Summary of Key Points
As a global leader in optical modules (which act as the "connectors" for AI computing clusters, responsible for converting electrical and optical signals), Zhongji Xuchuang's stock price soared by 20 times over 14 months (from 66 yuan to 1416 yuan) due to the surge in computing demand sparked by ChatGPT in 2023. Its market value briefly exceeded 1.3 trillion yuan, making it the top holding of public funds, with many institutions showing strong optimism. However, in the past month or so, the company's stock price has plummeted both on the Hong Kong Stock Exchange and the A-share market, resulting in a total market value reduction of over 500 billion yuan. The crucial contradiction lies in the fact that the company's fundamentals have not changed (first-quarter net profit increased by 262%, with orders booked through 2027), yet the market's valuation logic has shifted from an "AI story premium" to a "performance-based pricing," leading to a sharp correction.
I. The Logic Behind the Previous Surge: Three Elements of Confidence Driving Expectations to New Heights
Optical modules are essential components for AI computing power—thousands of NVIDIA GPUs must work together, and optical modules are necessary for signal conversion. Zhongji Xuchuang is the world's largest supplier of optical modules (leading in market share for five consecutive years), benefiting significantly from the growing demand for AI computing power.
From April 2025 to June 2026, the stock price rose from 66 yuan to 1416 yuan (a 20-fold increase in 14 months), driven by three key market consensus factors:
1. Clear industry trend: AI computing power is one of the most promising sectors for the coming years.
2. Direct benefit to the company: Optical modules are a critical part of the computing infrastructure.
3. Dominant position: Zhongji Xuchuang holds an absolute leadership in this sector.
Institutions heavily invested, with over 2,000 funds collectively backing the stock. Goldman Sachs set a target price of 2,581 yuan, and major investors such as Temasek, Hillhouse Capital, and Alibaba/Tencent purchased nearly half of the company's shares on the Hong Kong Stock Exchange. At that time, the market valued the company based on an assumption of "unlimited AI growth," with almost no discount.
II. The Trigger for the Sharp Drop: Discount on the Hong Kong Stock Exchange + Price Reduction Rumors
Two events shattered investor expectations:
1. Discrepancy in stock prices: On July 28, Zhongji Xuchuang's Hong Kong stock was issued at HK$980 (about RMB 846), 20% lower than the previous day's A-share closing price of RMB 1,076. The significant difference in prices led to arbitrage funds moving from the overvalued A-share market to the Hong Kong market, causing the A-share price to plummet by 15.69% and wiping out a market value of 180 billion yuan.
2. Rumors about price cuts for 1.6T optical modules: These high-profit (highest gross margin) products were rumored to see prices drop below US$600 next year. The company urgently repurchased shares worth 4-8 billion yuan and held a press conference to deny the rumors, but the stock only rebounded briefly.
On July 30, the stock price fell by 5% on its debut on the Hong Kong Stock Exchange and closed down 2.04% on the first day, while the A-share market tumbled even more (a 9% drop), resulting in a cumulative loss of 500 billion yuan.
III. Why Did the Stock Price Crash Despite Solid Fundamentals?
The "Davis Double Kill" phenomenon in finance can explain this situation: Stock price = earnings × valuation.
- During growth: Rising earnings and expanding valuations (the market's willingness to pay more for the company) lead to double-digit increases in stock prices.
- During a downturn: Even if earnings remain stable, a shrinking valuation (due to doubts about future growth) can cause a sharp drop in stock prices.
Zhongji Xuchuang's fundamentals are strong (orders booked through 2027, with a 262% increase in profit), but the market is now questioning key aspects: Will the price of 1.6T optical modules remain stable? Will competition intensify? How long can the high growth continue? Divergences among institutions have emerged (target prices ranging from RMB 430 to 2,581), and these differences have become reasons for selling off the stock.
IV. It's Not Just Zhongji Xuchuang: The Entire AI Hardware Chain is Facing Valuation Issues
This decline is not isolated to Zhongji Xuchang; it reflects a broader contraction in valuations across the entire AI hardware industry:
- Upstream chips: There are rumors that NVIDIA provided a guarantee of RMB 250 billion to OpenAI, raising doubts about the sustainability of demand.
- Downstream cloud providers: Companies like Google and Tesla are experiencing negative cash flows, leading to concerns about reduced investment in AI infrastructure.
- Other hardware components: Servers and liquid cooling equipment are also declining in value, as 100% of Zhongji Xuchang's customers are North American cloud providers. If these companies cut spending, the long-term value of optical modules will decrease.
The market's approach has changed: No longer do high-profile AI stories alone drive prices; only tangible financial performance matters. Microsoft's reduction in AI spending led to a rise in its stock price, while Meta's increased spending caused a sharp drop in its stock price.
V. What's the Future? Moving from "Listening to Stories" to "Checking Performance"
Zhongji Xuchang's share repurchases and orders provide confidence, but they may also serve as stabilizing signals. The market will become more rational:
- Valuation adjustment: Expectations will return to a more realistic level, focusing on quarterly profits, order stability, and price resilience.
- Industry differentiation: Only companies that can maintain high margins and market shares will emerge from the correction.
- Long-term outlook: The optical module market is still growing (Goldman Sachs predicts it will reach $72.6 billion by 2027), but it will take time for sentiment to recover.
In short, only when the tide recedes will we see who is truly competitive. Zhongji Xuchang remains a leader, but the market will no longer pay premium prices for future prospects; real performance will be the key determinant of its value.
(Note: This analysis does not constitute investment advice. The stock market is risky, and investors should proceed with caution.)