CITIC Securities: Alibaba and Tencent Bet on NPO, Focus on Scaling Up Network Development Opportunities

CITIC Securities Research Report points out that the current AI computing power network is experiencing a critical transition toward all-optical interconnection. NPO technology, with its excellent balance in signal integrity, power consumption, and maintainability, has become an ideal compromise solution to break through physical bandwidth bottlenecks. Tech giants represented by Alibaba and Tencent are accelerating the implementation and standardization of NPO architecture, marking that this technology has entered the stage of large-scale commercial use. This underlying hardware revolution is driving a profound restructuring of the optical communication industry chain, prompting manufacturers to shift from single-module assembly to high-value-added segments such as silicon photonics integration. Leading domestic optical modules are expected to benefit deeply from upgrades to core computing power infrastructure, experiencing dual growth in performance and valuation, with significant long-term investment value. We maintain a “Better than the Market” rating for the communications industry.

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Communications | Alibaba and Tencent Bet on NPO, Focusing on Scale-up Network Development Opportunities

The current AI computing power network is undergoing a critical transition toward all-optical interconnection. NPO technology, with its outstanding balance in signal integrity, power consumption, and maintainability, has become an ideal compromise to overcome physical bandwidth limitations. Major tech giants like Alibaba and Tencent are accelerating the deployment and standardization of NPO architecture, indicating that this technology has entered large-scale commercial application. This fundamental hardware change is profoundly restructuring the optical communication industry chain, pushing manufacturers from simple module assembly to high-value segments such as silicon photonics integration. Leading domestic optical module companies are poised to benefit significantly from upgrades to core computing infrastructure, experiencing both performance and valuation growth, making them highly attractive for long-term investment. We maintain a “Better than the Market” rating for the industry.

▍AI Large Models Drive Scale-up Network Transformation, NPO Technology’s Advantages in Balance Become Evident

Amid the wave of generative AI, large model architectures are gradually evolving from Dense to MoE, posing unprecedented extreme challenges in bandwidth density and communication latency for Scale-up interconnection networks. As underlying SerDes technology advances to 224G and even 448G, traditional copper wires or long-distance PCB traces are approaching physical limits due to signal attenuation. Compared to high-power-consuming traditional pluggable optical modules and the highly maintenance-intensive and difficult-to-manufacture CPO (co-packaged optics) solutions, NPO (Near-Package Optics) demonstrates a strong “greatest common divisor” feature. NPO moves the optical engine onto the same substrate near the switch chip, significantly shortening electrical signal transmission distance and reducing power consumption, while maintaining the independent replaceability of the optical engine, balancing signal integrity and maintainability.

▍Tech Giants Accelerate Entry, Alibaba’s UPN512 Architecture Leads Full Optical Interconnection Deployment

Currently, leading CSP manufacturers are accelerating the deployment of NPO-related solutions. Alibaba officially released the “UPN512 Technology Architecture White Paper,” aiming to build a fully interconnected system of 512 xPUs through single-layer Ethernet optical interconnection, with an expected reduction of over 30% in optical interconnection costs. As the core of the architecture, Alibaba has successfully powered up a 3.2T NPO module supporting silicon photonics and VCSEL technology, with a typical TDECQ of only 1.9dB and power consumption of just 20W. It has been applied in the new generation of domestic four-chip switches. Additionally, Tencent is actively exploring NPO evolution based on silicon photonics and has jointly initiated a standardization project with Alibaba at ODCC. The prototype is expected to achieve system-level activation by Q3 2026, marking a new phase of engineering deployment for full optical interconnection.

▍Transforming into “Optical Interconnection Solution Provider,” Domestic Optical Module Manufacturers Face Historic Opportunities

The accelerated deployment by internet giants like Alibaba and Tencent signifies that NPO technology has officially entered large-scale commercial use, which will profoundly reshape the business models and supply chain landscape of the optical communication industry. NPO requires optical module manufacturers to possess strong silicon photonics integration capabilities, high-precision packaging processes, and deep collaboration with chip manufacturers, pushing companies from “providing modules” to “optical interconnection solutions” with higher technical barriers. Leading domestic companies are seizing this historic opportunity: Zhongji Xuchuang has demonstrated the OpenSocket NPO solution and expects large-scale deployment by 2027; New EasySilk has launched VCSEL-based NPO optical engines to improve space utilization; Huagong Tech’s 3.2T NPO optical engine is also expected to achieve large-scale commercialization by 2026.

▍Risk Factors:

AI investment underperforming; intensified market competition; progress of new products like 1.6T not meeting expectations; technical route risks; geopolitical risks; over-rapid capacity expansion.

▍Investment Strategy:

Against the backdrop of AI large models evolving toward MoE architectures, the extreme demands of computing clusters for Scale-up networks make NPO technology a key breakthrough for full optical interconnection. Currently, tech giants like Alibaba and Tencent are accelerating their bets on this route. This technological evolution is deeply restructuring the industry chain, granting early adopters significant technological premium. With the sustained high prosperity of the AI industry and active promotion of NPO deployment by major players, leading domestic optical communication companies are expected to leverage their deep experience in high-speed interconnection to gain first-mover advantages, achieving both valuation and profitability growth. We maintain a “Better than the Market” rating for the communications industry.

(Source: Cailian Press)