Jefferies downgraded YOFC to HOLD, believing that China’s supply expansion will quickly eliminate the optical fiber shortage

Overview

This report focuses on YOFC’s optical fiber cycle opportunity and valuation risks driven by AI data center demand. Jefferies believes that the short-term optical fiber shortage will lift ASP, gross margin, and EPS, but capacity expansion in China and globally will rapidly close the supply gap in 2027-2028, making 2026/27 earnings potential cyclical peaks; it therefore downgraded the rating to HOLD.

Core views

The core view is that “the earnings peak is approaching, but valuation upside is limited.” AI data centers and military conflicts are generating incremental optical fiber demand, while supply shortages in the US may force some buyers to turn to Chinese suppliers. As the world’s largest optical fiber manufacturer, YOFC will benefit from rising prices and gross margins. However, optical fiber remains largely a commodity, the industry’s capacity expansion cycle is relatively short, and announced plans are sufficient to materially increase supply, creating downside pressure on prices once the shortage is eliminated.

Analysis framework

The report applies a demand breakdown, capacity expansion tracking, ASP and gross margin forecasts, EPS sensitivity analysis, and an SOTP valuation framework. On the demand side, it focuses on AI data centers, traditional telecommunications, and military-conflict-related demand. On the supply side, it estimates global and Chinese capacity growth through 2028 based on announced expansion plans and a 12-18-month construction cycle. For valuation, the optical fiber business is assessed using average P/E and P/B multiples, with the value of EverProX and diversified businesses added.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  The optical fiber business, EverProX, and diversified businesses are valued separately and then aggregated to derive YOFC’s target price of HK$153.74.

• Valuation methodsP/E

  Price-to-earnings valuation

  The optical fiber business valuation references 14.1x 2027E P/E, based on a cyclical peak assumption approximately 2 standard deviations above the long-term average.

• Valuation methodsP/B

  Price-to-book valuation

  The optical fiber business valuation references 3.56x 2028E P/B, close to the level of the 2018 cyclical peak.

• Scenario AnalysisBase/Upside/Downside Case

  12-month risk-reward scenarios

  The report provides base, upside, and downside scenario target prices of HK$153.74, HK$283.32, and HK$55.60, respectively.

Asset mapping & comparison

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

• YOFC (06869.HK)

  Subject company of the report and the world’s largest optical fiber manufacturer

  Strengths

  Benefits from AI data center demand, export sales, rising optical fiber ASP, high operating leverage in preforms plus optical fiber, and diversified businesses such as optical modules and AOCs.

  Weaknesses

  Optical fiber has commodity characteristics, telecommunications capital expenditure provides limited support, the share price has risen substantially, and the company’s lack of announced capacity expansion may create market share risks.

  Comparison

  Compared with some Western optical fiber manufacturers, YOFC has advantages in Chinese supply and scale, but capacity expansion across China’s industry will also weaken the shortage premium.

  Risks

  Industry capacity expansion exceeding expectations, optical fiber prices below expectations, raw material cost volatility, weakening 5G demand, and overseas compliance and supply chain risks.

• Lingyi iTech (Guangdong) Co. (002600.SS)

  Related company and industry event reference mentioned in the report

  Strengths

  Entered preform plus optical fiber capacity through the acquisition of Futong and may participate in industry supply expansion.

  Weaknesses

  Futong is a financially stressed asset, and integration effectiveness is uncertain.

  Comparison

  Its acquisition reflects the attraction of capital to a favorable industry cycle, contrasting with YOFC’s decision not to proactively expand capacity.

  Risks

  Expansion may intensify industry supply pressure, potentially lowering YOFC’s and the industry’s ASP.

Key data

• Current priceHK$142.00Based on the previous trading day’s closing price.
• Target priceHK$153.74Based on SOTP valuation, implying approximately +8% upside.
• Upside scenario target priceHK$283.32Implying approximately +100% upside.
• Downside scenario target priceHK$55.60Implying approximately -61% downside.
• 2026E EPSRmb11.44The report expects approximately 10x YoY growth; significantly raised from the previous estimate of 1.22.
• 2026E optical fiber ASPRmb146/fkmExpected to rise 203% YoY, approximately 18% above the previous peak before 2018.
• Preform plus optical fiber gross margin2025E 48% to 2026E 86%Driven by a substantial ASP increase and broadly stable unit costs.
• Global capacity expansionIncrease by 69% by 2028China’s capacity is expected to double, potentially eliminating the shortage.
• YOFC global capacity share17%The report identifies YOFC as the world’s largest optical fiber manufacturer.
• Global supply-demand coverage2027E 87% / 2028E 85%Improved supply indicates that ASP may peak in 2026.

Impact & implications

For investors, YOFC has strong short-term earnings elasticity, but its share price has risen approximately 14x over the past 12 months, suggesting that the market may have already priced in the benefits of the AI optical fiber shortage. If Chinese supply is released as expected, pricing power and gross margin may decline after 2027. Valuation should focus more on the sustainability of the cyclical peak than on a single-year EPS surge.

Risks

• Industry capacity expansion in 2026-2028 exceeds expectations, causing optical fiber ASP to decline earlier or more sharply.
• Bidding prices from Chinese telecommunications operators are below expectations, weakening the price increase thesis.
• The peak of 5G construction has passed, and future 6G may reuse existing optical fiber networks, limiting incremental traditional telecommunications demand.
• Significant volatility in raw material costs due to oil prices and inflation compresses profitability.
• If YOFC maintains its decision not to expand capacity, it may lose market share during the favorable industry cycle.
• Uncertainty exists around overseas sales and global supply chain compliance.

What to watch

• China Mobile optical fiber bidding results and price levels.
• Whether domestic CSP optical fiber bidding is finalized at viable prices.
• Announcements and commissioning progress for new optical fiber preform and optical fiber capacity globally and in China.
• Whether AI data center optical fiber demand growth remains above expectations.
• YOFC’s export revenue share and progress in overseas customer validation.
• Whether preform plus optical fiber gross margin approaches the report’s forecast in 2026-2027.