Nomura initiates coverage of Yuanjie Semiconductor Technology with a Neutral rating, viewing it as having the potential to become a global optical chip leader but considering its valuation high

Overview

This report represents Nomura's initiation of coverage on Yuanjie Semiconductor Technology. Its core view is that the company has become one of China's leading optical communication laser chip suppliers and has gained greater exposure to AI data centers and margin expansion by entering the supply chains of leading global optical module manufacturers. The report also emphasizes that, although the long-term outlook for optical communications and the company's share-gain thesis are strong, the current share price already reflects high growth expectations; therefore, it assigns a Neutral rating.

Core views

The report's core views include: first, technology upgrades by AI customers will support demand for high-end CW/EML lasers over the next 3-5 years; second, 1.6T optical modules are the most important short-term driver in 2026-27F, while 2.4T/3.2T and NPO/CPO are longer-term drivers; third, supported by its IDM model, epitaxy and process capabilities, the company has opportunities to gain share amid tight supply of high-end CW/EML laser chips; fourth, valuation is elevated, with the CNY1,655 target price based on 65x FY28F EPS, slightly below the current price.

Analysis framework

The report analyzes industry TAM, optical module speed upgrade roadmaps, upstream InP/epitaxy/equipment supply conditions, the company's product validation and capacity expansion plans, peer valuation comparisons, and EPS forecasts. Valuation is based on FY28F EPS multiplied by the median P/E of China's A-share optical laser sector.

Methodology notes

• Valuation methodsP/E multiple valuation

  65x FY28F EPS

  The CNY1,655 target price is based on FY28F EPS of CNY25.47 and a 65x P/E multiple, benchmarked against the median P/E of China's A-share optical laser sector.

• Industry analysisTechnology roadmap and TAM analysis

  1.6T / 2.4T / 3.2T, NPO, CPO, SiPh, TFLN

  The report assesses the demand cadence for high-power CW/EML laser chips through optical module speed upgrades, silicon photonics solutions, and advanced packaging-based optical interconnect trends.

• Competitive analysisSupply chain and IDM model assessment

  IDM and supply chain bottlenecks

  The report evaluates the global division of labor across InP wafers, epitaxy equipment, laser chip manufacturing, and silicon photonics foundries, concluding that the company's in-house epitaxy and manufacturing capabilities are competitive advantages.

Asset mapping & comparison

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

• Yuanjie Semiconductor Technology (688498.SS)

  Core covered company

  Strengths

  One of China's leading optical communication laser chip suppliers, with an IDM model, progress in high-end CW/EML products, and exposure to the AI optical module supply chain.

  Weaknesses

  Valuation is relatively high, and some high-end products remain in the validation or development stage; future results are sensitive to major customers and the pace of industry upgrades.

  Comparison

  Compared with overseas high-end optical chip and InP supply chain manufacturers, the company is in a catch-up and domestic substitution window; compared with downstream Chinese optical module leaders, it is positioned more toward the upstream core chip segment.

  Risks

  Weaker-than-expected optical module demand, slower-than-expected NPO/CPO penetration, supply chain diversification by key customers, geopolitical risks, and supply chain disruptions.

• Sumitomo Electric Industries (5802 JP)

  Peer supply chain reference company

  Strengths

  Has strong share and IDM capabilities in upstream optical communication segments including InP substrates, EML, and CW-LD.

  Weaknesses

  The report does not use it as the primary valuation benchmark for Yuanjie, but rather as a reference for the global supply chain and Japanese experience.

  Comparison

  Represents an overseas high-end optical communication upstream leader and provides a reference for understanding Yuanjie's catch-up opportunity and supply chain bottlenecks.

  Risks

  Optical communication capital expenditure cycles, capacity expansion pace, and changes in global customer demand.

• Mitsubishi Electric (6503 JP)

  Peer supply chain reference company

  Strengths

  One of the leading suppliers of optical communication EML chips.

  Weaknesses

  Compared with Yuanjie, it is more established as an overseas high-end supplier; the report primarily uses it for industry benchmarking.

  Comparison

  Provides a reference for the high-end EML competitive landscape, indicating that Yuanjie still needs customer validation and scaled volume production to enter the high-end EML market.

  Risks

  Changes in technology roadmaps, intensifying competition, and customer certification cycles.

Key data

• RatingNeutralInitiation rating.
• Target priceCNY1,655.00Based on 65x FY28F EPS of CNY25.47.
• Closing priceCNY1,715.04As of 2026-07-07.
• Implied upside-3.5%The target price is below the closing price stated in the report.
• FY26-28F revenue CAGR109%Nomura forecast.
• FY26-28F earnings CAGR114%Nomura forecast.
• Data communication laser chip revenue CAGR119%FY26-28F forecast.
• High-end optical communication chip shipments220mn units in 2025 to 1.28bn units in 2028FEquivalent to approximately 80% CAGR.
• Yuanjie CW laser market share32% in 2028FNomura forecast.
• Global laser chip market sizeUSD2.6bn in 2024 to USD22.9bn in 2030ECIC data cited in the report; CAGR of 44.1%.

Impact & implications

If AI data center optical modules migrate from 800G to 1.6T and higher speeds, demand for the company's high-power CW and high-end EML laser chips could expand rapidly, driving increases in revenue, gross margins, and market share. However, current valuation already largely reflects long-term growth, so the investment implication is more tilted toward waiting for order execution, capacity release, and valuation digestion to create a better risk-reward profile.

Risks

• Optical module market demand is weaker than expected.
• NPO / CPO penetration is slower than expected.
• Supply chain diversification by key customers creates share or pricing pressure.
• Geopolitical risks affect the global optical communication supply chain.
• Supply bottlenecks for high-end InP, epitaxy equipment, and key manufacturing equipment may affect capacity expansion.
• Alternative or complementary technology paths such as MicroLED and TFLN may change the long-term competitive landscape.

What to watch

• Actual shipments and customer order cadence for 1.6T optical modules in 2026-27F.
• Progress toward mass production of 100mW CW lasers and R&D progress on 300mW+ CW lasers.
• Customer validation results for 200G PAM4 EML and the contribution of high-end EML to revenue.
• Visibility into the ramp-up of NPO/CPO demand starting in 2027F.
• Progress on the company's Phase II capacity expansion in Shanxi and construction of its US production base.
• Whether major customers continue to expand procurement or shift toward supply chain diversification.
• Changes in supply and demand and geopolitical policy across InP substrates, epitaxy equipment, and silicon photonics foundries.