Written by: Rita

Reuters reported on August 4 that the Trump administration and the FCC are considering banning Chinese optical modules from entering the US market. Citigroup's research report on August 9 reviewed the regulatory framework issued by the FCC and found that optical modules are not included in any active bans. The FCC's Order 26-50 established two restricted list mechanisms based on manufacturers and origin, but optical modules were only mentioned once as an example in the hardware material disclosure requirement, and not as restricted products. The reported ban remains in the proposal stage. Citigroup's judgment is that Chinese manufacturers supply 60% to 70% of the high-speed optical modules for US major companies, and non-Chinese suppliers cannot fill the gap in the short term, thus the actual enforcement of the ban is unlikely to occur soon.

Optical modules not included in active bans; FCC mechanism has three possible paths

The FCC's Order 26-50, passed on July 22, officially established two types of restricted lists. The first type is based on manufacturers, directly naming entities such as Huawei and ZTE, which are restricted regardless of where their products are produced. The second type is based on origin, restricting all products produced outside the US in the entire product category, currently covering drones, routers, inverters, and advanced robotics equipment. Optical modules do not fall under either category.

The only place optical modules appear in the FCC's Order 26-50 is in an example sentence related to hardware/software material disclosure requirements: “Should we list a few key components, such as modular transmitters, IoT modules, semiconductors, and optical modules?” This sentence appears in the disclosure requirements section, not in the ban section. The status of optical modules as components is similar to that of chips in routers or sensors in drones.

Citigroup categorizes potential regulatory paths into three scenarios. The manufacturer-based scenario is the least likely, as Chinese manufacturers supply 60% to 70% of the US major companies' high-speed optical module demand, banning major manufacturers would directly impact the construction of US AI infrastructure. The scenario based on origin covering all offshore production is the strictest, but it would also have a significant impact, potentially forcing the US to introduce broad exemption mechanisms, which would be beneficial for equipment and automation companies. The scenario based on origin but limiting only Chinese origin allows for some flexibility in overseas production capacity; however, the definition of "origin" remains unresolved, with design, firmware, and supply chain control being relevant factors. Citigroup believes that origin restrictions are more likely to be implemented than manufacturer restrictions, but the probability of recent enforcement is low.

Chinese optical modules are the main supply source; the ban is difficult to enforce in the short term

Citigroup estimates that Chinese optical module suppliers collectively account for 60% to 70% of the high-speed optical module market for US major companies. US optical module companies are building local production lines, but increasing capacity takes time and cannot meet the demand of AI data centers in the short term. If the ban is indeed enforced, the construction of US AI infrastructure will be directly pressured, which contradicts the AI leadership goals publicly promoted by the Trump administration.

The FCC clearly reserves the right to modify or suspend restrictions, and there have been similar precedents before. The diplomatic calendar between the US and China in September and November 2026 provides a natural turning point, and restrictions on optical modules may be included in negotiations on rare earths, agricultural procurement, or other bilateral priorities, serving as bargaining chips that may not necessarily lead to enforcement.

The speed of building local production lines by US optical module companies will be a key variable. Automation equipment and production line integration companies may benefit during this process, but this requires a capacity ramp-up cycle of several quarters. Citigroup assesses that the likelihood of recent restrictions being enforced is low, but a long-term trend of replacement has already been established.

New Fiber and Dongshan Precision have the largest exposure; Tianfu Communication is relatively insulated

If the optical module ban is implemented, the degree of impact on different companies varies significantly. New Fiber and Dongshan Precision have the largest exposure to US optical module exports and face high risks under both the manufacturer and all offshore production scenarios, with some alleviation only under the scenario limiting to Chinese origin due to overseas capacity ramp-up. Tianfu Communication, as a passive component supplier, is only indirectly affected and relatively insulated.

Dongshan Precision: Citigroup gives a target price of 350 RMB based on a classification summary valuation method, with a buy rating. The optical module business is valued at 20 times the expected earnings per share for 2027, the optical chip business at 50 times, the AI PCB business at 25 times, and the traditional business at 15 times. Dongshan Precision's optical module and optical chip businesses are doubly exposed, but if the regulatory path ultimately stays at the origin level, their overseas capacity layout may provide some buffer.

New Fiber: Citigroup gives a target price of 701 RMB, with a buy rating, based on 20 times the expected earnings per share for 2027, which is 0.5 standard deviations lower than the five-year historical average. This valuation already reflects the strong cycle of 800G/1.6T and ASIC/Scale-Up opportunities but does not fully account for the potential substitution risks from CPO for Nvidia customers.

Tianfu Communication: Citigroup gives a target price of 419 RMB, with a buy rating, based on 34.3 times the expected earnings per share for 2027, at the five-year average level. As a passive component supplier, regardless of how the ban is implemented, its products are not covered by the restricted list, making it the lowest risk among the three.

Citigroup's conclusion is clear: Chinese optical module manufacturers occupy an irreplaceable position in the US AI supply chain, and the US does not have sufficient capacity to fill this gap in the short term. The discussion of the ban will continue, but it will not be implemented quickly. Investors need to pay close attention to the pace of domestic capacity construction in the US and the negotiation direction of optical module topics in the US-China diplomatic agenda. The logic of domestic substitution for optical modules remains unchanged, but the time window is longer than the market expects.

Disclaimer

This article is a summary and interpretation of the third-party brokerage research report (Citigroup Research, August 9, 2026) by Chao Xiang Research, combined with the organization of publicly available market information. The ratings, target prices, profit forecasts, and related judgments quoted in the text are solely the opinions of the brokerage’s analysts and represent the positions of their respective institutions and do not represent the views of Chao Xiang Research, nor do they constitute any investment advice.

The market has risks, and decisions should be made independently. This article should not serve as the basis for buying or selling any securities.