Fiber-Optic Stocks Sell Off on Supply Glut Worries
TREE NEWS reports: Hong Kong-listed shares of Yangtze Optical Fibre and Cable (YOFC) tumbled more than 16% on Monday to HK$156.60, extending a roughly 37% decline from their June peak. The selloff swept across the fiber-optic complex after Hengtong Optic-Electric unveiled a private placement plan to raise up to RMB 6.636 billion, with the bulk earmarked for expanding optical preform and specialty fiber capacity.
The capital raise, disclosed on the evening of September 24, includes RMB 758 million for a next-generation fiber R&D and production project and RMB 862 million for a high-end optical materials facility in Inner Mongolia. Combined with earlier expansion announcements from peers and new entrants, the move reignited fears that the industry will face severe overcapacity and peak earnings around 2027.
UBS Pushes Back With Aggressive Upgrade
In a note published the same day, UBS analysts David Chow and Sara Wang maintained a Buy rating on YOFC’s H-shares and raised their target price to HK$330 from HK$290, implying roughly 73% upside from current levels. The bank lifted its 2026–28 net profit forecasts for the H-shares by 116%–158%, projecting RMB 9.1 billion, RMB 15.6 billion and RMB 19.1 billion respectively.
UBS argues that the market is significantly overestimating the overcapacity risk. For incumbent fiber makers, new capacity takes at least two to three years to become effective supply due to bottlenecks in critical production equipment. For newcomers, the cycle likely exceeds three years, and actual volumes will fall well short of announced plans given steep process-knowledge barriers.
Demand Mix Is Shifting Toward AI Infrastructure
The more important story, is a structural shift in demand drivers—from domestic telecom carrier budgets to global AI infrastructure buildout. High-spec fibers such as G.657.A1/A2 used in AI data centers carry far higher production barriers than the G.652.D standard fiber that dominated the last cycle, and AI customers will favor suppliers with proven delivery records.
Meanwhile, Chinese carriers are tilting capex toward higher-return computing networks and AI infrastructure, reducing their incentive to suppress fiber prices. UBS expects tight supply-demand for high-end fiber to persist at least through 2027–28, with prices continuing to rise, albeit more slowly than in the first half of 2026.
Margin Expansion and Valuation Gap
UBS assumes YOFC will allocate over 50% of capacity—roughly 4,500 tonnes—to G.657.A1/A2 fiber, priced at RMB 130–150 per core-km, about double standard fiber, while unit production costs stay stable at RMB 15–20. Under this scenario, gross margins could hold above 70%, with net margins reaching 37.3%, 46.0% and 44.1% in 2026–28. Revenue is forecast to grow 70.8% to RMB 24.3 billion in 2026 and a further 39.4% to RMB 33.9 billion in 2027.
The bank highlights three competitive advantages: world-leading preform technology (YOFC is one of the few firms mastering PCVD, VAD and OVD processes), full value-chain coverage that captures downstream connectivity profits, and an unusually deep H-share discount of 57% versus its A-shares—far wider than the roughly 23% discount seen among copper-interconnect peers.
Key Takeaways for Investors
- Near-term volatility is supply-driven, not demand-driven. The selloff reflects fear of future capacity announcements rather than any deterioration in current AI fiber demand.
- Valuation disconnect. YOFC’s H-shares trade at just 8–9x 2027 expected earnings, versus 12–36x for Chinese and global peers, suggesting the market is pricing in a cyclical bust that UBS does not foresee.
- Watch preform equipment lead times. The pace at which announced capacity actually comes online is the single most important variable for the bull case.
- Scenario range is wide. UBS’s bull case targets HK$500 (20x 2027 P/E), while its bear case sits at HK$100 (8x), underscoring how sensitive the stock is to fiber pricing assumptions.
