Structural upcycle in AI optical interconnect, benefiting optical modules and optical chips but with valuation divergence across stocks

Overview

This report discusses the impact of AI infrastructure buildout on China’s communications infrastructure and optical communications industry chain. Citi believes that capex by AI servers, GPU/ASIC clusters, and cloud service providers is driving high-speed optical interconnect into a structural upgrade cycle, with demand extending from traditional communications into data centers, enterprise, and telecom scenarios, among which data communications will become the core incremental source.

Core views

The core view is that the optical interconnect market is upgrading simultaneously in market size, bandwidth specifications, and technology form factors. 800G, 1.6T, and 3.2T optical modules will continue scaling, CPO/NPO will begin generating incremental demand from 2027E, and rapidly rising silicon photonics penetration will drive demand for EML and CW laser chips. At the company level, firms with capabilities in optical chips, optical modules, CPO/NPO, or overseas customer exposure will benefit more; however, risks are rising for stocks with overly high valuations, customer decoupling, or margin pressure.

Analysis framework

The report maps AI accelerator shipment assumptions into an optical interconnect demand model, breaking down shipments, bandwidth specifications, ASPs, and technology routes across data communications, telecom, and enterprise scenarios, and then translates industry demand into earnings forecasts, target prices, and ratings for covered companies. Valuation methods include P/E, SOTP, and valuation ranges based on historical averages and standard deviations.

Methodology notes

• Industry demand modelOptical interconnect shipment and market size model

  Uses assumptions on AI accelerators, bandwidth upgrades, and scale-out and scale-up networks to derive demand for optical modules, optical engines, and optical chips.

  The report uses 800G, 1.6T, 3.2T, and CPO/NPO shipment volumes as core variables to forecast 2028E optical interconnect shipments, market size, and ASP trends.

• Scenario analysisBase case, bull case, and bear case assumptions

  Measures demand elasticity through different assumptions on AI cluster adoption rates, cloud service provider demand, and supply constraints.

  The base case is aligned with the US team’s AI accelerator forecasts, while the bull case reflects stronger CSP demand and the possibility of Nvidia/Google clusters adopting scale-up designs.

• Valuation methodologyP/E and SOTP valuation

  Applies FY27E or FY28E P/E multiples to different companies, and uses sum-of-the-parts valuation for DSBJ.

  DSBJ uses SOTP, assigning different multiples to traditional businesses, optical modules, optical chips, and AI PCB; most other companies use historical mean/standard deviation ranges or peer valuation multiples.

Asset mapping & comparison

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

• Accelink Technologies (002281.SZ)

  Maintained at Sell, target price Rmb137, current price Rmb266.360.

  Strengths

  A leading Chinese optical device supplier with chip-level technology and mass-production capabilities, supported by domestic AI capex and optical module demand.

  Weaknesses

  Domestic optical module ASPs and gross margins are lower, earnings growth lags peers with higher overseas customer exposure, and valuation is already elevated.

  Comparison

  Compared with companies benefiting from overseas customer chains, its margins and quality of growth are weaker.

  Risks

  If domestic carrier, government/enterprise, or data center capex exceeds expectations, or if easing competition improves margins, upside risk could emerge.

• Dongshan Precision / DSBJ (002384.SZ)

  Buy and preferred pick, with target price raised from Rmb225 to Rmb350, current price Rmb257.130.

  Strengths

  Aggressively expanding in optical chips and optical modules, and expected to benefit from penetration into Tier-1 US CSP customers, 100G EML and CW laser capabilities, and AI PCB business.

  Weaknesses

  Some traditional businesses are still affected by consumer electronics, NEV competition, and losses in the optoelectronics business.

  Comparison

  Among covered companies, DSBJ has multiple upside levers across optical chips, modules, and AI PCB.

  Risks

  Slower-than-expected module FPC progress, competition in Tesla business, losses in the optoelectronics business, rising material costs, and China-US geopolitical risk.

• Eoptolink Technology (300502.SZ)

  Buy reiterated, with target price raised from Rmb353.572 to Rmb701, current price Rmb555.300.

  Strengths

  One of the leaders in high-speed optical modules, benefiting from the 800G/1.6T cycle, 3.2T and NPO contributions, with better cost efficiency and gross margins than peers.

  Weaknesses

  Sensitive to key customers and the pace of overseas data center investment, while CPO deployment may also substitute for traditional optical modules.

  Comparison

  Compared with most optical module peers, Eoptolink has stronger cost efficiency and profitability.

  Risks

  Lower-than-expected data center investment, lower-than-expected carrier and government/enterprise optical network capex, price competition, slower-than-expected customer expansion, China-US tech disputes, and faster CPO deployment.

• EverProX Technologies (300548.SZ)

  Maintained at Neutral, with target price raised from Rmb122 to Rmb286, current price Rmb282.230.

  Strengths

  Benefiting from opportunities in data communications products such as MPO and AOC, while the industry remains in a growth phase.

  Weaknesses

  Target price is close to the current price, leaving limited upside and making the investment case less attractive than preferred names.

  Comparison

  Compared with DSBJ, Eoptolink, and Suzhou TFC, the risk-reward is more balanced but lacks obvious valuation upside.

  Risks

  Revenue or earnings growth below expectations, gross margin pressure, and market share expansion falling short of expectations.

• Suzhou TFC Optical Communication (300394.SZ)

  Buy, with target price raised from Rmb318.572 to Rmb419, current price Rmb325.280.

  Strengths

  A beneficiary of CPO, with 2028E net profit forecasts supported by CPO assumptions and scaling 3.2T optical engines.

  Weaknesses

  2026/27E earnings forecasts were lowered due to tight EML supply, competition in some passive components, and product mix changes, with gross margins below previous expectations.

  Comparison

  Well positioned in CPO-related opportunities, but near-term earnings revisions are not as strong as DSBJ and Eoptolink.

  Risks

  CPO shipments below expectations, constrained EML supply, competition leading to lower gross margins, and slower-than-expected scaling of optical engines.

• T&S Communications (300570.SZ)

  Downgraded from Buy to Sell, with target price cut from Rmb156 to Rmb152, current price Rmb271.320.

  Strengths

  May still participate in fiber shuffle box opportunities.

  Weaknesses

  The decoupling trend with Corning led to 2026/27E EPS cuts of 38%/23%, while valuation at about 59x 2027E EPS is high.

  Comparison

  Compared with other AI optics beneficiaries, customer relationship and valuation risks are more prominent.

  Risks

  If revenue growth is faster than expected or market sentiment stays strong, the share price pullback could be delayed; however, the main risks still come from intensifying competition, customer decoupling, and valuation mean reversion.

Key data

• Global optical interconnect market sizeUS$92bn by 2028EEquivalent to a three-year CAGR of 65%, mainly driven by bandwidth upgrades and AI data center demand.
• Optical interconnect shipments300m by 2028E vs 110m in 2025Equivalent to a three-year CAGR of 40%.
• Data communications shipment share89% by 2028EData centers, cloud, and AI migration are making data communications the main source of optical interconnect demand.
• 800G/1.6T shipment growth31% / 215% CAGR in 2025-28ECorresponding to the shipment CAGRs of 800G and 1.6T optical modules, respectively.
• 3.2T optical module shipments4m in 2027E；35m in 2028EStill in the sampling or development stage, but expected to scale rapidly by 2028E.
• CPO/NPO shipments0.4m / 18m / 56m in 2026E/2027E/2028EThe report expects CPO/NPO to begin making a meaningful contribution from 2027E.
• Silicon photonics penetration60% in 2028E vs 29% in 2025Driven by migration to 800G-and-above optical modules, CPO/NPO, and tight EML chip supply.
• Optical chip demand约1705m-1714m in 2028EIncluding about 718m EML and about 987m CW laser chips.

Impact & implications

The investment implication is that the industry profit pool may concentrate in companies with positions in high-speed optical modules, silicon photonics, optical chips, and CPO/NPO. DSBJ benefits from increasing share in optical chips and modules, Eoptolink benefits from 3.2T and NPO opportunities, and Suzhou TFC benefits from CPO-related demand; by contrast, although Accelink and T&S Communications are also in the industry upcycle, valuation, profitability in the domestic market, or customer decoupling risk constrain their ratings.

Risks

• AI data center, cloud service provider, or carrier capex comes in below expectations.
• Adoption of 800G, 1.6T, 3.2T, CPO/NPO, or scale-up networks is slower than expected.
• Tight supply of key components such as EML and CW laser chips limits end shipments.
• Intensifying price competition leads to downward revisions to ASPs, gross margins, and earnings forecasts.
• China-US technology disputes, geopolitics, and customer supply-chain decoupling affect orders and valuations.
• Some stocks already have high valuations, and if earnings delivery falls short of expectations, there is valuation downside risk.

What to watch

• Changes in 2026E-2028E forecasts for AI accelerators, GPU/ASICs, and CSP capex.
• Order, shipment, and ASP trends for 800G, 1.6T, and 3.2T optical modules.
• The adoption pace of Nvidia CPO and Google NPO or other scale-up network solutions.
• Silicon photonics penetration, EML supply, CW laser chip demand, and long-term supply agreements.
• DSBJ optical chip external sales, Eoptolink 3.2T/NPO progress, Suzhou TFC CPO shipments, and changes in the T&S-Corning relationship.
• Industry gross margins, capacity utilization, and price competition.