Surge in AI Capex Benefits Leading Japanese Cable Makers

Overview

This report focuses on the Japanese wire and cable industry. The core view is that despite macroeconomic uncertainties and recent pullbacks in some individual stocks, hyperscalers' investments in AI data centers (DC), driven by generative AI and large language models (LLMs), remain robust. The report forecasts a significant 87% YoY increase in related capital expenditures in 2026, which will bring substantial incremental demand for fiber optic cables, optical connectors, and other high-value-added products. Institutions have revalued the three industry leaders—Furukawa Electric, Sumitomo Electric, and Fujikura—using the Residual Income Model (RIM), adjusted their target prices, and maintained an overall 'Attractive' rating for the sector.

Core views

Demand Side: Explosive Growth in AI Infrastructure Investment The report points out that with the popularization of generative AI and the expansion of inference demands, distributed AI infrastructure (such as regional data centers and edge computing nodes) is becoming increasingly important. To meet low-latency and data localization compliance requirements, demand for high-speed communication infrastructure (including multi-core fiber optic connectors, transceivers, etc.) continues to rise. Morgan Stanley's US Technology team significantly raised its expectation for cloud computing capital expenditure among 11 major cloud vendors in 2026 from +63% to +87%. Approximately 75% of this capital expenditure will be directly invested in AI infrastructure (including data centers, GPU clusters, power facilities, etc.), which will become the core driver of performance for cable companies. Technological Evolution: CPO Increases Optical Component Usage The report focuses on next-generation GPUs (such as NVIDIA's Rubin architecture) which may adopt CPO (Co-Packaged Optics) technology. Compared to traditional pluggable modules, CPO integrates optical elements with semiconductor chips within the same package, enabling lower power consumption, higher bandwidth, and lower latency. In large switch configurations, the application of CPO can double or even multiply port density (e.g., increasing from 64 ports to 128 or 512 ports). This means a significant increase in the number of fiber cores and cable connection points required per unit of switch, thereby substantially increasing the usage of optical components per unit. Institutions believe that Sumitomo Electric, which develops continuous-wave laser diodes (CW-LD) and achieves vertical integrated production on indium phosphide platforms, is expected to be one of the biggest beneficiaries of CPO technology adoption. Individual Stock Analysis and Earnings Forecast Adjustments 1. Furukawa Electric (5801.T, Overweight): Institutions maintain its target price at JPY 66,000. Furukawa Electric is accelerating its transition from a period of profit recovery to rapid growth. Its data communication solutions (optical communication solutions) and functional products (especially liquid cooling modules) are the main profit engines. Institutions forecast its Operating Profit (OP) Compound Annual Growth Rate (CAGR) during FY3/27-FY3/29 to be as high as 42.1%, leading among the three companies. Liquid cooling module sales are expected to surge from JPY 50 billion in FY3/27 to JPY 300 billion in FY3/29. Although its stock price has recently pulled back along with the AI sector, institutions believe its valuation attractiveness has improved. 2. Sumitomo Electric (5802.T, Equal-weight): Institutions significantly raised its target price from JPY 11,000 to JPY 14,500. Sumitomo Electric's growth prospects in the Infocommunications sector are being reassessed, particularly regarding the expansion of fiber optic connectors, cables, and optical devices. Its CW-LD products hold a high market share and benefit from cost advantages through vertical integration. Although its automotive wiring harness business is stable, institutions believe the probability of significant margin improvement has not yet been fully reflected, hence maintaining the 'Equal-weight' rating. OP CAGR for FY3/27-FY3/29 is expected to be 19.5%. 3. Fujikura (5803.T, Equal-weight): Institutions lowered its target price from JPY 5,200 to JPY 4,700. Fujikura holds a globally leading market share in multi-core fiber optic cables and MPO connectors, but it faces obvious capacity bottlenecks. Additionally, institutions have newly incorporated the risk that fiber production may be constrained by hydrogen shortages, expecting FY3/27 SWR/WTC (Spiderweb ribbon/Tube-stranded cables) sales to decrease by approximately 10% compared to previous expectations. Although the company has announced large-scale capacity expansion plans both domestically in Japan and in the US (totaling hundreds of billions of yen), short-term sales growth will slow down before new capacity is fully released. OP CAGR for FY3/27-FY3/29 is expected to be 19.3%. Exchange Rate and Raw Material Risks Depreciation of the Japanese yen is favorable for these three export-oriented enterprises. Institutions estimate that for every 1 yen depreciation of the yen against the US dollar, operating profits for Furukawa Electric, Sumitomo Electric, and Fujikura will increase by approximately JPY 500 million, JPY 1 billion, and JPY 1.7 billion, respectively. However, helium supply risks triggered by tensions in the Middle East (used for preform manufacturing) and delays in passing on soaring raw material costs remain downside risks to monitor.

Analysis framework

The institution's analytical logic follows the path of 'Macro Prosperity Judgment -> Industry Chain Technological Change Breakdown -> Individual Company Competitive Advantage and Capacity Matching Assessment -> Long-term Value Revaluation'. First, by tracking the capital expenditure guidance of upstream hyperscalers, the prosperity of downstream AI data center construction is confirmed, which is the source of the entire industry's Beta. Second, delving into technical details, the report analyzes how new technologies like Co-Packaged Optics (CPO) change physical layer connection structures, thereby quantifying their拉动 (pull) effect on the usage of specific components such as fiber optics and connectors, identifying Alpha opportunities. Finally, combining each company's capacity reserves, ramp-up progress of new products (such as liquid cooling modules, CW-LD), and differences from market consensus, the Residual Income Model (RIM) is used for valuation. The RIM model is considered best suited to capture the long-term intrinsic value of these companies undergoing structural transformation, rather than relying solely on short-term P/E multiples.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Supply and Demand Framework

  The research report judges industry prosperity and corporate profit elasticity by tracking the match between upstream cloud vendor capital expenditure (demand side) and cable enterprise capacity expansion and raw material supply (supply side).

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Volume-Price Decomposition

  When analyzing the impact of CPO technology, the report explicitly pointed out the significant increase in 'unit usage' (Volume) caused by changes in technical architecture. This is a typical volume-price decomposition analysis approach used to predict revenue growth drivers.

• Valuation MethodDCF Cash Flow Discounting

  DCF Cash Flow Discounting / RIM Residual Income Model

  The report explicitly uses the Residual Income Model (RIM) as the pricing basis. RIM is a variant of DCF, focusing on estimating corporate intrinsic value using net assets and excess returns (ROE exceeding the cost of capital), making it particularly suitable for evaluating companies in high-growth or transition periods.

• Competition and Strategy FrameworkMoat / competitive advantage

  Competition and Strategy Framework / Moat

  In individual stock selection, the report emphasized Sumitomo Electric's vertical integration capability and high market share in the CW-LD field, as well as Fujikura's global leading position in the MPO connector field, reflecting the analysis of competitive advantages (moats).

Asset mapping & comparison

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

• Furukawa Electric (5801.T)

  Overweight. Benefits from strong demand for optical communication solutions and liquid cooling modules in AI data centers, with leading profit growth expectations in the industry.

  Strengths

  Explosive growth expected in liquid cooling module sales (reaching JPY 300 billion in FY3/29); excess preform production capacity provides competitive advantage; FY3/27-29 OP CAGR expectation is as high as 42.1%.

  Weaknesses

  Recent stock price pullback along with the AI sector, but institutions believe part of the pessimistic expectation has already been reflected.

  Comparison

  Among the three companies, Furukawa Electric has the highest profit growth expectation and the largest contribution from new products, thus receiving the highest rating.

  Risks

  Growth may slow if product certification by hyperscalers is delayed.

• Sumitomo Electric (5802.T)

  Equal-weight, but target price significantly upgraded. Potential biggest beneficiary of CPO technology, possessing CW-LD vertical integration advantages.

  Strengths

  Vertically integrated production of CW-LD on indium phosphide platform with high market share; rapid expansion of information communications business.

  Weaknesses

  Low probability of significant margin improvement in automotive wiring harness business; market consensus has partially priced in earlier gains.

  Comparison

  Compared to Furukawa Electric, Sumitomo Electric has a larger proportion of automotive business, which drags down overall growth expectations, hence the Equal-weight rating.

  Risks

  Worsening situation in the Middle East may affect raw material supply and production costs for the automotive business.

• Fujikura (5803.T)

  Equal-weight, target price downgraded. Holds globally leading MPO connector share, but short-term constrained by capacity.

  Strengths

  Occupies a leading position in the global MPO connector and fiber optic splicing machine markets; has announced massive capacity expansion plans.

  Weaknesses

  Obvious existing capacity bottlenecks; faces risk of decreased fiber output due to hydrogen shortages; short-term sales growth expectations slowed.

  Comparison

  Compared to the other two, Fujikura's recent earnings guidance was below market expectations, and capacity release takes time, making it relatively less attractive.

  Risks

  If the hydrogen shortage risk persists longer than expected, it will directly impact FY3/27 performance; execution of capacity expansion investment falls short of expectations.

Key data

• Expected Capex Growth Rate for Leading Cloud Vendors in 2026+87% YoYSignificantly revised up from the previous expectation of +63%, indicating extremely strong demand for AI infrastructure.
• Furukawa Electric FY3/27-29 OP CAGR42.1%Highest growth expectation among the three comparable companies, mainly benefiting from volume growth of high-value-added products such as liquid cooling modules.
• Sumitomo Electric FY3/27-29 OP CAGR19.5%Expansion of information communications business offsets the drag from limited margin improvement in automotive business.
• Fujikura FY3/27-29 OP CAGR19.3%Short-term growth expectations are suppressed due to capacity bottlenecks and hydrogen shortage risks.
• Japanese Yen Exchange Rate Sensitivity¥1 Change Corresponds to OP ChangeFurukawa Electric: +JPY 500 million; Sumitomo Electric: +JPY 1 billion; Fujikura: +JPY 1.7 billion.

Impact & implications

For investors, this report reinforces the core position of the Japanese wire and cable sector in the AI infrastructure supply chain. Although short-term market sentiment has experienced pullbacks due to macro interest rate expectations and AI sector volatility, the fundamental logic remains solid. Furukawa Electric is viewed as the preferred target due to its rapid execution on new products (liquid cooling) and the highest profit growth expectations. Sumitomo Electric possesses unique positioning value in CPO technology iteration due to its vertical integration advantages in key optical devices (CW-LD). Although Fujikura benefits from fiber demand in the long term, it needs to overcome capacity constraints and raw material risks in the short term. Investors should closely monitor the improvement in the proportion of AI-related business revenue in subsequent quarterly financial reports, as well as the implementation progress of capacity expansion projects by each company.

Risks

• Slowing capital expenditure by hyperscalers due to power or infrastructure limitations
• Macroeconomic slowdown affecting overall IT spending
• Shortages of key materials such as fiber optics and electricity
• Bottlenecks in GPU and chip supply
• Interruption or soaring costs of raw materials such as helium due to tensions in the Middle East
• Appreciation of the Japanese yen eroding profits of export-oriented enterprises
• Pressure on margins due to lag in product price pass-through

What to watch

• Subsequent quarterly capital expenditure guidance from hyperscalers and the proportion of AI-related investments
• Changes in AI-related business revenue and margins in quarterly financial reports of each company
• Progress in resolving Fujikura's hydrogen shortage issues and actual commissioning times for capacity expansion projects
• Actual adoption progress of CPO technology by mainstream GPU vendors such as NVIDIA
• Monthly export data (especially fiber optic/cable exports to North America and Asia)