A recent report from CGS International highlights that several core optical chip companies have announced capacity expansion plans, private placements, or investments in new projects. The optical communication supply chain is identified as the sector with the most elasticity in the AI arms race, where high technical barriers create a competitive moat. Supply shortages for certain upstream materials are amplifying the benefits of domestic substitution. The report recommends focusing on targets within the optical industry chain.
Optical communication capacity expansion has moved from the planning stage into tangible capital expenditure, with the industry's prosperity continuing to rise. The supply chain is entering a new intensive capital expenditure cycle, covering core segments from upstream optical chips and components to optical fiber preforms, and midstream optical modules. Yuanjie Semiconductor Technology Co., Ltd. (Yuanjie Technology) plans to invest 4.27 billion yuan of its own funds to build a science and technology park project, including laser chip production lines, manufacturing plants, and supporting facilities, aiming to break through current capacity bottlenecks and scale up high-end laser chip production. Henan Shijia Photons Technology Co., Ltd. (Shijia Photons) intends to raise up to 2.8 billion yuan through a private placement, with funds allocated for high-speed AWG chips (750 million yuan), CW optical chips and COC industrialization projects (1.4 billion yuan), and high-density optical interconnect device (MPO/MMC) capacity expansion (170 million yuan), to address constraints in existing capacity and high-end manufacturing capabilities. Focuslight Technologies Inc. (Focuslight) plans to raise up to 1.021 billion yuan via a private placement to cover chip substrates, optical components, high-end equipment, and working capital, forming a complete industry chain layout. Meanwhile, optical module leader Zhongji Innolight Co., Ltd. (Zhongji Innolight) and others have been actively listing in Hong Kong, with fundraising scales empowering the continuous expansion of global capacity. As high-end optical chip technology continues to break through, the optical communication supply chain is poised to begin a new prosperity cycle of rising both volume and prices.
The profitability of the optical communication sector is steadily strengthening, and the realization of capacity expansion is fueling high growth, with earnings performances expected to be fully delivered. According to the first-half 2026 performance forecasts, core leaders in the optical communication supply chain, including Eoptolink Technology Inc., Ltd. (Eoptolink), Yuanjie Technology, and Shijia Photons, have reported significant and above-expectation profit growth. This earnings delivery is ongoing, and the release of future capacity is expected to drive the industry's fundamentals towards medium-to-long-term positive development.
Optical chips represent the segment of the optical communication supply chain with the highest technical barriers and are the core focus for domestic substitution. From a global supply-demand perspective, there is a significant capacity gap in high-end EML optical chips, high-power CW light sources, high-precision lenses, and upstream Indium Phosphide (InP) substrate materials. The high technical barriers of optical chips create a strong competitive moat, and the ongoing shortage of some upstream materials continues to drive the domestic substitution process. As 800G/1.6T shipments ramp up in the second half of the year, and the proportion of silicon photonics-based solutions increases, the profitability of the optical communication sector is expected to improve marginally.
Technologies are continuously iterating and upgrading, moving from pluggable modules to CPO/NPO, and from EML to silicon photonics CW, opening new space for domestic substitution. Driven by the rapid development of AI computing infrastructure, data center interconnection, and emerging applications like silicon photonics and CPO, there are significant marginal changes in the evolution of optical interconnect technology. Co-packaged optics (CPO) integrates ASIC chips with optical engines and other optical devices on the same high-speed motherboard, suitable for chip-to-chip connections within and between racks in scale-up architectures, as well as some scale-out scenarios. Near-packaged optics (NPO) serves as a practical transitional solution between traditional pluggable modules and CPO. Domestic leading CSPs have completed full-system verification, marking this technology's move from laboratory to large-scale engineering deployment. The current round of capacity expansion by leading optical communication manufacturers is not cyclical but driven by technology upgrades (from pluggable modules to CPO/NPO, from EML to silicon photonics CW), combined with domestic substitution opening new growth avenues. Overall, companies with upstream chip R&D capabilities are expected to capture excess profits in this new cycle, with their profitability set to continue strengthening.
Risk warnings include: risks from fluctuations in overseas industrial and trade policies; risks of AI application development falling short of expectations; risks of a decline in CAPEX from major CSPs; and risks of changes in optical communication technology roadmaps.
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