Sector Deep Dive | Tracking the Optical Communications Industry Chain: Is a Q3 Recovery Likely?

Updated Investment Strategy for Optical Communications

💡 Key Insight

1. After surging significantly since the beginning of the year, the optical communications sector has recently experienced a notable pullback,This is essentially an emotional correction driven by 'high industry momentum + high expectations + high crowding,' rather than a fundamental deterioration.— Demand-side forecasts continue to be revised upward, with the industry’s total addressable market (TAM) projected to grow from USD 18 billion in 2025 to USD 102 billion in 2028, expanding more than fourfold over three years.。

2. After examining the three main market concerns—sustainability of capital expenditures (Capex), memory price hikes crowding out budgets, and uncertainties around CPO/NPO technology roadmaps—none of them fundamentally reverses the demand outlook,The core issue remains tight supply of upstream optical chips and passive components, not insufficient downstream demand.

3. Regarding key stocks, $ZJ INNOLIGHT (03308.HK)$Q2 earnings are expected to strongly materialize, with growth momentum likely accelerating in the second half of the year.；U.S. market $Lumentum (LITE.US)$ Benefiting from tight supply conditions for EML lasers, it has greater earnings elasticity. $Coherent (COHR.US)$ Its valuation offers better value due to vertical integration and InP capacity expansion.We are bullish on the recovery opportunity in the optical module sector in Q3.

🔍 I. Industry Chain Overview

High-end upstream materials are still dominated by overseas suppliers, while domestic players like Source Photonics are accelerating their catch-up efforts. In terms of market share, based on an estimated global demand of approximately40 millionunits for 800G optical modules in 2026,$ZJ INNOLIGHT (03308.HK)$its share is approximately 35%,， $Eoptolink Technology Inc., (300502.SZ)$ 、 $Coherent (COHR.US)$ each around 20%, $Lumentum (LITE.US)$ approximately 5%; 1.6T optical modules $ZJ INNOLIGHT (03308.HK)$ market share further increased toover 50%。

Chart 1: Optical Communications Industry Chain

Source: Compiled by Futu Securities

The figure above shows the full landscape of the optical communications industry chain. In terms of value distribution, Chinese manufacturers lead globally in the midstream optical module segment.

🔍 II. Stock Price Review: Understanding the Current Pullback

Industry demand continues to be revised upward: Morgan Stanley raised its shipment forecast for AI optical modules in 2026/2027/2028 from 53 million/71 million/80 million units to73 million/141 million/150 million units, the industry's total addressable market (TAM) is projected to grow from USD 18 billion in 2025 toUSD 102 billion in 2028; another estimate shows the global data center optical module market will reach approximately USD 40 billion in 2026, up 150%-160% year-over-year.The core reason for the stock price adjustment is not deteriorating fundamentals, but rather the market repricing three major risks.

🔍 III. Key Stocks

1. $ZJ INNOLIGHT (03308.HK)$

- Prior to its Hong Kong listing, multiple foreign brokerages raised target prices; Tianfu Communication and Eoptolink released earnings guidance exceeding expectations (partly supported by national team funds stabilizing the market), and the sector has gradually recovered this week.

- Industry consensus: Demand is in a second acceleration phase driven by volume ramp-up of 800G and initial deliveries of 1.6T; sequential Q1→Q2 surge confirms concentrated order recognition from North American CSPs; supply-side tightness in optical chips and passive components represents the largest source of upside elasticity; on the technology front, 1.6T and 800G silicon photonics solutions are entering a high-margin volume production phase in H1 2026.

- Q2 earnings: The probability of previously pessimistic market expectations (below RMB 7 billion) has significantly declined, with mainstream optimistic forecasts now at RMB 7.5–8 billion;Achieving over RMB 7.5 billion (implying sequential growth exceeding 30%) would be viewed as a significant alleviation of market concerns.

- Second half: Sequential growth in Q3 and Q4 is expected to accelerate further, driven by rising 1.6T shipment mix and easing component shortages, jointly boosting profitability.

Chart 2: Zhongji Xchuang's Optical Module Shipment Structure and Trend Toward Higher Speeds

Source: Citi, LightCounting, Compiled by Futu Securities

💡 Q2 earnings were constrained by component shortages; Q3 is expected to see acceleration driven by easing supply constraints and volume ramp-up of 1.6T products, coupled with reduced positioning crowding—favoring opportunities in the optical module sector for Q3.

2. U.S. Stocks $Lumentum (LITE.US)$ and $Coherent (COHR.US)$

💡 LITE offers higher elasticity, while COHR provides better valuation appeal.

Chart 3: Lumentum Expects EML Chip Production Capacity to Increase by Over 50% Year-over-Year by End-2026

Source: Lumentum, Compiled by Futu Securities

Chart 4: Coherent InP capacity to double consecutively in 2026 and 2027

Source: Coherent, compiled by Futu Securities

⚠️Risk Warning

AI computing infrastructure build-out and optical module demand falling below expectations

AI application-side growth lagging behind expectations

[Investment Advisory Information]

Yang Yi, Licensed Representative, CE No.: BUR210

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