On Monday (28 September), optical fibre concept stocks suffered a sharp sell-off, with Yangtze Optical Fibre And Cable Joint Stock Limited Company (SEHK: 6869) leading the decline with a drop exceeding 16%, yet UBS concurrently released a research report maintaining its Buy rating against the trend and substantially raising earnings forecasts, arguing that the market's overcapacity concerns are severely overstated and that AI-driven data centre demand is fundamentally reshaping the supply-demand logic of the optical fibre industry.

As of press time, Yangtze Optical Fibre fell 16.03% to HK$156.6, having accumulated a pullback of 37% from its June high. On the news front, optical fibre leader Hengtong Optic-Electric disclosed a private placement plan to raise no more than RMB 6.636 billion, with optical fibre preform and specialty fibre capacity expansion as the core investment direction, triggering a fresh wave of market concerns about industry oversupply.

However, UBS in its latest research report raised its net profit forecasts for Yangtze Optical Fibre H-shares for 2026-28 by 116%-158%, and lifted its target price from HK$290 to HK$330, implying approximately 73% upside from the current share price.

UBS analysts David Chow and Sara Wang noted that Yangtze Optical Fibre H-shares currently trade at only 8-9x 2027 expected P/E, far below the 12-36x range of Chinese and global peers. Investors' concerns about optical fibre industry overcapacity have been excessively reflected in the share price, while the company's strategic value as a core player in the global AI supply chain is severely undervalued.

Hengtong Placement Triggers Sell-Off, Optical Fibre Sector Under Broad Pressure

The direct trigger for this round of optical fibre stock declines was the private placement plan disclosed by Hengtong Optic-Electric on the evening of 24 September.

Hengtong plans to issue no more than 740 million A-shares, raising a total of no more than RMB 6.636 billion, to be invested in nine projects including optical communications. Among these, the "New Generation Optical Fibre R&D and Production Project" is allocated RMB 758 million, and the "Inner Mongolia Optical High-End Optical New Materials Construction Project" is allocated RMB 862 million, together forming the core of optical fibre preform and specialty fibre capacity expansion.

This news, combined with previously announced capacity expansion plans from peers and new entrants, has intensified market concerns about industry oversupply and peak earnings around 2027.

From a valuation perspective, while China's optical fibre sector has still gained approximately 170% year-to-date, it has retreated 37% from its June high. The 12-month forward consensus P/E has compressed from a peak of 40-50x to approximately 23x (about 0.2 standard deviations above the historical average), while global peers such as Corning and Prysmian remain valued at more than 1 standard deviation above their historical averages.

UBS: Overcapacity Risk Limited, Supply Tightness to Persist Through 2027-28

UBS systematically refuted market concerns about overcapacity in its research report.

UBS believes that capacity from new entrants will come online far later than the market expects. For existing optical fibre manufacturers, new capacity requires at least 2-3 years from investment to effective supply, primarily constrained by bottlenecks in the supply of key production equipment; for new entrants, this cycle could exceed three years, and the actual scale of implementation will be far smaller than planned, as relevant process knowledge barriers and equipment bottlenecks are extremely severe.

Meanwhile, structural changes on the demand side are reshaping industry logic. UBS pointed out that the driving force behind optical fibre demand is shifting from domestic telecom operators' procurement budgets to global AI infrastructure construction. The high-specification optical fibre required by AI data centres (such as G.657.A1/A2) has significantly higher production barriers than the G.652.D standard fibre that dominated the previous cycle, and AI end customers will prioritise leading suppliers with proven delivery track records.

In addition, Chinese telecom operators are tilting capital expenditure toward higher-return computing network and AI infrastructure, and their willingness to suppress optical fibre prices is expected to diminish marginally. UBS expects that the tight supply-demand balance for high-end optical fibre will persist at least through 2027-28, with optical fibre prices continuing to rise, though at a slower pace than in the first half of 2026.

Substantial Earnings Upgrade, Gross Margin Expected to Exceed 70%

Based on the above assessment, UBS raised its net profit forecasts for Yangtze Optical Fibre for 2026-28 by 120%, 116% and 158% respectively, to RMB 9.1 billion, RMB 15.6 billion and RMB 19.1 billion, corresponding to earnings per share of RMB 10.96, RMB 18.86 and RMB 23.12. UBS's 2027/28 earnings forecasts are 7% and 19% above market consensus, respectively.

The core drivers of the earnings upgrade come from two dimensions: first, AI-driven optical fibre pricing is stronger than expected; second, product mix is accelerating toward high-value products. UBS assumes that Yangtze Optical Fibre will allocate more than 50% of its capacity (approximately 4,500 tonnes) to G.657.A1/A2 fibre, which is priced at RMB 130-150 per core kilometre, roughly double that of G.652.D standard fibre, while unit production costs remain broadly stable at RMB 15-20 per core kilometre.

Under this assumption, Yangtze Optical Fibre's gross margin is expected to remain above 70%, with net profit margins reaching 37.3%, 46.0% and 44.1% for 2026-28 respectively. UBS expects Yangtze Optical Fibre's revenue to grow 70.8% year-on-year to RMB 24.3 billion in 2026, and further grow 39.4% to RMB 33.9 billion in 2027.

Yangtze Optical Fibre's Technical Barriers Build a Moat, Global AI Supply Chain Position Undervalued

UBS believes that Yangtze Optical Fibre has the strongest capability among Chinese optical fibre companies to capture AI opportunities, with core advantages reflected in three aspects.

First, preform technology is globally leading. According to UBS channel checks, Yangtze Optical Fibre is one of the few companies globally that simultaneously masters PCVD, VAD and OVD preform manufacturing processes, and extensively uses proprietary equipment of its own design, which UBS views as the fundamental reason for its superior product quality and faster commercialisation of high-end/AI optical fibre. The company's polarisation-maintaining (PM) fibre has achieved mass production and holds a leading share in the Chinese market, and hollow-core fibre has also reached commercial scale.

Second, full industry chain coverage provides additional profit space. Yangtze Optical Fibre covers the complete value chain from preforms to downstream connectivity products. As fibre density increases, profits from AI/data communication products will further accumulate in downstream connectivity products.

Third, the H-share valuation discount is abnormally deep. Yangtze Optical Fibre H-shares trade at a 57% discount to A-shares, while comparable dual-listed AI beneficiaries (optical modules, PCIe/CXL chips, etc.) generally enjoy H-share premiums. Even copper interconnect (AI PCB) peers have an H-share discount of only about 23%. UBS believes this abnormal discount reflects that offshore investors view Yangtze Optical Fibre H-shares more as a cyclical stock rather than a structural AI beneficiary, and as optical fibre spot prices remain elevated, the H-A discount is expected to gradually narrow.

UBS raised its target price for Yangtze Optical Fibre H-shares from HK$290 to HK$330, based on 16x 2027 expected P/E (previously 30x), corresponding to a 2027-30 earnings CAGR of 16%. The report stated that the reason for lowering the valuation multiple is that UBS expects optical fibre pricing to gradually normalise over a longer period, and therefore lowered the valuation multiple to reflect this expectation.

In scenario analysis, the bull-case target price is HK$500, corresponding to 20x 2027 P/E, assuming optical transmission business revenue growth of 60% and blended gross margin of 74.2%; the bear-case target price is HK$100, corresponding to 8x P/E, assuming revenue growth of only 30% and blended gross margin declining to 57.2%.

For Yangtze Optical Fibre A-shares, UBS's target price is RMB 510, corresponding to 27x 2027 expected P/E (previously 35x), maintaining a Neutral rating, implying a target H-A discount of approximately 40%.