Summary of Key Points
Since August, the optical communication sector has performed outstandingly during the rebound from the sharp decline in AI technology stocks. However, there is a clear differentiation within the sector: second-tier companies with market values of 50-10 billion yuan have seen much higher gains than large-cap leaders with market values over 100 billion yuan. The reasons behind this include the shift in industry focus from "CPO implementation" to "NPO (New Optical Packaging) growth"; financing funds prefer more flexible second-tier options; the rebound in earnings of overseas giants; and the increasing demand for key components, which provides fundamental support; as well as the acceleration of domestic substitution, allowing second-tier companies to secure more orders.
Why Are Second-Tier Leaders Outperforming? – Smaller Market Value and Flexibility + Financing Funds “Voting with Their Money”
During this rebound, second-tier optical communication companies have seen significant gains: Changyingtong rose by 82%, Shijia Photon by over 70%, and Tianfu Communication by 67%. In contrast, the leading company Zhongji Xuchuang only increased by 10%, and Xinyisheng by 17%. Why is there such a difference?
- Smaller Market Value, Greater Flexibility: Second-tier companies generally have market values of 50-10 billion yuan, which means lower entry barriers for capital to drive their prices up. Large-cap leaders with market values in the tens of billions of yuan require more funds to move their prices, and leveraged investors (financing clients) prefer smaller, more flexible options.
- Financing Clients Increasing Holdings in Second-Tier Companies: The financing balances of Taichen Optoelectronics increased by 28%, and Changyingtong by 40%, while Zhongji Xuchuang’s decreased. This indicates that leveraged investors are clearly favoring these “small but promising” second-tier companies, creating a positive feedback loop where rising prices encourage further buying.
The Industry Story Has Changed: From “CPO Implementation” to “NPO Growth”
The market focus has shifted from whether CPO (Co-Packaged Optics) can be widely adopted to the new opportunities brought by NPO (Pure Optical Packaging).
- What is CPO?: CPO involves combining optical modules with switch chips, which is faster but more technically complex. NVIDIA’s CPO switches are now in mass production, so the question is no longer whether it can be implemented, but where the new growth lies.
- NPO Represents New Growth: NPO is a more advanced form of co-packaging and is expected to see demand reach 30-40 million units by 2028, with a market value of over $40 billion. Additionally, silicon photonics technology makes passive components (such as fiber connectors and splitters) more cost-effective, which are areas where second-tier companies have strengths.
- Overseas Giants Provide Confidence: The American optical communication company Lumentum’s quarterly revenue doubled, with a gross margin of over 50%, demonstrating the solid fundamentals of the industry.
Solid Fundamental Support: Earnings Exceed Expectations + Shortage of Key Components
The rebound is not baseless; it is supported by actual performance and supply-demand imbalances:
- Earnings Exceed Expectations: Shijia Photon’s revenue increased by 50% in the first half of the year, with profits rising by 45%, and second-quarter profits grew by 70% year-over-year. The growth in optical chip sales contributed significantly to these results.
- Shortage of Key Components: There is a 30% shortage of EML lasers (core components for optical communication), due to insufficient production capacity for the materials used (indium phosphide substrates), which is expected to persist until 2028. This shortage means stable prices and abundant orders, ensuring companies’ profitability.
Accelerating Domestic Substitution: Second-Tier Companies Securing Real Orders
Domestic substitution has been another catalyst for this rebound, with second-tier companies moving from sample validation to bulk order placement:
- Yongding Co., Ltd.: Its subsidiary received a 1.133 billion yuan order for high-power laser chips, representing real revenue.
- Changguang Huaxin: The production capacity for 100G EML chips is increasing, and 200G chips are in the sample validation phase—this is a critical step from laboratory to market.
These developments indicate that domestic optical communication companies are no longer just playing catch-up; they are truly capable of replacing imports and gaining shares in the global market.
Capital Dynamics: After Emotions Cool Down, Focus on “Value for Money”
The sharp decline in the optical communication sector in July was mainly due to excessive price gains (congested trading) and panic. The rebound in August shows that the industry fundamentals are sound; investors are simply looking for more cost-effective options:
- Large-cap leaders were previously overvalued, so their valuations have dropped, making them less attractive compared to second-tier companies.
- Second-tier companies have faster growth and lower valuations, along with expectations of domestic substitution and new business opportunities (NPO), which attract investors.
In summary, the rebound in the optical communication sector is not a generalized increase but represents “structural opportunities.” The key lies in choosing the right sectors (NPO, passive components) and targets (second-tier leaders, domestic substitution). For individuals interested in this sector, it’s advisable to focus on companies with orders and technological breakthroughs, rather than blindly chasing large-cap leaders.