CITIC SEC: Maintains "Outperform" rating for the telecommunications industry; OCS market scale is expected to explode rapidly.

CITIC SEC released a research report stating that it maintains an "outperform" rating for the telecommunications industry. OCS is transitioning from a customized solution for a single customer, Google, to a universal network foundation for AI clusters. The firm anticipates that the stock price drive in 2026 will come from orders and earnings guidance, entering a practical realization phase of revenue and profits from 2027 to 2028. Meanwhile, market demand growth may outpace the expansion pace of leading overseas companies' self-built production capacity. The management of Lumentum has clearly articulated the extension of the supply chain. Additionally, the core value proportion of single-machine costs for OCS from Costar Group exceeds 60%, which aligns with domestic manufacturers' developed supply capabilities. The certainty of increasing domestic market share is higher than that of the overall machine share competition. In the short term, the CIOE China Optical Expo from September 9 to 11 and the Huawei Connect Conference from September 17 to 19 are expected to catalyze interest in the sector. CITIC SEC's main points are as follows: Long-term vision transitioning to industry practice, OCS breaks through the performance ceiling of electrical switches. The OCS optical circuit switch replaces traditional optical-electrical-optical conversion with full optical connections, eliminating packet buffering and storage forwarding, achieving ultra-low latency, zero buffering, and protocol-independent operation while reducing power consumption and jitter. According to the OCP's OCS white paper, large-scale data center deployments that adopt OCS solutions can reduce power consumption by up to 41% and capital expenditures by 30%, with bandwidth upgrades not constrained by electrical chip processes, significantly broadening the product lifecycle. The industry has already achieved mass production of OCS based on MEMS solutions, and is accelerating research and development towards LCD, silicon-based waveguides, and piezoelectric ceramic solutions. The firm believes that under the current background where large AI models are transitioning to trillions of parameters, traditional electrical switches are limited by bandwidth bottlenecks and power consumption constraints, making them inadequate for supporting ultra-large-scale cluster computing. As OCS commercialization progresses further, OCS full optical networks will become the core foundation of AI computing power. End customers are accelerating deployments, and the OCS market is expected to experience rapid expansion. Cignal AI predicts that the global OCS market size may exceed $8 billion by 2030, corresponding to a compound growth rate of over 30% from 2026 to 2030. Lumentum's OCS shipment volume for Q4 FY26 doubled quarter-over-quarter, with a forecast indicating a CAGR of over 150% for shipments by 2028; ADI FY26Q3 indicated that it expects OCS business to maintain double-digit growth in 2027 (FY26Q3), driven by rapid market demand growth. At present, the main source of OCS market demand comes from Google. According to Semianalysis, Google is expected to introduce a 6D Torus architecture on the TPU v9t for training (originally a 3D Torus), doubling the ICI links from 6 to 12 per chip, significantly reducing network diameter and greatly increasing the demand for OCS in cabinets. NVIDIA is also strategically positioning itself and investing in the European silicon photonics leader iPronics (September 2026) to support the development of its second-generation OCS technology, which is expected to integrate OCS within the Rubin Ultra NVL576 architecture as early as possible. Considering that its GPU shipments far exceed those of TPU, the firm believes that if NVIDIA confirms the OCS+CPO architecture, it could form a second growth curve on par with Google. Demand growth outpaces capacity expansion, highlighting the strengths of domestic manufacturers amidst the overflow of orders. Lumentum's management made it clear during an earnings call (FY26Q4) that the demand signals for OCS in 2027 are extremely strong, and the company is starting to seek partnerships with foundries to expand its production capacity gap. China has now mastered multiple core processes from MEMS chips, two-dimensional collimators to micro-lens arrays and is a significant player in global OCS capacity. The firm believes that as end customer applications accelerate, the growth rate of OCS market demand will outstrip global capacity expansion, and overseas manufacturers will not be able to handle all the demand alone. Domestic manufacturers possess abundant corresponding technological reserves and have significant advantages in production scale-up and supply assurance, with expectations for market share and value proportions to continue increasing, firmly optimistic about the opportunities for domestic substitution amidst the explosive demand for OCS. Risk factors: AI capital expenditures falling short of expectations; Google TPU shipments and cluster deployment pace not meeting expectations; delays in new customer onboarding; obstacles in OCS capacity ramp-up; risks associated with switching technology routes; geopolitical and export control risks; intensified competition and product price volatility risks.