On Friday, UBS initiated coverage on Yangtze Optical Fibre And Cable Joint Stock Limited Company (6869:HK) (OTC: YZOFF) stock with a Neutral rating and a price target set at HK$12.10.
The firm pointed to the current downcycle in China's fibre/cable demand due to high fibre penetration and limited capital expenditure from telecommunications companies as factors impacting growth prospects.
The analyst from UBS noted that while Yangtze Optical Fibre's emerging fibre/cable products have promising growth potential and margins are expected to improve, the company's revenue is still largely dependent on traditional telecom products.
With a meaningful demand recovery for these products remaining uncertain, the firm's revenue estimates for Yangtze Optical Fibre are slightly below the consensus.
The upcoming optical cable tender by China Mobile (NYSE:CHL) (CM) was identified as a potential key catalyst for Yangtze Optical Fibre. The analyst suggested that the tender could positively influence the company's valuation if the price or volume exceeds previous rounds, whereas a decline would have a negative impact.
Despite the cautious revenue outlook, UBS's earnings estimates for Yangtze Optical Fibre are slightly above consensus, primarily due to an anticipated higher gross margin. The analyst highlighted that potential upside to the company's valuation could stem from a faster-than-expected demand recovery, while downside risks may arise from an increasingly competitive landscape.
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