Strength is constant!
The recent CES 2025 event showcased a plethora of innovations from NVIDIA, particularly the unveiling of their latest GPU family, the GeForce RTX 50 seriesIn addition, the tech giant has taken the wraps off various advancements related to AI models, autonomous driving technologies, and AI robotics, leaving the audience awestruck.
However, the successful development and deployment of these high-tech products is heavily reliant on the massive training of AI dataAs the amount of training data grows, the role of optical modules—essential components responsible for data transmission—has significantly come to the forefront, enhancing information transfer capabilities across devices.
Market predictions indicate that by the year 2025, the global optical module sector is expected to surpass a staggering $12 billion, driven by a robust growth rate.
This upswing in demand for optical modules has consequently generated a ripple effect, boosting the need for upstream optical components and thus leading to significant gains for manufacturers within this burgeoning industry.
In the first three quarters of 2024 alone, three prominent optical device manufacturers—Tianfu Communication, Taicheng Technology, and Light Library Technology—reported impressive profit growths of 122.4%, 39.1%, and 19.5%, respectively.
The remarkable profit surge of Tianfu Communication stands out among its peers; how has the company managed such extraordinary growth?
Optical components comprise an array of parts, including chips, active optical devices, and passive optical devices, among which there are over 20 distinct subcategoriesSuch complexity necessitates that manufacturers demonstrate adaptability and multifaceted production capabilities to meet their clients’ diversified design and production requirements.
Luckily, Tianfu Communication’s strategic platform-based construction aligns perfectly with this key competitive aspect
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To date, the company has developed an extensive product matrix consisting of 14 primary product lines and 8 major technical platforms, enabling them to provide end-to-end solutions for clients.
In contrast, competitors like Taicheng Technology and Light Library Technology lag significantly behind Tianfu Communication when it comes to the breadth of product offerings, resulting in a natural deficit in their ability to secure large orders.
Furthermore, Tianfu Communication has established a substantial customer base, collaborating with major telecom giants such as ZTE and Huawei, along with leading optical module firms including Zhongji Xuchuang and Huagong Technology.
By the end of the third quarter of 2024, the company's contract liabilities rose to 196 million yuan, which is considerably higher than its competitors.
This extensive product line also facilitates quick iterations and integrated development, allowing the company to avoid starting research and development (R&D) from scratch, thereby enhancing the efficiency of new product creationConsequently, Tianfu Communication has consistently remained at the forefront within the industry regarding both product and technological innovation.
Moreover, the company’s ability to directly leverage existing product lines for secondary manufacturing minimizes R&D costs for new products, which in turn boosts their gross profit marginsBy the end of the third quarter in 2024, Tianfu Communication reported a stunning gross profit margin of 58.2%, while most competitors hovered around 20% to 30%.
It’s noteworthy that Tianfu Communication’s optical components supply platform has become deeply integrated into the supply chains of downstream customers, giving them a significant edge in bargaining power compared to other firms in the same industry.
Consequently, the company’s accounts receivable turnover days averaged just 63.1 days by the end of the third quarter of 2024, a figure that is significantly lower than that of its competitors and continues to shrink.
This decreasing trend in accounts receivable turnover days boosts the company's cash recovery capabilities, thereby accelerating profit turnaround.
Crucially, this transformed profit margin allows for substantial reinvestment in R&D initiatives
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In an industry characterized by rapid technological evolution, rigorous R&D expenditures and fruitful innovation have become the key drivers of competitive advantage for the company.
By the end of the third quarter of 2024, Tianfu Communication invested 170 million yuan in R&D with a spending rate of 7.2%, ranking them among the leaders in their field.
When examining the outcomes of such investments, it is clear that Tianfu Communication’s latest products are positioned at the forefront of industry technologies.
With an incessant rise in computing power demands, the market is witnessing an emergence of increasingly high-speed optical module productsIn the next five years, the 800G and 1.6T optical modules are projected to dominate, with a staggering compound annual growth rate of 60% expected.
In line with this trend, corresponding optical components will also require continuous updates to meet new parameters and standards set forth by these optical modules.
Currently, Tianfu Communication's shipment figures for 400G and 800G optical components are relatively steady, while new products like the 1.6T are still ramping up production, gradually increasing output capacity.
However, a notable challenge existsThe 200G EML chips crucial for the 1.6T optical components are currently in the early supply phaseAchieving stable, mass production of these new chips will take time, and there’s a risk that a “chip shortage” might impact order fulfillment.
Despite these concerns, there is no reason for immediate alarmThe company is simultaneously expanding its influence in other technical fields and products.
1. Lateral Expansion Strengthens Optical Component Capabilities
The previously discussed 800G and 1.6T optical modules focus on enhancing performance through increased speed; however, as speeds escalate, so too do the dimensions and energy consumption of these optical modules
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Addressing these issues will require innovative methods to boost integration levels.
This necessity has birthed the CPO (Co-Packaged Optics) innovation.
In CPO designs, optical engines and switching chips are housed together, shortening the distance between the two and ultimately resulting in reduced power consumption and enhanced transmission efficiency.
It’s evident that the optical engine is integral to CPO systemsAs demand continues to surge, the worldwide optical engine market is predicted to reach $8.8 billion by 2026.
Among domestic optical module manufacturers, Huawei Technology has achieved production of 800G optical engines, while Tianfu Communication has taken the lead by realizing mass production of 1.6T optical engines and associated devices.
Thanks to its capacity for producing 1.6T optical engines, Tianfu Communication has also become a supplier for NVIDIA.
By supplying NVIDIA’s subsidiary, Mellanox, the company has secured a significant role in high-stakes supply chains.
For 2025, NVIDIA anticipates a demand of approximately 5 million units for the 1.6T optical engines, with Mellanox expected to hold half of that shareShould Tianfu Communication capture 70%-80% of that pie, that translates to an estimated 1.7 million units and an anticipated 30% growth over 2024 figures.
2. Vertical Growth Path Creating New Revenue Streams
While deeply rooted in optical communications, the company is also actively venturing into the laser radar product space.
Laser radar serves as the core sensor for L3 and higher levels of autonomous driving and Advanced Driver-Assistance Systems (ADAS), facilitating remote sensing capabilities over both space and time.
With the ever-increasing level of automotive intelligence, projections indicate that the domestic laser radar market will reach $4.31 billion by 2025.
Moreover, the operating principles of laser radar and optical modules share significant similarities, consisting of launch modules, receiving modules, and main control modules, albeit differing in design specifics, parameter requirements, and performance benchmarks.
Thus, venturing into laser radar will not demand substantial new technical investments from the company
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