AI computing power, combined with telecom network expansion and emerging applications like automotive LiDAR, is propelling the global indium phosphide (InP) industry chain into a high-growth cycle. China holds a dominant global position in high-purity indium, and the domestic high-purity red phosphorus industry is accelerating its import substitution process. To meet surging AI demand, global InP manufacturers are embarking on a wave of capacity expansion. The industry chain is experiencing both an explosion in demand and a reshaping of supply, with companies controlling upstream scarce resources and possessing mass-production capabilities for large-diameter substrates set to benefit long-term from the sector's robust growth. The firm recommends Hubei Xingfa Chemicals Group Co.,Ltd. (600141.SH), a core player in the phosphorus chemical sector with resource advantages and a strong industry chain position.
AI Computing Drives Demand Surge, InP Enters High-Growth Phase
Indium phosphide (InP), a III-V compound semiconductor with direct bandgap and high electron mobility, perfectly matches the low-loss window for fiber optic communications, making it an irreplaceable core substrate material for high-speed optical chips. Currently, driven by the expansion of AI computing clusters and upgrades to optical interconnects in data centers, the widespread adoption of 800G optical modules and accelerated deployment of 1.6T modules are triggering a surge in demand for InP substrate materials. According to Lumentum forecasts, AI-driven InP optical channel shipments are expected to grow at a compound annual growth rate (CAGR) of 85%. Coupled with telecom network expansion and emerging applications like automotive LiDAR, the global InP industry chain is entering a period of high prosperity.
Upstream Core Raw Materials Face High Technical Barriers and Supply Constraints
High-purity indium, a scarce strategic metal, is dominated globally by China, which accounts for nearly 70% of production. Driven by AI demand, domestic refined indium prices have risen approximately 180% cumulatively from early 2024 to July 2026. Electronic-grade high-purity red phosphorus (6N-7N grade), another core phosphorus source, has long been monopolized by a few companies like Japan's NCI. In 2026, Japanese companies tightening quotas to China created risks of periodic supply disruptions. The domestic high-purity red phosphorus industry is accelerating its breakthrough. Tuocai Technology has achieved mass production of 30 tons of 7N-grade product, while companies like Weidun Jinglin, Guangdong Xiandao, and Hubei Xingfa Chemicals Group Co.,Ltd. have also made breakthroughs in 6N/7N-grade production lines and technology, significantly speeding up the import substitution process.
Midstream Substrate Segment Shows Oligopolistic Structure, Overseas Giants Control Core Capacity
In response to the surge in AI demand, global InP manufacturers are intensifying capacity expansion: Sumitomo Electric has committed an additional ¥18 billion in investment, planning to increase capacity to 3.1 times its FY2024 level by FY2028; AXT is expanding capacity at its Beijing plant through equity financing via common stock issuance (raising approximately $630 million) and long-term agreement prepayments; JX Metals plans to invest up to ¥120 billion, aiming to increase capacity by 7 to 10 times. Domestic producer Yunnan Chihong Zinc & Germanium has also invested 189 million yuan to expand total InP substrate capacity from 150,000 pieces per year to 450,000 pieces per year (converted to 4-inch equivalents).
Supply-Demand Imbalance Hard to Resolve Short-Term, Upstream Resource Holders and Substrate Leaders Benefit Long-Term
Despite global giants ramping up investments, constrained by high crystal growth process barriers and lengthy customer qualification cycles, the supply-demand imbalance for InP substrates is difficult to alleviate in the short term. According to QYResearch forecasts, the global InP wafer market size will grow from $204 million in 2025 to $488 million in 2032 (CAGR of 13.5%). With alternative technologies like silicon photonics and thin-film lithium niobate unable to challenge InP's intrinsic advantages in the short to medium term, the InP industry chain is witnessing both demand explosion and supply restructuring. Companies with upstream scarce resources and mass-production capabilities for large-size substrates will benefit long-term from the industry's high prosperity.
Investment Recommendation
The firm recommends Hubei Xingfa Chemicals Group Co.,Ltd. as a core investment target in the phosphorus chemical sector, citing its resource advantages and strong industry chain position. The company is a leader in fine phosphorus chemicals, with synergistic operations across phosphorus, silicon, and fluorine chains. Its glyphosate and organic silicon businesses provide a solid foundation, while microelectronics and new energy materials contribute incremental growth. Leveraging its existing technical and industrial chain advantages in electronic-grade yellow phosphorus and electronic-grade phosphine, the company is actively advancing R&D for electronic-grade red phosphorus production technology. Success in this endeavor would achieve domestic substitution for this key InP raw material.
Risk Factors
Risks include fluctuations in downstream demand, raw material supply and price volatility, intensifying market competition, geopolitical and trade frictions, technical barriers and yield rates, and risks related to R&D investment and talent attrition.