A Reuters report shakes the optical communications sector in both China and the U.S.! How are major foreign banks interpreting this?

An exclusive Reuters report instantly stirred the optical communications sector in both China and the U.S.

On August 4, $Applied Optoelectronics (AAOI.US)$ U.S. stocks surged 19%, $Coherent (COHR.US)$ surged over 12%, $Lumentum (LITE.US)$ rose nearly 9%, and even upstream optical fiber material suppliers $Corning (GLW.US)$ also posted gains of nearly 9%. Affected by this news, $ZJ INNOLIGHT (03308.HK)$ fell nearly 8% today.

The source of this sharp market volatility was rumors that 'the U.S. is planning to restrict Chinese data center components.'According to Reuters, the Trump administration is drafting a ban that would prohibit the U.S. from importing newly manufactured data center components made in China. The Federal Communications Commission (FCC), which regulates the U.S. telecommunications industry, is working on measures to block imports of new Chinese optical transceivers—devices that enable data to travel at light speed through fiber-optic cables within data centers. Officials hope to announce the measure later this year, at which point it would take effect.

The People's Daily stated that the U.S. Federal Communications Commission (FCC) has added foreign-made power inverters and advanced robotic equipment to its so-called 'Covered List,' meaning new models of these products will no longer receive certification and will be barred from sale in the U.S. market. Washington claims these measures are 'non-discriminatory' or justified by 'national security,'but in reality, they constitute discriminatory treatment and suppression targeting Chinese companies and products—a classic example of unilateral bullying that openly distorts market economy rules and the principle of fair competition.

So how are foreign institutional investors assessing this sudden development? This article will urgently summarize key foreign-investor viewpoints for fellow investors.

Morgan Stanley: Non-Chinese manufacturers’ capacity is insufficient to meet demand driven by AI-related capital expenditures.

Morgan Stanley's core view is that this news is positive for the U.S. optical components supply chain.Regarding the rationale for beneficiaries, Morgan Stanley noted that $ZJ INNOLIGHT (03308.HK)$ and $Eoptolink Technology Inc., (300502.SZ)$ together account for approximately 50% of the global optical transceiver market. In this landscape, $Coherent (COHR.US)$ with its vertical integration capabilities, stands out as the clearest large-scale beneficiary, $Applied Optoelectronics (AAOI.US)$ and $Fabrinet (FN.US)$ could also capture some incremental demand. Although its direct exposure to optical modules is relatively small, it supplies lasers to multiple global module manufacturers. Restrictions on Chinese suppliers reduce the likelihood of easing the supply tightness, meaning the EML supply shortage could persist longer, thereby indirectly benefiting the company.

On feasibility, Morgan Stanley remains relatively cautious.The report stated bluntly thatcurrent non-Chinese manufacturers’ capacity is insufficient to meet the demand driven by AI-related capital expenditures.Notably, the CEOs of both LITE and COHR have publicly advocated for such restrictions, arguing that U.S. vendors generally cannot supply Chinese cloud providers, while Chinese vendors can supply U.S. customers—a perceived asymmetry they deem unfair. Moreover, most cloud providers have anticipated such policy risks over the past two years and have already certified alternative suppliers, even though these suppliers’ current capacity may not fully meet demand. The report also mentioned that such policies could help alleviate near-term market concerns about a 'profit margin ceiling' for optical module makers.

The biggest risk lies in indium phosphide (InP) substrates.Morgan Stanley pointed out thatInP substrate supply primarily comes from Chinese manufacturers,Such as $AXT Inc (AXTI.US)$ -- $Lumentum (LITE.US)$ A new supply agreement was just announced last week, and COHR’s CEO had visited China several months ago as part of Trump’s delegation. Securing a continuous supply of InP substrates will be critical to meeting surging demand. The report also suggests a potential solution: Chinese cloud vendors could commit to purchasing U.S. components in exchange for some degree of regulatory concession.

Barclays: Rumors of a ban are more of a negotiation tactic; hyperscalers cannot fully disengage from Chinese suppliers

Barclays stated that the ban rumors are primarily a negotiation tactic, with low likelihood of actual enforcement, though they offer short-term tailwinds for U.S. optical module manufacturers.Market rumors suggest the Trump administration is considering banning imports of new Chinese data center components—particularly optical transceivers. Analysts believe this is more likely a negotiating chip ahead of the September U.S.-China summit rather than a final policy. Nevertheless, the initial market reaction has been positive for the U.S. interconnect ecosystem, especially optical transceiver manufacturers. $Coherent (COHR.US)$ and $Lumentum (LITE.US)$ 。

Strict enforcement of such a ban would severely disrupt supply chains and trigger Chinese countermeasures.If the U.S. not only bans direct exports from China but also prohibits manufacturers with subsidiaries in China (including those circumventing restrictions via 'shadow manufacturing' in Southeast Asia), it would significantly benefit U.S. manufacturers. However, China could retaliate by restricting exports of indium phosphide (InP) substrates. AXT accounts for approximately 35% of the global InP substrate market (with most of its production based in China), which would exacerbate an existing supply shortage of over 30% for InP lasers, thereby constraining production of optical transceivers and NPO/CPO solutions, and ultimately hindering AI accelerator deployment.

Supply chain decoupling between the U.S. and China is intensifying, yet hyperscalers remain unable to fully disengage from Chinese suppliers.Although U.S. hyperscalers are attempting to reduce reliance on Chinese suppliers, market demand far outweighs political considerations. Currently, InnoLight ( $Zhongji Innolight (300308.SZ)$ its subsidiary) is the world's largest optical module supplier, $Eoptolink Technology Inc., (300502.SZ)$ ranking second. Any substantive ban would severely disrupt the global semiconductor ecosystem, making it more likely to be 'empty headline news' or a negotiation tactic.

Nomura: If the FCC bans all next-generation optical modules from China, it would result in a lose-lose scenario.

Nomura stated that if the FCC only bans data center components labeled 'Made in China,' the impact on Chinese optical module manufacturers would be limited.If the U.S. Federal Communications Commission (FCC) ultimately implements a ban targeting only data center components such as optical modules manufactured in China, Nomura believes that $Eoptolink Technology Inc., (300502.SZ)$ and other leading suppliers would be less affected. This is because these top-tier companies began establishing overseas production capacity for high-end optical modules several years ago, effectively mitigating risks associated with country-of-origin restrictions.

If the FCC bans all next-generation optical modules from China, it would create a lose-lose situation.If the ban expands to cover all next-generation (next-gen) optical modules from Chinese suppliers, Nomura believes this would delay global AI data center (AIDC) deployment timelines and further increase deployment costs. Chinese optical module manufacturers hold a significant share of the high-end optical module market within the global AI supply chain, thanks to their superior product performance and cost efficiency. Moreover, the global optical communications industry is highly globalized and interdependent; China’s control over certain key materials could also create bottlenecks in a supply-constrained market.

Additionally, it maintains a positive view on InnoLight. Although related news reports may cause short-term market volatility, Nomura retains its positive stance on InnoLight based on its strong fundamentals and attractive valuation.

– Citi: Potential U.S. ban has manageable impact; overseas capacity serves as key buffer

Citi stated that the impact of the proposed U.S. ban is manageable, with overseas capacity serving as a key buffer.The U.S. government is reportedly weighing a ban on imports of China-made optical components used in AI data centers. Citi believes this will not be a straightforward rule, given that Chinese companies dominate the global optical transceiver market (seven of the top ten are Chinese firms) and hold cost advantages and technological leadership. The key lies in Chinese suppliers’ overseas capacity expansion strategies, which will determine their degree of exposure.

Order of individual stock exposure: TFC < Dongshan Precision < Eoptolink.Based on geographic footprint and business profile, Citi views TFC as least affected, as it primarily supplies passive components and its main customer is headquartered in Thailand, resulting mainly in indirect exposure; Dongshan Precision ranks next, as most of its optical transceivers for U.S. cloud service providers (CSPs) are produced in Thailand and Taiwan; although Eoptolink derives a high share of revenue from Thailand (approximately 88%), it faces risk if the policy extends to third-country production linked to China, though its current overseas footprint provides relatively strong insulation.

Maintain Buy ratings and target prices for all three companies. Citi maintains Buy ratings on Dongshan Precision, Eoptolink, and TFC, assigning target prices based on sum-of-the-parts (SOTP) or P/E valuation methods, believing current valuations reflect a robust optical module cycle and strong demand from AI infrastructure investments.

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