YOFC H-shares upgraded to Overweight; Morgan Stanley believes the recent correction is overdone

Overview

This is a rating change report on Yangtze Optical Fibre and Cable JSC Ltd. The core conclusion is that the recent decline in the H-share has been excessive, the AI infrastructure-driven upcycle in optical fiber demand is still continuing, and near-term earnings growth visibility remains high. Morgan Stanley maintains its H-share target price at HK$230.00 and upgrades the rating to Overweight; meanwhile, it maintains Underweight on the A-share, mainly because the A-share valuation is too high.

Core views

The report's core views include: first, after the H-share corrected about 45%-50% from its June peak, the risk-reward has improved significantly; second, the 2Q26 profit alert has increased confidence in the delivery of full-year earnings; third, AI data infrastructure demand remains strong and supply expansion has an execution cycle, so industry earnings momentum over the next 6-12 months is unlikely to change materially; fourth, supply risk has not disappeared, and new optical preform projects by Hoshine Silicon and Han’s Laser indicate that high profit margins may attract new capacity, so the risk of cycle normalization after 2027 or 2028 needs continued monitoring.

Analysis framework

The report draws its conclusions by combining the profit alert, Morgan Stanley model forecasts, market consensus expectations, historical forward P/E ranges, the RIM valuation model, and relative A/H-share valuation. The H-share investment view focuses on post-correction risk-reward, AI demand, and valuation recovery; the A-share view focuses on valuation premium and attractiveness relative to the covered universe.

Methodology notes

• Valuation methodsResidual income model

  Residual Income Model

  The H-share base-case target price is derived from the RIM model, assuming a cost of equity of 11%, risk-free rate of 3%, equity risk premium of 8%, beta of 1.0, mid-term growth rate of 15%, and terminal growth rate of 2%.

• Valuation methodsHistorical forward P/E comparison

  Historical forward P/E range comparison

  Using the 2020-2025 forward P/E range of 5x-38x as a reference, the report notes that the H-share's current forward P/E has fallen from 34x to 20x, placing it slightly above the historical average but below the +1 standard deviation level.

• Earnings forecastMorgan Stanley ModelWare and Refinitiv consensus comparison

  MS forecasts versus consensus comparison

  The report uses Morgan Stanley ModelWare forecasts and Refinitiv Estimates as the source of consensus expectations; Morgan Stanley's 2026 and 2027 forecasts are 10% and 27% above consensus, respectively.

Asset mapping & comparison

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

• 6869.HK

  Primary covered name, H-share

  Strengths

  Valuation is more attractive after the correction, AI demand supports the optical fiber upcycle, the profit alert increases confidence in near-term earnings delivery, and new products such as hollow-core fiber offer re-rating potential.

  Weaknesses

  Valuation remains slightly above the historical average, and high industry profit margins may attract new capacity.

  Comparison

  Compared with the A-share, the H-share trades at a lower valuation, and the report believes the recent correction of more than 45% offers an attractive entry point.

  Risks

  AI infrastructure demand weaker than expected, faster-than-expected expansion of optical fiber capacity, declines in optical fiber and cable prices, and telecom operators squeezing profit margins.

• 601869.SS

  A-share reference for the same company

  Strengths

  Benefits from the same optical fiber upcycle and AI demand, with fundamentals consistent with the H-share.

  Weaknesses

  Valuation is relatively full, and the A/H premium exceeds 100%, which the report believes is difficult to fully justify on fundamentals.

  Comparison

  Less attractive than the H-share, rated Underweight; target price Rmb202.25.

  Risks

  A/H premium compression, earlier-than-expected cycle normalization, margin decline, and irrational industry capacity expansion.

Key data

• H-share rating changeEqual-weight to Overweight6869.HK was upgraded, with the target price maintained at HK$230.00.
• H-share target price and upsideHK$230.00; 49% upsideThe closing price was HK$153.90 as of 2026-07-14.
• 2Q26 profit alertRmb1.9-2.5bnThe company issued a positive profit alert on July 14, supporting the full-year earnings forecast.
• 2026 net profit forecastRmb7.5bnThe report believes the full-year forecast is highly achievable.
• MS versus consensus2026E +10%; 2027E +27%Reflects Morgan Stanley's more optimistic view on near-term earnings momentum.
• H-share valuation pullbackForward P/E from 34x to 20xThe 2020-2025 historical forward P/E range was 5x-38x, with a historical average of about 17x.
• New supply projectsHoshine Silicon 3,200 tons; Han’s Laser 2,000 tonsThese two optical preform projects have increased market concerns over supply risk.
• 1Q26 gross margin and forecast range41.5%; 2026-2028E 47%-57%High gross margins may attract new capacity, creating medium-term supply risk.
• Technological progress1.2Tb/s per wavelength HCF WDM field trialYOFC announced that its hollow-core fiber WDM system achieved ultra-long unrepeatered transmission, and the report believes it is at the forefront of next-generation optical technology.

Impact & implications

For investors, this means the short-term trading focus for the H-share is shifting from concerns over supply risk to earnings delivery and valuation recovery, and strong results over the next few quarters could become a catalyst for re-rating. However, this view depends on continued strength in AI infrastructure demand, capacity expansion not materializing too quickly, and resilient fiber pricing; if demand is weaker than expected or supply expansion materializes earlier than expected, the earnings downcycle could begin as early as 2027 and constrain share price performance.

Risks

• AI infrastructure demand weaker than expected.
• Expansion of new optical preform and optical fiber capacity is faster than expected.
• Further declines in optical fiber and cable prices.
• Telecom operators, as major customers, squeeze profit margins.
• Industry cycle normalization comes earlier, making earnings targets above Rmb10bn difficult to achieve.
• A/H-share premium compresses, especially affecting A-share performance.
• Drone-related demand is uncertain and affected by geopolitical factors.

What to watch

• Whether gross margins continue to improve in 2H26 and 1H27.
• Whether continued earnings improvement in 2H26 can be delivered and become a re-rating catalyst.
• Actual demand from AI data infrastructure for optical fiber, optical cable, and hollow-core fiber products.
• The approval, construction, and ramp-up pace of new optical preform projects such as those of Hoshine Silicon and Han’s Laser.
• Changes in optical fiber tender prices from telecom operators.
• Whether the H-share forward P/E can recover further from around 20x.
• Whether the A/H premium continues to widen or begins to compress.