backhaul. 5G network fronthaul mainly uses 10G and 25G optical transceiver modules, midhaul mainly uses 50G, 100G, and 200G optical transceiver modules, and backhaul mainly uses 100G, 200G, and 400G optical transceiver modules.
The demand for optical modules for 5G network construction
Source: Decoli Prospectus
Finally, telecommunications transmission. Telecom optical transmission networks mainly include subdivisions such as bone engineering networks, metro networks and broadband access networks.
The demand for optical transceivers in the construction of telecommunication transmission networks
Source: Decoli Prospectus
1.3 The AIGC revolution drives the demand for optical modules
The emergence of ChatGPT, the monthly active users of the product exceeded hundreds of millions in 2 months, is the fastest growing consumer application in history, is expected to lead a new round of technological revolution, and behind ChatGPT technology, AI model parameters have been improved hundredfold, and the computing power and data demand required to train models have also ushered in explosive growth. With the development of AIGC, the global data scale is expected to continue to increase, and the data center high-rate optical module market will obtain a large incremental market.
Global Data Scale (ZB)
Source: Applied Materials
According to the CPO standard and grassroots survey data of China Computer Interconnection Technology Alliance (CCITA), the convergence ratio of upstream and downstream ports in the cross-interconnection network of the leaf ridge architecture to which the cloud computing general-purpose server belongs is about 3:1, and one server requires about 4-6 optical modules, and the overall average unit price is about 1 US dollar/GB. The A100, H100 and other GPUs used in AI servers require 8-10 high-rate optical modules of more than 200G, the following is a reference to the NVIDIA GPU H100 network architecture, the average single GPU can correspond to about 5 optical modules.
Optical module demand sensitivity analysis
Source: NVIDIA Technical Documentation, Trendforce
With the popularization of AI large models, it will bring tens of millions of increments to the demand for optical modules. According to LightCounting's statistics, the global top 5 cloud manufacturer Ethernet optical module market reflects the preference for high-rate optical modules. In 2023, the demand for 800G optical modules is expected to further replace the share of lower-rate optical modules, and the overall consumption and specifications of high-rate optical modules will continue to increase, showing a trend of increasing volume and price.
Top 5 Cloud Vendor Ethernet Optical Module Market Size (Million US Dollars)
Source: LightCounting, Shenhua Research Institute
Second, optical module industry analysis
2.1 Development status of optical modules
(1) Optical module industry chain
The optical module is in the middle of the industrial chain, and the upstream of the industrial chain is the supplier of electronic components, PCBs, optical chips, structural parts and other components; The downstream of the industry chain are customers such as telecom operators and cloud computing data center operators.
Optical module industry chain
Optical chips are the core devices of the upstream industry chain, accounting for about 26% of the total cost of optical modules. The functional classification can be divided into laser chips and detector chips. Laser chips, according to the light structure, can be further divided into surface emitting chips and side emitting chips, surface emitting chips include VCSEL chips, side-emitting chips include FP, DFB and EML chips. Detector chips, mainly PIN and APD.
(2) Optical chips: domestic substitution is timely
The optical chip is the core device of the optical module, and the added value is very flexible. According to LightCounting's data, the proportion of optical chips in the optical module market has increased from about 15% in 2018 to more than 25% after 2025, and optical chips are expected to benefit deeply.
2018-2027E optical chips account for the proportion of the optical module market
Source: LightCounting, Shenhua Research Institute
From the perspective of the global market, the scale of China's optical chip market continues to increase. According to ICC forecasts, the proportion of sales scale of Chinese optical chip manufacturers in the global optical chip market will continue to increase from 2019 to 2024.
2019-2024E China optical chips account for the global market share
Source: Modor Intelligence, Shenhua Research Institute
It is time for the domestic replacement of optical chips. Compared with foreign countries, the technical gap in the field of optical chips is not small, basically 2 generations worse, and the low-end is accelerating the realization of domestic substitution, and the penetration rate of high-end products is very low. At present, mainland optical chip enterprises have basically mastered the core technology of optical chips with a rate of 2.5G and below, and some 10G optical chip products have high performance requirements and greater difficulty, such as 10GVCSEL/EML laser chips, etc., with a localization rate of less than 40%; In terms of 25G and above optical chips, with the advancement of 5G construction, mainland optical chip manufacturers have made breakthroughs in 25GDFB laser chips applied to 5G base station fronthaul optical modules, and optical module companies in the data center market have begun to gradually use 25G DFB laser chips from domestic manufacturers, and the localization rate of 25G optical chips in 2021 will be about 20%. However, the localization rate of optical chips above 25G is still low, about 5%, and overseas optical chip manufacturers are still the mainstay.
Domestic replacement rate of optical chips in 2021
Source: Yuanjie Technology Prospectus, Shenhua Research Institute
At present, the global optical module market is mainly dominated by the United States, China and Japan, and half of the world's top ten optical module manufacturers in 2021 are from China. With the continuous expansion of overseas business of domestic downstream module manufacturers, optical chips can follow optical modules to the sea, which is expected to be applied to overseas manufacturers, and domestic optical chips have broad development prospects.
Top 10 manufacturers of optical modules in the world
Source: Borche Technology, Shenhua Research Institute
(3) Optical module equipment: the market space can reach 31.5 billion yuan
The production process of optical modules mainly includes SMD, coupling and testing.
Production process equipment
Source: Zheshang Securities
If optical modules are produced with new capacity, the market space of optical module equipment can reach 31.5 billion yuan in 2020. If there is no new production capacity, the equipment is calculated by four-year depreciation, and the market space of optical module equipment is about 8 billion yuan;
Equipment market space deduction
Source: New Yisheng / Decoli Prospectus, Lightcouting, Shenhua Research Institute
Assumption: Optical modules are all produced at new capacity
The high-end market is relatively concentrated, mainly Ficontec, Systech abroad, and Leishen technology and Curiosity Intelligence in China. The low-end market competition landscape is relatively fragmented.
Representing the business
2.2 Development trend of optical module technology
(1) The optical module market has broad development space
According to Lightcounting's forecast, the global optical module market size will reach $17.6 billion in 2026, with a CAGR of 13.85% from 2021 to 2026. The digital communication market will dominate the optical module market size, increasing from 55% in 2020 to 77% in 2026. The main reason is that the demand for optical modules caused by the outbreak of data traffic continues to increase, and the 5G construction in the telecom market tends to be stable.
Global optical module segment size and forecast
Source: Lightcounting, Shenhua Investment
The demand for optical modules brought about by data centers due to traffic explosion is still the core driving force for the development of optical modules. With the development of AIGC, the rapid increase in the amount of data on the inference side of large models at home and abroad will further catalyze the significant increase in the demand for optical module computing power.
(2) 800+G optical module
Since 2019, the internal interconnection of North American ultra-large data centers, including Amazon and Google, has begun to commercially deploy 400G optical modules, and domestic data centers are expected to achieve 400G large-scale deployment in 2022. Data center switch chip throughput is expected to reach 51.2 Terabytes in 2023 and 102.4 Terabytes after 2025. Higher speed 800G/1.6T optical modules will be gradually needed.
Data center switch chip throughput continues to increase
Data source: Zhongji Xuchuang announcement, Shenhua Research Institute
The performance requirements of low power consumption will drive the proportion of 800G optical modules to increase significantly. High-rate modules also have relatively low power consumption, of which the early power consumption of 400G optical modules is about 10-12W, and long-term power is expected to be around 10W, while the power consumption of 800G optical modules is about 16W.
Ethernet optical module sales forecast
Source: "5G Bearer and Data Center Optical Module White Paper", Shenhua Research Institute
In terms of listed companies, Zhongji Xuchuang launched the first 800G pluggable OSFP and QSFP-DD series optical modules in December 2020, and passed customer certification in October 2022.
Domestic enterprise 800G optical module layout
Data source: company official website, company announcement, Shenhua Research Institute
(3) Silicon photonics integration is an important evolution direction for optical modules in the future
Silicon photonics integration has significant advantages in peak speed, energy consumption, and cost. Silicon photonics technology is a next-generation technology based on silicon and silicon-based substrate materials that utilizes existing CMOS engineers for the development and integration of optical devices. Brick optical solutions have high integration, and have good performance in peak speed, energy consumption, cost, etc., so it is one of the important development directions of optical modules in the future.
Schematic diagram of silicon photostructure
Data source: Zhongji Xuchuang announcement, Shenhua Research Institute
The proportion of silicon photonics is expected to increase significantly. In ultra-400G short-range scenarios and coherent optical scenarios, the low-cost advantage of silicon optoelectronic modules may make them the mainstream products for data center network upgrades to 400G. According to Lightcounting's forecast, the global silicon photonics module market will reach nearly $8 billion by 2026, which is expected to account for half of the market share.
Historical sales and forecasts of silicon photonics
Source: Lightcounting, Shenhua Research Institute
In 2019, domestic companies began to lay out silicon photonics technology, the earliest was Cambridge Technology released the first 200G FR4 module based on analog CDR, and then Hengtong Optoelectronics, Xinyisheng, Zhongji Xuchuang and other companies launched products at different times, but overall there was no mass production.
Domestic enterprises actively deploy silicon photonics technology
Source: Zheshang Securities, Shenhua Research Institute
(4) Ultimate form: CPO
Traditional optical communication usually connects different devices through optical fibers, while optical modules and electronic chips are packaged in different packages, and when the photoelectric conversion is completed, the electrical signal has to go through a distance to be transmitted to the ASIC chip of the switch. This separation results in significantly increased signal transmission latency and power consumption at single-lane rates of 200G or higher. In order to solve this problem, it is necessary to bring the photoelectric conversion module closer to the ASIC chip, NPO is a near-package optical technology, that is, the optical module and the switch chip are on the same PCB substrate, but this way to improve efficiency is not enough.
The ultimate form is Co-packaged Optics (CPO) technology, which directly packages the photoelectric conversion module and ASIC chip together to form a large chip to achieve the tight integration of high-speed optical communication and high-performance electronic processing, so that the problem of electrical signal transmission distance is perfectly solved. In the CPO form, the traditional optical module actually no longer exists. In that big chip, only the photoelectric conversion part in the optical module is retained, so the industry calls the photoelectric part in the CPO "light engine".
Optical module technology upgrade diagram
Source: Co-packaged datacenter optics opportunities and challenges
LightCounting believes that the biggest application scenario of CPO technology is the CPU, GPU and TPU markets in the HPC and A fields. By 2026, HPC and A are expected to be the largest markets for CPO optical components. CPO shipments are expected to start with 800G and 1.6T ports, start commercial use in 2024-2025, and scale up from 2026 to 2027, accounting for 30% in 2027.
CPO shipment forecast
Source: Lightcounting, Shenhua Research Institute
Domestic manufacturers in the layout of CPO technology enterprises are basically consistent with the layout of silicon photonics technology, of which Robotec has shipped CPO equipment, Borche Technology in 2023 to promote the trial production and mass production of Datacom 800G silicon photoelectric modules, CPO products and new DWDM devices.
Domestic manufacturer CPO layout
Source: Company websites, Shenhua Research Institute
3. Major listed enterprises
The development technology of domestic optical module enterprises is not small with foreign countries, such as the optical chip field of core core devices, basically 2 generations behind, and the low-end is accelerating the realization of domestic substitution, but the penetration rate of high-end products is very low. With the wave of AI, the development of optical modules has accelerated significantly, and domestic data centers are expected to achieve 400G large-scale deployment in 2022, but for higher speed 800+ G optical modules, only Zhongji Xuchuang has been launched, and it will pass customer certification by the end of 2022. Silicon photonics integration technology route is an important evolution direction of optical modules in the future, in 2019 began domestic enterprises began to layout, Cambridge Technology, Hengtong Optoelectronics, Xinyisheng, Zhongji Xuchuang and other enterprises have launched products, but there is no mass production. CPO is the ultimate form of optical modules, many companies have laid out, Borche Technology will promote CPO products in 2023, but most companies are still in the research stage, mature and large-scale application will take time.
3.1 Zhongji Xuchuang: Optical module leader, AI revolution opens up growth space
The company is the world's leading supplier of optical modules for data centers, mainly committed to the research and development, design, packaging, testing and sales of high-end optical communication transceiver modules, and its products serve domestic and foreign customers in the fields of cloud computing data center, data communication, 5G wireless network, telecommunication transmission and fixed network access. According to the report of LightCounting, a market authority, in 2017 and 2018, Innolux ranked second in the global optical module market share for two consecutive years; And it is predicted that it is expected to rank first in the global optical module market share in 2020.
Company product product matrix
Source: Company announcement, Shenhua Research Institute
The company began to lay out optical modules in 2019, leading 400G/800G optical module production capacity and overseas production capacity coordination, all ahead of Xinyisheng and Cambridge Technology.
Zhongji Xuchuang optical module production capacity layout is leading
Source: Company announcement, Shenhua Research Institute
In 2022, the company will achieve an operating income of 9.642 billion yuan (YoY+25.29%) and a net profit attributable to the parent of 1.224 billion yuan (YoY+39.57%); In the first quarter of 2023, it achieved revenue of 1.837 billion yuan (YoY-12.04%) and net profit attributable to the parent of 250 million yuan (YoY+14.95%). The company's high revenue and profit increase in 2022 was mainly caused by the large-scale shipment of high gross profit 400G, 200G and other products, and the profit growth in 2023Q1 was mainly due to the change of product structure, the year-on-year growth of the USD/RMB exchange rate, and the continuous cost reduction of the company's products, which brought about a year-on-year increase in gross profit margin and an increase in net profit.
Operating income and growth rate
Source: Wind, Shenhua Research Institute
Net profit attributable to the parent and growth rate
Source: Wind, Shenhua Research Institute
3.2 Optical Speed: the largest manufacturer of optical communication devices in China
The company is the largest supplier of optical communication devices in China, and is currently the only high-tech enterprise in China that has the ability to conduct systematic and strategic research and development of optoelectronic devices, and is one of the most influential entities in China's optoelectronic device industry. ZTE, Huawei Technologies, and Fiberhome domestic communication system equipment manufacturers have become stable customers of the company.
The company's main products
Data source: company official website, Shenhua Research Institute
In 2022, the operating income will be 6.912 billion yuan, a year-on-year increase of 6.56%, the net profit attributable to the parent will be 608 million yuan, a year-on-year increase of 7.25%, and the net profit attributable to the parent after deduction will be 546 million yuan, a year-on-year increase of 16.16%. From the perspective of the single quarter of 23Q1, the operating income was 1.268 billion yuan, down 25.92% year-on-year, and the net profit attributable to the parent was 102 million yuan, down 28.62% year-on-year. The market demand for fixed network access & digital communication contributed to the steady growth of performance in 2022, but in 23Q1, the company's performance was under short-term pressure due to factors such as the traditional off-season of the industry and downstream demand fluctuations in the first quarter. At present, the company's digital communication optical module product matrix is rich, in addition to medium and low-speed products, it also includes 200G, 400G, 800G and other high-speed optical module products, and future growth can be expected.
Operating income and its growth rate
Source: Wind, Shenhua Research Institute
Net profit attributable to the parent and its growth rate
Source: Wind, Shenhua Research Institute
3.3 Yuanjie Technology: domestic optical chip leader, product upgrading opens up growth space
The company focuses on the optical chip industry, the main business is the research and development, design, production and sales of optical chips, the main products include 2.5G, 10G and 25G and higher rate laser chip series products, which are currently mainly used in optical fiber access, 4G/5G mobile communication networks and data centers.
Genealogy of the company's product range
Source: Yuanjie Technology Prospectus, Shenhua Research Institute
In 2022, the company achieved operating income of 283 million yuan, a year-on-year increase of 21.89%, and a net profit attributable to the parent of 100 million yuan, a year-on-year increase of 5.28%. In terms of revenue structure, the company's telecom market achieved operating income of 237 million yuan, a year-on-year increase of 19.26%, mainly due to the continuous increase in investment in 10GPON network construction by telecom operators at home and abroad. The company's revenue from the digital communication market and others was 45 million yuan, an increase of 33.69% year-on-year, mainly due to the company's 25GDFB laser chip batch shipment. In 2023Q1, the company achieved operating income of 35 million yuan, down 40.6% year-on-year, and net profit attributable to the parent of 12 million yuan, down 49.68% year-on-year, mainly due to poor market demand for optical fiber access and data center optical chips in the first quarter.
Operating income and its growth rate
Source: Wind, Shenhua Research Institute
Net profit attributable to the parent and its growth rate
Source: Wind, Shenhua Research Institute
IV. Summary
Optical Module is the upstream core link of the optical communication industry chain, composed of optoelectronic devices, functional circuits and optical interfaces, etc., the main function is to realize the mutual conversion of photoelectric signals. Its application scenarios are mainly in data centers, wireless backhaul, and telecom transmission. With the birth of ChatGPT, AI model parameters have been improved hundredfold, and computing power and data demand have ushered in explosive growth, bringing tens of millions of incremental increments to the demand for optical modules.
It is time for the domestic replacement of optical chips. The optical chip is the core device of the optical module, accounting for about 26% of the total cost of the optical module, and the added value is very elastic. Compared with foreign countries, the technical gap in the field of optical chips is not small, basically 2 generations worse, the middle and low end is accelerating the realization of domestic substitution, and the penetration rate of high-end products is very low, such as the core technology below 2.5G has been basically mastered, but the localization rate of chips such as 10GVCSEL/EML does not exceed 40%, the domestic replacement rate of 25G is about 20%, and the localization rate of optical chips above 25G is only about 5%, and domestic substitution has a long way to go.
Optical modules have broad space for development. According to Lightcounting's forecast, the global optical module market size will reach 17.6 billion US dollars in 2026, with a CAGR of 13.85% from 2021 to 2026. At present, the future evolution direction mainly includes: 1) higher speed 800+ G optical module, 2) silicon photonics integration, 3) ultimate form CPO.
At present, under the wave of AI, domestic enterprises have laid out cutting-edge optical module technology. Domestic data centers have achieved 400G large-scale deployment in 2022, but for higher speed 800+ G optical modules, only Zhongji Xuchuang is currently leading the launch. Silicon photonics integration technology route is an important evolution direction of optical modules in the future, CPO is the ultimate form of optical modules, at present, Cambridge Technology, Hengtong Optoelectronics, Xinyisheng, Zhongji Xuchuang and other enterprises have launched products, especially the CPO base, most enterprises are still in the research stage, mature and large-scale application still takes time.
In short, the birth of ChatGPT, the wave of AI has become unstoppable, with the rapid rise of the amount of data on the inference side of large models at home and abroad, the demand for optical module computing power will rise sharply, and the medium and long term will definitely drive the optical module industry to set sail. However, in the trend of technological development, silicon photonics integration, CPO are in the research layout stage, the overall failure to achieve mass production, the current A-share market is more concept speculation, in the medium and long term can pay attention to the optical module leader Zhongji Xuchuang (300308), the largest domestic optical communication device manufacturer Guangxun Technology (002281), the domestic optical chip leader Yuanjie Technology (688498).
Disclaimer:
This report is based on publicly available materials or information, but the Institute does not guarantee the completeness or accuracy of such materials and information. Under no circumstances shall the information or opinions expressed in this report constitute investment advice to any person and the Institute shall not be liable to any person for any loss arising from the use of any content in this report.
Shenhua Research Institute has the sole right to modify and finally interpret the terms of this statement.