Whose expectations did the third-quarter results exceed?

  • YOFC reported third-quarter 2026 revenue of 9.316 billion yuan, up 139% year on year and 52% quarter on quarter, exceeding Morgan Stanley’s previous forecast of 8.171 billion yuan by 14%.
  • Net profit was 3.203 billion yuan, up 1742% year on year and 32% quarter on quarter, exceeding the bank’s forecast of 2.519 billion yuan by 27%. Rapid revenue growth and substantial margin expansion together drove the earnings increase.

Where did growth come from, and how did margins change?

  • Management said growth came from an improved revenue mix in the core business and rapid year-on-year increases in sales volumes and average selling prices for major optical products. Morgan Stanley believes accelerated deployment of AI clusters and data centers has significantly increased demand for AI-related optical fiber.
  • Third-quarter gross margin was 57.4%, up sharply from 29.7% a year earlier but below the second quarter’s 60.5%. Net margin also fell from 39.7% in the second quarter to 34.4%, while profitability remained above the year-earlier level.
  • A lower expense ratio provided additional support: the third-quarter operating expense ratio was 12.66%, below 16.02% in the first half. Selling and administrative expense ratios both declined, while the research and development expense ratio rose from 5.11% to 5.31%.

How does Morgan Stanley view future earnings and valuation?

  • The bank has an Overweight rating on the company’s Hong Kong-listed shares and a target price of 230 Hong Kong dollars, implying approximately 139% upside from the closing price of 96.15 Hong Kong dollars on 30 October 2026. Its base case uses a residual income model, assuming a cost of equity of 11%, a medium-term growth rate of 15% and a perpetual growth rate of 2%.
  • Under the bank’s ModelWare methodology, net profit is forecast at 12.73 billion yuan in 2027, falling to 11.44 billion yuan in 2028. Optical fiber and cable prices, industry capacity expansion, and margin pressure from telecom operators that are major customers are all factors in its assessment.