BofA Upgrades Zhongji Xuchuang Target Price to RMB 1650, Bullish on 1.6T Optical Module Demand

Overview

Bank of America releases a research report on Zhongji Xuchuang, maintaining the Buy rating and significantly raising the target price from RMB 1100 to RMB 1650. The core logic is that under AI computing power demand, 1.6T optical module demand will remain strong through 2027-2028. Meanwhile, new solutions such as NPO (Near-Packaged Optics) are expected to start contributing significant revenue from 2027 onwards. Analysts raised profit forecasts for 2026-28 by 16-70%, believing the company, as the global leader in optical modules, will fully benefit.

Core views

Demand Side: 1.6T optical module demand trends are robust and expected to persist until 2028. Order backlogs and capacity utilization at upstream suppliers confirm this judgment: Tower Semi secured a $1.3 billion contract for 2027 and larger commitments for 2028; Lumentum's production capacity is fully booked through 2028; the supply-demand gap exceeds 30%. Global 1.6T shipment volumes are estimated at 20 million units in 2026 and 56 million units in 2027. Zhongji Xuchuang's market share is expected to remain above 40%. New Solutions: NPO demand visibility increases in 2027, with expectations that more than one cloud service provider will deploy NPO in their scale-up systems. Based on BofA analysis, every 5 million units of NPO orders could generate over RMB 10 billion in profit for Zhongji Xuchuang (assuming ASP of $1000 and net margin of 30%). Market discussions also cover the 2.4T Coherent-Lite solution, potentially deployed by Google, indicating that high-value coherent optical solutions are expanding from scale-across architectures to scale-up architectures. Zhongji Xuchuang is one of the few Chinese suppliers and, leveraging its deep relationship with Google, is well-positioned to become a key beneficiary. Profit Forecasts: EPS for 2026-28E are projected at RMB 35.30/66.00/93.16, representing increases of 16.2%/44.5%/70.5% versus prior estimates, and outperforming market consensus by 41.7%/67.7%/52.5%. It is projected that 1.6T and NPO will contribute approximately 68% and 14% of revenue in 2027 respectively.

Analysis framework

Bank of America employs a top-down analytical framework: first verifying the 1.6T demand trend via upstream supplier orders and capacity status (Tower Semi contracts, Lumentum capacity fully booked, supply-demand gap); then estimating company revenue based on shipment volume forecasts and market share; subsequently deriving profit forecasts combining ASP and margin assumptions; and finally determining the target price using the P/E valuation method. The report also highlights the upside potential of profit forecasts by comparing BofA estimates with market consensus, and analyzes the correlation between stock price movements, demand expectations, and NPO order discussions.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  P/E Valuation Method

  The report calculates the target price of RMB 1650 by multiplying the expected 2027 P/E multiple (25x) by the expected 2027 EPS (RMB 66). A 25x P/E ratio is slightly below the trading average plus one standard deviation since 2021 (27x), reflecting market concerns regarding CPO technology substitution.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Analysis

  The report verifies demand trends through upstream supplier order backlogs and capacity utilization rates. A supply-demand gap exceeding 30% indicates strong demand, which is a common demand verification method in the optical module industry.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Volume-Price Decomposition Analysis

  The report decomposes revenue growth into two dimensions: shipment volume ('volume') and ASP ('price'). The significantly higher ASP of 1.6T products compared to 800G drives revenue growth through simultaneous volume and price increases.

• Company Fundamentals and Financial FrameworkProfit Quality Analysis

  Profit Forecast vs. Consensus Comparison

  The report compares BofA forecasts with market consensus, showing that profit forecasts for 2026-28E exceed consensus by 42-68%, highlighting the aggressiveness of the analyst's view and potential expectation gaps.

Asset mapping & comparison

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

• Zhongji Xuchuang (300308.SS)

  Key beneficiary, global optical module leader, critical supplier for AI computing infrastructure construction

  Strengths

  Number one global optical module market share, deep cooperation with hyperscalers like Google, leading 1.6T and NPO technologies, comprehensive product portfolio covering data centers, 5G, networking, and FTTH

  Weaknesses

  Risk of CPO technology substitution; intensifying high-end competition may exert pressure on ASPs

  Comparison

  Compared to the US-supplier-dominated coherent optics market, Zhongji Xuchuang is one of the few Chinese suppliers, holding differentiated advantages in Coherent solutions

  Risks

  Slowing AI demand; erosion of ASPs; intensifying competition; accelerated CPO adoption

Key data

• Target PriceRMB 1650Raised from RMB 1100, based on 25x 2027E P/E
• 2026E EPSRMB 35.30Increased 16.2%, 41.7% higher than consensus
• 2027E EPSRMB 66.00Increased 44.5%, 67.7% higher than consensus
• 2028E EPSRMB 93.16Increased 70.5%, 52.5% higher than consensus
• 1.6T Shipment Volume Forecast20 million units in 2026 / 56 million units in 2027Global market forecast
• Market ShareAbove 40%Expected to maintain in 2027
• NPO Revenue ContributionApproximately 14% in 2027Every 5 million unit order can generate over RMB 10 billion in profit
• 1.6T Revenue ContributionApproximately 68% in 2027Core growth driver

Impact & implications

The report concludes that as the global leader in optical modules, Zhongji Xuchuang will fully benefit from the optical module upgrade cycle driven by AI computing infrastructure construction. The ramp-up of 1.6T products will drive high-speed revenue and profit growth from 2026 to 2028, while new solutions like NPO and Coherent-Lite will further expand growth prospects. However, valuation multiples have decreased from 30x to 25x, reflecting market concerns about CPO technology substitution and intensifying competition. The report suggests the market focuses more on profit upside potential, where profit surprises and new technology discussions may drive further stock price appreciation.

Risks

• Slowing AI demand, leading to slower adoption of 400G/800G/1.6T and NPO
• Faster-than-expected erosion of ASPs for high-end products, resulting in weaker margins
• Competitors entering the high-end market faster, causing pressure on market share and ASPs
• CPO technology adoption faster than expected

What to watch

• Sustainability of 1.6T optical module demand through 2027-2028
• Deployment progress of NPO solutions in 2027
• Adoption status of the 2.4T Coherent-Lite solution by Google
• Replacement pace of traditional pluggable optical modules by CPO technology