Japanese Wire and Cable Stocks Remain Fundamentally Strong After Pullback; Top Pick is Furukawa Electric

Overview

Morgan Stanley released a research report on the Japanese wire and cable industry, noting that despite increased macro uncertainty and recent pullbacks in AI-related stocks, industry fundamentals remain strong. The report maintains an 'Attractive' rating for the industry, with core logic based on accelerating investment by hyperscale cloud providers in AI data centers. In terms of stock selection, the report favors Furukawa Electric (Overweight) due to its strongest earnings growth momentum; it maintains Equal-weight ratings for Sumitomo Electric and Fujikura, but adjusted their target prices based on respective capacity release rhythms and expectation gaps.

Core views

Demand Side: AI data center investment is the core driver. The report raised the expected capital expenditure growth rate for 11 global hyperscale cloud providers in 2026 from +63% to +87%, with approximately 75% allocated to AI infrastructure. As generative AI inference demand expands, the importance of distributed AI servers and edge computing facilities increases, driving export growth for products such as high-speed optical connectors. Additionally, next-generation GPUs may adopt CPO (Co-Packaged Optics) technology, which will significantly increase the number of fiber cores and connection points per switch, benefiting related component suppliers. Supply Side and Company Differentiation: The three companies benefit differently in terms of degree and timing. Furukawa Electric is considered the top pick, with its optical solutions and digital infrastructure components businesses transitioning from recovery to accelerated growth; liquid cooling module volume exceeded expectations earlier, with an F3/27-29 operating profit CAGR expected to reach 42.1%. Sumitomo Electric holds vertical integration advantages and remaining preform capacity in optical devices (such as CW-LD); the report upgraded its F3/27-29 earnings forecast, but maintained an EW rating given that market expectations are already well-priced in. Although Fujikura has sustainable profitability, it is constrained by existing capacity and hydrogen supply risks, leading to a short-term slowdown in SWR/WTC optical cable sales growth; the report downgraded its F3/27-29 earnings forecast and target price, awaiting a return to growth after new capacity comes online. Valuation and Market Sentiment: Current stock price corrections are primarily driven by excessive prior gains and weakened expectations for Fed rate cuts, but this enhances valuation attractiveness. The report believes that bullish sentiment could reignite with the release of hyperscaler earnings reports in late July. Supply and demand for optical products remain tight; although price hikes have not yet significantly reflected in margins, confirmation of improvement later would bring additional upside potential.

Analysis framework

The report employs an analytical framework combining 'top-down industry drivers' with 'bottom-up individual stock alpha'. First, it anchors total industry demand by tracking hyperscale cloud provider capital expenditure guidance and assesses structural increments by integrating technological evolution (such as CPO penetration rates). At the individual stock level, it focuses on comparing three dimensions: earnings growth speed, progress of capacity/investment supporting growth, and the gap with market consensus expectations. Regarding valuation, considering the industry is in a period of business structure transformation where traditional PE fails to reflect long-term value, the report uniformly adopts the Residual Income Model (RIM) for pricing to more accurately capture mid-to-long-term enterprise value creation capabilities.

Methodology notes

• Valuation MethodRIM Residual Income Model

  Using the Residual Income Model rather than pure PE as a tool for deriving target prices

  For companies in periods of high capital expenditure and business transformation, current earnings may be distorted by depreciation and amortization. The RIM model better reflects long-term investment value by forecasting future excess returns (the portion of ROE exceeding the cost of equity) and discounting them, avoiding interference from short-term profit fluctuations on valuation.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Transmission chain from hyperscale cloud provider Capex to wire and cable company performance

  The report uses upstream cloud provider capital expenditures as a leading indicator, quantifying their pull effect on midstream optical communication equipment and fiber optic cable demand. This transmission analysis helps investors understand why this sector can maintain high prosperity despite macro uncertainty.

• Competition and Strategy FrameworkMoat / competitive advantage

  Competitive barriers formed by vertical integration and capacity redundancy

  When evaluating Sumitomo Electric, the report particularly emphasizes its vertical integration capabilities on the indium phosphide platform and remaining preform capacity. In a supply-demand imbalance cycle, companies with autonomy over upstream core materials and idle capacity can respond to demand faster, capturing above-industry market share and profit elasticity.

Asset mapping & comparison

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

• Furukawa Electric (5801.T)

  Industry top pick, fastest earnings growth, dual-driven by liquid cooling modules and optical solutions

  Strengths

  F3/27-29 OP CAGR reaches 42.1%; liquid cooling module volume exceeds expectations early; more attractive valuation after correction

  Weaknesses

  Growth may slow if product certification by hyperscalers is delayed

  Comparison

  No capacity bottlenecks compared to Fujikura; higher earnings elasticity compared to Sumitomo Electric

  Risks

  Slowing Capex by hyperscalers; lagging price transmission due to rising raw material costs

• Sumitomo Electric (5802.T)

  Core beneficiary of CPO technology, prominent vertical integration advantage, upgraded earnings forecast

  Strengths

  High market share in CW-LD; remaining preform capacity; infocomm segment profits expected to surpass automotive segment

  Weaknesses

  Limited room for margin improvement in automotive wiring harness business; market expectations are already well-priced

  Comparison

  Higher technical barriers than peers, but short-term stock upside weaker than Furukawa

  Risks

  Worsening Middle East situation affecting automotive business; optical communication demand falling short of expectations

• Fujikura (5803.T)

  Short-term growth slowdown due to capacity constraints, target price lowered, waiting for new capacity release

  Strengths

  Global #1 share in MPO connectors and fusion splicers; high profitability is sustainable

  Weaknesses

  Obvious existing capacity bottlenecks; hydrogen shortage risks affect short-term sales; medium-term plans below market expectations

  Comparison

  Relatively reasonable valuation but lacks short-term catalysts; need to observe execution progress of expansion

  Risks

  Sharp slowdown in data center investment; expansion progress falling short of expectations; significant appreciation of the yen

Key data

• 2026 Hyperscale Cloud Provider Capex Growth Rate+87% YoYPreviously forecast at +63%, upgrade reflects acceleration in AI infrastructure investment
• Furukawa Electric F3/27-29 OP CAGR42.1%Highest among the three companies, mainly driven by optical solutions and liquid cooling modules
• Sumitomo Electric F3/27 OP Forecast445 billion JPYUpgraded from previous forecast, higher than the company's planned 425 billion JPY
• Fujikura F3/27 OP Forecast260 billion JPYDowngraded from previous forecast, affected by an approximate 10% reduction in SWR/WTC sales volume
• Furukawa Electric Target Price Implied P/E34.6x (F3/28e)Derived based on the RIM model, corresponding to a target price of 66,000 JPY

Impact & implications

The report believes that the current stock price correction provides a better entry point for investors, especially for Furukawa Electric, which has the highest certainty of earnings acceleration. For the industry, the introduction of CPO technology will be the next key variable, potentially reshaping the value chain distribution of optical components. Sumitomo Electric is likely to be the largest potential beneficiary due to its technological positioning, but patience is required for performance realization to digest valuations. Fujikura's short-term pressure reminds investors to pay attention to supply chain bottleneck risks, but there remains a re-rating opportunity if its long-term expansion plans land ahead of schedule or price hikes transmit smoothly. Overall, the structural growth logic driven by AI remains unchanged, and we recommend using the pullback to position in quality targets.

Risks

• Hyperscale cloud providers cutting capital expenditures due to power/infrastructure constraints or macroeconomic slowdown
• Shortages of key materials like optical fibers causing industry growth to drop to single digits
• Constraints on GPU and chip supplies delaying data center construction pace
• Middle East geopolitical tensions triggering helium supply risks or crude oil price increases
• Significant appreciation of the yen eroding profits of export-oriented enterprises

What to watch

• Quarterly earnings and capital expenditure guidance from hyperscale cloud providers in late July
• Monthly customs export statistics for optical fibers, cables, and connectors from Japan
• Progress in resolving Fujikura's hydrogen shortage issue and timeline for new capacity commissioning
• Whether NVIDIA's next-generation Rubin GPU officially adopts CPO architecture
• Magnitude of product price hikes across companies and actual improvement in profit margins