While performance plummets, stock prices soar—Yunnan Germanium Industry ramps up expansion in the AI computing power era of "hard currency"

With the continued growth in AI computing power demand and the rapid development of optical communication technology, indium phosphide (InP) single crystals, as a key foundational material, are expected to see sustained expansion in market demand, and may even be referred to by the market as the “hard currency” of the AI compute era.

The largest domestic supplier of indium phosphide substrates, Yunnan Aluminum and Germanium Industry (002428.SZ), is stepping up investment in this sub-segment. The company’s latest announcement shows that the second meeting of the ninth session of the board of directors approved the resolution on implementing the “High-Quality Indium Phosphide Single Crystal Wafer Construction Project,” agreeing for its controlling subsidiary, Yunnan Xinyao Semiconductor Materials Co., Ltd. (hereinafter “Yunnan Xinyao”), to carry out this project.

According to the announcement, the project’s total investment is planned to be 189 million yuan. Yunnan Xinyao will lease factory space within its existing plant area, carry out adaptive upgrades to the original production lines, add major process equipment and supporting facilities, and expand a production line capable of producing 300k wafers per year (equivalent to 4 inches, including 6,000 wafers of 6 inches) of high-quality indium phosphide single crystal wafers based on existing capacity. Ultimately, it will reach an annual production capacity of 450k wafers (equivalent to 4 inches) of high-quality indium phosphide single crystal wafers. The construction period is 18 months. The funding sources are self-owned funds and loans from financial institutions.

The announcement states that based on calculations, the project’s internal rate of return is as high as 49.51%, with an investment payback period of 4.48 years (including the construction period). However, the company also cautioned in the announcement that the economic benefit projections are based on current market conditions and do not represent performance commitments; actual results are affected by many factors such as project progress, the macroeconomic environment, and market changes.

Indium phosphide, as a second-generation III-V compound semiconductor material, has become a core material in the fields of optical communications, high-frequency millimeter-wave devices, and optoelectronic integrated circuits due to its unique physical properties. With the global AI computing power demand growing at an exponential rate, the indium phosphide industry is entering an important period of development opportunity.

In its announcement, Yunnan Aluminum and Germanium Industry stated clearly that in recent years, driven by the rapid growth in market demand for optical communications, high-speed optical modules have entered a stage of large-scale deployment. Downstream manufacturers’ demand for indium phosphide single crystal wafers has continued to expand, and they are also putting forward higher requirements for size and quality. The company’s current production capacity can no longer meet market demand.

In March this year, Nvidia invested $2.0 billion each in Coherent and Lumentum, the giants in optical communications, and signed long-term purchase agreements. Behind this is the core goal of locking in production capacity for the most scarce indium phosphide single crystal wafers in the world and high-end optical components.

Of note is that the fabrication technology for indium phosphide has extremely high technical barriers. Crystal growth requires very high process thresholds; even if new entrants purchase equipment, it is still difficult to solve yield and stability issues in the short term, and scaling up the production of large-sized wafers is even more challenging. The global indium phosphide substrate market shows a highly monopolized landscape: three companies—Sumitomo of Japan, AXT of the United States, and JX Metals of Japan—collectively control more than 90% of global production capacity.

With capacity constraints for leading manufacturers and orders already scheduled for after 2026, other-tier manufacturers are seeing a window of opportunity. In a recent investor research activity, Yunnan Aluminum and Germanium Industry mentioned that in terms of indium phosphide wafers, its controlling subsidiary Yunnan Xinyao has already started supplying downstream customers in batches, maintaining long-term good cooperation and interaction with those customers.

In addition, it is worth mentioning that, according to Jifengshan Laboratory, one of Hubei’s top ten laboratories, which publicly announced in August last year, the laboratory achieved an important technical breakthrough in the field of indium phosphide materials. It developed for the first time an epitaxial growth process for a 6-inch indium phosphide (InP) based PIN-structure detector and an epitaxial growth process for FP-structure laser emitters. Key performance indicators reached an internationally leading level, laying the groundwork for scalable manufacturing of 6-inch indium phosphide (InP) optical chips. Jifengshan Laboratory emphasized that the breakthrough in 6-inch indium phosphide processing is expected to drive down the cost of domestic optical chips to 60%-70% of the current mainstream 3-inch process, helping strengthen the competitiveness of domestic optical chip markets.

Jifengshan Laboratory also mentioned at the time that in this technical breakthrough, the key industrialization technologies for the 6-inch high-quality indium phosphide single crystal wafer of its indium phosphide substrate cooperation partner, Yunnan Xinyao, have been achieved, and mass production is imminent.

Yunnan Aluminum and Germanium Industry was founded in 1998. Its predecessor was Yunnan Lincang Xinyuan Germanium Industry Co., Ltd. In 2002, it completed a shareholding system restructuring. Relying on the germanium resources concentrated in Yunnan Lincang, it began with a joint venture between local smelters and a geological brigade. With more than 40 years of accumulated germanium production technology, it gradually developed into a leading enterprise in China’s germanium industry chain with both the largest resource reserves and the top position nationwide in production volume and sales volume. The company listed on the Shenzhen Stock Exchange in 2010. In 2014, it completed the integration of germanium resources in Lincang. In recent years, it has extended into high-end compound semiconductor materials such as gallium arsenide and indium phosphide.

However, Yunnan Aluminum and Germanium Industry is currently under pressure on its performance and is still in the period of painful transformation. According to the company’s earlier performance forecast, in 2025 it showed a typical pattern of “revenue growth without profit growth.” The attributable net profit was only 15 million to 22 million yuan, a year-on-year plunge of 58.57%-71.75%. Non-recurring profit and loss (after excluding non-recurring items) turned from profit to loss. The core reason is that the prices of raw materials such as germanium concentrate and metal indium/gallium rose sharply, leading to unit cost increases for each product line far exceeding the increases in selling prices, resulting in a significant decline in overall gross profit margins. In addition, combined with a surge in R&D investments in new businesses such as indium phosphide and a substantial increase in financial expenses and credit impairment losses, revenue growth was completely absorbed by costs and expenses.

Although in 2025 performance dropped sharply and revenue grew without profit growth, the market continues to bid up the stock driven by long-term logic such as domestic indium phosphide substitution, the outbreak of AI optical communications demand, and the scarcity of germanium resources. On the very day the above announcement was released, on April 3, Yunnan Aluminum and Germanium Industry’s share price surged strongly. During intraday trading it even touched the daily limit up. The highest price reached 52.25 yuan, and the closing price was 51.71 yuan, up 8.86%. The total trading value for the entire day was as high as 300k yuan, with a turnover rate of 16.64%. Since the beginning of this year, the company’s share price has cumulatively risen by more than 60%.

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