AI Drives Fiber Price Surge, But High Expectations Have Been Priced In—Maintaining Neutral Rating for H-Shares

Overview

This report provides an earnings commentary and outlook for Yangtze Optical Fibre and Cable (YOFC). Morgan Stanley points out that, driven by AI data center construction and tight supply, fiber prices have recently surged to a seven-year high. Although short-term fundamentals remain strong, the firm significantly raised its revenue and earnings forecasts for 2026-2027, increasing the H-share target price from HK$47 to HK$230. However, considering that the H-share stock price has already risen about three times since the beginning of the year, the current valuation fully reflects high earnings expectations, and accelerated global capacity expansion could lead to a cyclical reversal and price decline in 2027-2028. Therefore, we maintain a 'Market-Neutral' rating for H-shares. For A-shares, given the AH share premium exceeding 100%, the valuation appears overly high, so we maintain a 'Reduce' rating.

Core views

Demand Side: The AI infrastructure boom is the core driver. Hyperscale AI data centers consume 5-10 times or even more fiber than traditional data centers. According to CRU forecasts, the share of AI-related applications in global fiber demand will rise from 5% in 2024 to 30% in 2027. Additionally, the drone sector, driven by anti-interference requirements, also consumes large amounts of long-distance fiber, though this demand is highly sensitive to geopolitical factors and remains uncertain. Supply Side: Global capacity expansion is accelerating, with overseas manufacturers being more aggressive. Corning signed a $6 billion deal with Meta and is partnering with NVIDIA to expand capacity; Fujikura plans to invest 300 billion yen to triple its current capacity; India's HFCL is also rapidly expanding production. By contrast, Chinese manufacturers have learned from past cycles and remain relatively cautious in capacity expansion, focusing instead on improving yield and utilization rates to increase effective supply. However, if overseas manufacturers seize market share, Chinese firms may be forced to follow suit, intensifying competition. Prices and Earnings: Fiber prices have risen significantly. G.652D fiber prices rose by 75%, G.657A single-mode fiber increased by over 80%, some multimode fiber spot prices doubled, and some single-mode fibers saw increases of 400%-650%. As a result, YOFC’s first-quarter gross margin reached 41.5%, far exceeding the historical range of 19%-31% from 2015-2025. The firm expects the gross margin to further rise to 54%-59% from the second half of 2026 to the first half of 2027, but it may subsequently decline as capacity comes online. Valuation and Expectations: The current H-share stock price implies that the company needs to generate approximately RMB 10 billion in net profit over the next 12 months (i.e., quarterly net profit must reach RMB 2.5 billion, 4-5 times the first-quarter level). Although the firm significantly raised its earnings forecasts (net profit forecast for 2026 up by 343%, for 2027 up by 553%), it believes that such high growth expectations are unlikely to be sustained indefinitely, and historically high margins will inevitably attract increased supply, leading to a cyclical reversal. Therefore, we advise against chasing higher prices, noting that a sharp valuation correction in 2026 is unlikely, but in 2027, as spot prices correct, the stock price may face downward pressure.

Analysis framework

The firm adopts a combined top-down and bottom-up analysis approach. First, by tracking spot fiber prices (such as G.652D, G.657A, etc.), it confirms that the industry is in a strong upward cycle. Second, it dissects the demand structure, distinguishing between contributions from AI data centers (structural growth) and drones (higher uncertainty). Third, it compares capital expenditure plans of major global competitors (Corning, Fujikura, HFCL, etc.) to assess potential supply-side pressures, particularly the impact of aggressive overseas capacity expansion on the long-term competitiveness of Chinese manufacturers. Finally, combining historical valuation ranges (5x-38x Forward P/E) and the Residual Income Model (RIM), it evaluates whether the current stock price has already priced in future growth. The firm particularly emphasizes the 'mean-reversion' logic—that historically high margins are unsustainable and will inevitably lead to increased supply and margin normalization.

Methodology notes

• Valuation MethodRIM Residual Income Model

  Residual Income Model

  The firm uses the RIM model to value YOFC, which calculates intrinsic value based on the present value of the company’s book value and future excess earnings (net profit minus the cost of equity capital). Compared to relying solely on the price-to-earnings ratio, the RIM model better reflects the long-term value creation capability of high-growth, high-ROE companies, especially those in cyclical growth sectors with heavy assets and volatile earnings.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Balance and Cyclical Analysis

  The core logic of the report is built on the supply-demand framework. By analyzing the surge in demand driven by AI (demand side) and global manufacturers’ capacity expansion plans (supply side), it concludes that the industry is currently in a price-increasing cycle caused by supply shortages, but predicts that increased supply will eventually rebalance supply and demand and drive prices down—a typical cyclical industry analysis paradigm.

• Company Fundamentals and Financial Framework

  Implied Earnings Expectations Backward Calculation

  The firm retroactively calculates the market-implied net profit requirement for the next 12 months (approximately RMB 10 billion) based on the current stock price and historical average price-to-earnings ratio (17x Forward P/E), then compares it with the company’s actual first-quarter performance (RMB 495 million) to demonstrate that the current stock price already incorporates extremely high growth expectations and limited upside potential. This is a commonly used method for analyzing market expectation gaps.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Yangtze Optical Fibre and Cable-H (6869.HK)

  Benefiting from fiber price hikes and AI demand, but valuation is already high

  Strengths

  Strong short-term earnings momentum, gross margin hits historic high

  Weaknesses

  Stock price has risen threefold since the beginning of the year, fully reflecting high expectations; facing pressure from global capacity expansion

  Comparison

  More reasonably valued compared to A-shares, but upside potential is limited

  Risks

  Fiber prices fall faster than expected, capacity expansion outpaces expectations

• Yangtze Optical Fibre and Cable-A (601869.SS)

  Also benefiting from industry prosperity, but valuation is too high

  Strengths

  Same fundamental benefits as H-shares

  Weaknesses

  Priced more than 100% above H-shares, poor risk-reward ratio

  Comparison

  Valuation significantly higher than H-shares; analysts prefer H-shares

  Risks

  AH premium converging, market sentiment cooling

• Corning (GLW.N)

  Major overseas competitor, aggressively expanding capacity

  Strengths

  Deeply tied with Meta and NVIDIA, securing large orders and investment support

  Comparison

  More aggressive capacity expansion than Chinese manufacturers, potentially capturing high-end market share

  Risks

  Execution risks, excessive capital expenditure

Key data

• H-share Target PriceHK$230.00Significantly raised from HK$47.00
• A-share Target PriceRmb202.25Significantly raised from Rmb43.93
• 2026 Revenue Forecast Growth+64%Substantially raised from previous forecast
• 2026 Net Profit Forecast Growth+343%Substantially raised from previous forecast
• 2026 Gross Margin Forecast50.9%Raised by 20.4 percentage points from previous forecast
• G.652D Fiber Price Increase+75%Reached a seven-year high in January 2026
• Price Increase for Some Single-Mode Fibers+400%~650%Compared to end-2025 prices
• Q1 2026 Gross Margin41.5%Far above historical averages
• Implied Net Profit for Next 12 Months~Rmb10bnBack-calculated based on 17x Forward P/E

Impact & implications

For the industry, the AI-driven super-cycle does indeed exist, but the high-margin environment will inevitably attract global capacity expansion, especially as overseas giants, leveraging their ties with big tech companies, may secure more favorable positions. For Chinese manufacturers, although they enjoy short-term price surges, they face medium- to long-term risks of intensified competition and margin normalization. For investors, the current stock price has already fully priced in the high earnings for 2026-2027, making chasing higher prices risky. If subsequent quarterly results fail to consistently exceed expectations or spot prices turn downward, the stock price could face downward pressure. A-shares, due to their high premium, offer lower cost-effectiveness compared to H-shares.

Risks

• Fiber and cable prices falling faster than expected
• Irrational industry capacity expansion causing supply-demand imbalance
• Price pressure from major customers (telecom operators) squeezing profit margins
• Drone demand fluctuating sharply due to geopolitical impacts
• AI data center construction slower than expected

What to watch

• Telecom operators’ fiber procurement prices
• Actual demand changes in AI and drone markets
• Utilization rate of domestic fiber preform capacity
• Additional demand from 5G-related applications
• Progress of capacity deployment by major global competitors