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Public funds in China continued to ramp up their investments in the optical communication industry last quarter, notably amid the rapid expansion of artificial intelligence models. As of March 31, these funds’ holdings in the communications sector surpassed 13.1 percent, marking the fourth consecutive quarter of growth. This is a significant increase from just 2.7 percent at the end of the first quarter last year.
The capacity to transmit data at high speeds is crucial in pushing the limits of AI computing power. Optical communication, which relies on lasers as information carriers and optical fibers as transmission channels, revolves around optical modules, chips, and components specially designed for optical systems.
This trend of public funds “buying hardware and selling software” within the AI supply chain reflects a strategic move to seek performance assurance throughout the industry.
While holdings in the technology, media, and telecommunications sectors reached a record high of 40 percent last quarter, there was notable divergence within these investments. The proportion invested in the communications industry increased by 2 percentage points, whereas investments in electronics, computers, and media decreased by 1.6 percent, 0.6 percent, and 0.4 percent, respectively.
Among the optical module stocks, Zhongji Innolight has solidified its position as the most heavily held by public funds. Meanwhile, Eoptolink Technology and Dongshan Precision Manufacturing have also appeared among top holdings of some cross-style fund managers. As of March 31, nearly 12 percent of Zhongji’s tradable shares were owned by over 1,100 funds.
Many companies in the optical communication sector have seen their share prices soar this year. Zhongji [SHE: 300308] has gained roughly 45 percent since the end of last month. Despite a slight dip of 3.6 percent, its stock closed at CNY826.01 (USD121.07) at 2:05 p.m. today in Shenzhen, pushing its market cap above CNY1 trillion (USD146.5 billion).
Similarly, Eoptolink [SHE: 300502] and Yuanjie Semiconductor Technology [SHA: 688498] reached record highs. Eoptolink declined slightly by 0.7 percent to CNY534.40 today, while Yuanjie Semiconductor rose 1.8 percent to CNY1,444 (USD211.63). Dingtong Precision Metal [SHA: 688668] has surged 78 percent since the beginning of this month, and Shijia Photons Technology [SHA: 688313] has jumped 60 percent.
The surge in investments stems from the industry’s robust outlook and the performance of leading firms. Zhongji Innolight posted a net profit of CNY10.8 billion (USD1.6 billion) and revenue of CNY38.24 billion last year, reflecting increases of 109 percent and 60 percent, respectively, over the previous year. Eoptolink experienced an even more dramatic rise, with net profit soaring 236 percent to CNY9.5 billion and income jumping 187 percent to CNY24.8 billion.
The growing demand for AI computing power continues to fuel the expansion of data centers, alongside rising demand for graphics processing units (GPUs) from cloud service providers. High-speed optical modules, including 800 gigabit-per-second and 1.6 terabit-per-second options, are expected to dominate the market in the next three years, with 3.2 Tbps modules gradually gaining traction from 2028.
The market for 800G and 1.6T optical modules is expected to expand rapidly this year, with combined sales projected to reach USD 14.6 billion—accounting for roughly 64 percent of the entire optical module market, according to LightCounting.
Various institutions have released reports discussing the high level of investment concentration in the AI hardware sector. While investment activity has reached historic peaks, analysts suggest that, given the industry’s growth prospects and stability, these crowded trades have yet to become excessive.
Though crowded trades surpassed those seen in 2021 with Contemporary Amperex Technology, they remain below the levels of Kweichow Moutai and the financial and real estate markets in 2007.
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