After a 37% correction in the fiber optic sector, UBS remains bullish: the market may be overestimating the risk of "overcapacity" in 2027.

The Chinese fiber optic sector, which has corrected 37% from its June high, is experiencing a mispricing caused by market misjudgment.

According to TrendFocus, UBS has initiated coverage of China's fiber optic cable industry, believing that investors' concerns about overcapacity and peak profitability in 2027 are significantly overestimated.

UBS's core assessment is that the demand engine for the fiber optic industry has shifted from the capital expenditure budgets of China's three major telecom operators to global data center construction. This structural shift means that demand is more closely aligned with actual consumption and directly linked to AI infrastructure development, rather than relying on cyclical telecom procurement plans. Meanwhile, the expansion speed on the supply side is constrained by multiple bottlenecks, including extended lead times for preform equipment, talent shortages, and customer certification cycles, meaning actual implementation will be significantly later than market expectations.

Against this backdrop, UBS raised its target price for Yangtze Optical Fibre and Cable's H shares from HK$290 to HK$330, representing a 73% upside from the current price of HK$190.5. This corresponds to forward P/E ratios of 14.8x and 8.6x for 2026 and 2027 respectively, with a projected CAGR of 45% for earnings per share from 2026 to 2028. UBS maintained a neutral rating on Yangtze Optical Fibre and Cable's A shares, raising its target price from RMB 310 to RMB 510.

What did the market price in after the stock price corrected by 37%?

According to a UBS report, the share prices of China's fiber optic sector have corrected 37% from their June highs, after accumulating gains of over 300% and still rising approximately 170% year-to-date. With this correction, the sector's consensus 12-month forward P/E ratio has fallen from 40-50 times to 23 times, about 0.2 standard deviations above the historical average, while overseas peers such as Corning and Prysmian are still trading at more than one standard deviation above their historical average.

UBS believes that the direct trigger for this round of valuation contraction is the intensive announcements of capacity expansion plans by second-tier manufacturers and new entrants in the second quarter of 2026, which reminded the market of the oversupply situation at the end of the previous 5G cycle and formed the expectation of "profit peaking in 2027". However, UBS believes that this analogy has a fundamental flaw - the current industry demand structure and supply constraints are completely different from then.

Demand Engine Shift: From Carrier Budgets to Global AI Computing Power

Historically, China's fiber optic demand has been primarily driven by the capital expenditure budgets of the three major domestic telecom operators. This disconnect between procurement decisions and actual end-user demand has led to cyclical oversupply in the industry. Following the disappointment of 5G network construction, operators have pressured for lower procurement prices, resulting in a prolonged period of low fiber optic prices.

This logic is being challenged. UBS predicts that global fiber optic demand will grow at a compound annual growth rate (CAGR) of approximately 11% from 2026 to 2030, with data center demand growing at a CAGR of 37%, while telecommunications demand will only grow at 5%. The share of data centers in global fiber optic demand will rise from slightly over 10% in 2025 to over 45% in 2030.

The changes in demand structure have been confirmed by price signals.

The price difference between Chinese and overseas optical fiber has narrowed significantly and is trending towards convergence since the end of 2025, whereas historically, Chinese prices have long been discounted by 20% to 40% relative to overseas prices. China's optical fiber and cable export value has also increased substantially since 2026. The latest round of China Mobile's centralized procurement of optical fiber saw a price discount of only 20% relative to spot prices, far lower than the discount rates in previous cycles, confirming a structural improvement in the pricing environment.

Meanwhile, Chinese telecom operators are also shifting their capital expenditure structure towards computing networks. UBS predicts that the ratio of telecom to computing network capital expenditure in China's telecom sector will change from 65/35 in 2026 to 50/50 in 2028. As AI-related investments are geared towards enterprise clients and have a clearer return logic, operators will be less price-sensitive in fiber optic procurement, helping to maintain a healthy pricing environment.

Supply bottleneck: Expansion schedule is longer than market expected

UBS breaks down the supply-side capacity expansion into three phases. The first phase involves leading domestic manufacturers completing brownfield expansions within existing facilities by the end of 2026 or early 2027, typically taking no more than 1.5 to 2 years. The second phase involves new capacity announced by second-tier manufacturers in the second quarter of 2026, which, based on the industry's usual construction cycle of over 2 years, is expected to be operational by the end of 2027 or 2028. However, due to extended delivery times for key equipment and intense competition for talent, the actual timeframe may be extended to 3 years. The third phase, overseas capacity expansion, is expected to be realized after the end of 2028.

Preforms are the core bottleneck of the entire supply chain. Chinese manufacturers account for more than 60% of global optical fiber production capacity, but companies with vertically integrated preform manufacturing capabilities are highly concentrated among the leading players. Preform equipment currently needs to be imported from South Korea and the United States, with delivery times exceeding one year. Even after new entrants complete equipment procurement, they still need to go through lengthy processes such as installation and commissioning, process optimization, and customer certification—expanding preform production capacity from 300 tons to over 1,000 tons represents a significantly higher technical and operational barrier.

UBS predicts that the industry’s capacity utilization rate will remain above 90%, and the tight supply and demand situation will continue until at least 2027 or 2028.

Specification Upgrade: High-end Fiber Optic Supply Will Remain Tight in the Long Term

The shift in demand towards high-end optical fiber products is another structural barrier to mitigate the risk of oversupply.

The evolution of AI network architecture is driving the market to shift from standard G.652.D fiber to higher-specification products: G.654.E ultra-low loss fiber is used for long-distance interconnects between data centers (Scale-Across), G.657.A1/A2 bend-insensitive fiber is used for interconnects between racks (Scale-Out), and polarization-maintaining fiber (PM fiber) and hollow-core fiber are for more advanced Scale-Up scenarios.

These high-end products require years of R&D accumulation, manufacturing process refinement, and customer certification, with technological barriers far exceeding those of traditional telecommunications fiber optics. New entrants' initial production capacity will likely be concentrated on standard G.652.D products, while market demand is shifting towards products beyond these. UBS believes that the supply of high-end data center fiber optics will remain structurally tight in the foreseeable future, and leading manufacturers with preform capacity, process accumulation, and a portfolio of specialty fiber optic products will continue to benefit.

Valuation: H-share discount does not reflect its position in the AI supply chain.

UBS points out that Yangtze Optical Fibre and Cable's H-shares are trading at a discount of up to 57% relative to their A-shares, while AI PCB companies, which are also part of the AI computing power supply chain, are trading at a discount of only 23% . Optical interconnect (optical modules) and semiconductor interconnect chip companies are even trading at a premium to their H-shares. This unusual discount suggests that offshore investors are overpricing the risk of fiber optic oversupply while underestimating Yangtze Optical Fibre and Cable's strategic position in the global AI supply chain.

Yangtze Optical Fibre and Cable's A-shares are currently trading at a consensus P/E ratio of 34 times for the next 12 months, a premium of 79% over the domestic peer average and close to Corning's 39 times. UBS believes that the A-share pricing is basically reasonable, and therefore maintains a neutral rating with a target price of RMB 510, corresponding to a P/E ratio of 41.7 times for 2026.

In contrast, Yangtze Optical Fibre and Cable's (YOFC) H-shares have forward P/E ratios of only 14.8x and 8.6x for 2026 and 2027, respectively, with a projected CAGR of 45% for earnings per share from 2026 to 2028. UBS believes that as offshore investors gradually recognize YOFC's core position in the global AI supply chain, the H/A discount is expected to narrow, maintaining a buy rating with a target price of HK$330.

Key verification nodes

UBS listed the main verification conditions for the above judgment.

In terms of outcomes, the discount of the next round of fiber optic procurement prices by China Mobile and China Telecom relative to spot prices, as well as whether Yangtze Optical Fibre and Cable's quarterly gross profit margin and preform capacity utilization rate remain within the range assumed in the report, are the most direct indicators to observe.

At the mechanism level, the pace of signing long-term fiber optic agreements between global cloud vendors and operators, the delivery time of preform equipment and the actual commissioning time of effective production capacity of second-tier plants, as well as the speed at which the proportion of computing power and networks in the capital expenditure of Chinese operators increase, will determine whether the supply and demand tension can continue.

If the price discount between Chinese and overseas fiber optic cables widens again to the historical range of 20% to 40% before 2026, or if second-tier manufacturers and new entrants bring their production capacity to market ahead of schedule, upgrades to high-end fiber optic specifications fall short of expectations, or overseas data center deployments slow down due to power and approval issues, then the judgment of "supply discipline maintained and prices high" needs to be revised downward.

UBS has set the core verification window at the fourth quarter of 2026—when the results of the next round of fiber optic procurement by the three major telecom operators will be disclosed simultaneously with the company's third-quarter results.

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