Guosheng Securities: Revaluation of domestic substitution value of indium phosphide is optimistic about the long-term allocation value of the sector

The Zhitong Finance App learned that Guosheng Securities released a research report saying that it is difficult to prepare large indium phosphide substrates on the supply side and certify customers, making them difficult to release on a large scale in a short period of time. Demand-side optical communication is expected to continue to contribute to the increase, driving a steady increase in demand for indium phosphide in the medium to long term. The bank believes that the indium phosphide shortage pattern is difficult to resolve in the short term, and is optimistic about the long-term allocation value of the indium phosphide sector.

Guosheng Securities's main views are as follows:

Indium phosphide (InP) is the core material for second-generation III-V compound semiconductors

With its characteristics of high saturated electron drift rate and low luminescence transmission loss, indium phosphide forms a unique competitive advantage in photoelectric chip substrate materials. Since then, indium phosphide has been commercialized on optical communication tracks and has become a key preparation raw material for semiconductor lasers and receivers within optical modules. In addition, based on the material characteristics of high frequency, low noise, and high breakdown voltage, along with the increase in the frequency of application of high-voltage high-power devices, indium phosphide was gradually introduced into the production process of radar laser devices and RF devices after 2010.

The preparation of indium phosphide relies on high-purity indium and high-purity phosphorus, and the raw materials are scarce varieties

1) High purity indium: As a typical scattered metal, indium is both scarce and associated. Native indium is produced as a by-product during processing and refining of other metallic minerals. Its supply resources are naturally limited, and supply elasticity is very small. Currently, as the largest resource country for indium, China's export controls are gradually becoming stricter, further limiting the supply of indium. At the same time, the preparation of indium phosphide requires the use of high-purity indium of grade 6N or higher. Currently, only a few companies in the world have large-scale preparation capabilities for high-purity indium. Sumitomo Electric, AXT, and JX Metals, the three leading global indium phosphide substrate manufacturers, generally have no native indium resources and rely on imported crude indium for deep processing, and their desire to expand production is clearly limited by raw materials. 2) High purity red phosphorus: High purity red phosphorus directly determines the crystal quality and dislocation density of indium phosphide substrates. In particular, 7N grade high-purity red phosphorus is the most difficult to prepare as an essential material for 6-inch indium phosphide substrates. According to an official report from the Qingdao Dongjiakou New Material Science and Technology Innovation Center, the global demand for 7N red phosphorus is about 800-1,000 tons, the overseas effective 7N production capacity is 400-450 tons, the domestic effective 7N production capacity is <40 tons, the localization rate is < 5%, and the import dependency exceeds 90%. Overseas quotas for China were tightened in '26. Most domestic enterprises were only able to guarantee supply through Changxie lockup, and some small and medium-sized manufacturers without Changxie were forced to cut production.

Size upgrades are the general trend, and overseas manufacturers have locked in 6 inches

The 6-inch indium phosphide substrate is a high-end core material specially tailored for AI high-speed computing power scenarios. Compared to small to medium sized substrates, 6 inch has the advantages of producing a large number of chips in a single wafer, high consistency, lower cost, and adapting to high-density integrated packages. It is the absolute mainstream demand specification for the current and future AI computing power industry. Leading overseas manufacturers Coherent and Lumentum have fully deployed 6-inch indium phosphide production lines, and demand for 6-inch substrates is expected to grow rapidly. According to Yole data, the share of global demand for 6-inch high-end substrates has exceeded 62% in 2026, and the share will continue to rise to more than 80% in the next three years.

The shortage pattern of indium phosphide is difficult to resolve in the short term

The global shortage of indium phosphide substrates exceeds 2 million pieces. Orders from leading companies have been scheduled to 2028, and long-term agreements lock in production capacity for the next few years. Demand for indium phosphide is expected to continue to grow, as emerging fields such as 6G fronthaul, automotive lidar, and quantum computing are simultaneously entering the market to grab production. On the supply side, indium phosphide has no effective buffer channel: first, the substrate process is highly monopolized. The effective production capacity of the world's high-end 4/6-inch indium phosphide substrates is only 600,000 to 750,000 pieces/year; three overseas manufacturers, AXT, Sumitomo Electric, and JX Metals, account for more than 85% of the market share, and the release period of additional production capacity is 18-36 months; second, the core raw material high-purity indium and high-purity red phosphorus resources are scarce. The number of mass production lines purified to the 7N level is extremely small, and the production capacity expansion cycle exceeds 3 years; third, the overseas delivery cycle for indium phosphide monocrystals is extremely small. Over 12 months, there was a bottleneck in the equipment supply itself.

Risk warning: risk of technology iteration, risk of yield falling short of expectations, risk of customer certification failure, risk of industry supply release exceeding expectations, downstream computing power and capital expenditure falling short of expectations.