Written by: Rita
Reuters reported on August 4th that the Trump administration and the FCC are considering banning Chinese optical modules from entering the U.S. market. In a research report dated August 9th, Citi reviewed the regulatory framework already enacted by the FCC and found that optical modules do not appear on any effective ban list. FCC Order 26-50 established two restricted list mechanisms: one based on manufacturers and one based on country of origin. However, optical modules were only mentioned once in the order, as an example in the context of hardware/material list disclosure requirements, not as a restricted product. The reported ban remains at the proposal stage. Citi's assessment is that Chinese suppliers provide 60% to 70% of high-speed optical modules for U.S. hyperscale customers. Non-Chinese suppliers cannot fill this gap in the short term, making the immediate enforcement of a real ban unlikely.
Optical Modules Not Listed in Effective Bans; FCC Mechanism Has Three Potential Paths
The FCC's Order 26-50, passed on July 22nd, formally established two types of restricted lists. The first is manufacturer-based, directly naming entities like Huawei and ZTE, restricting their products regardless of where they are produced. The second is country-of-origin-based, restricting entire product categories produced outside the U.S., currently covering drones, routers, inverters, and advanced robotics equipment. Optical modules are not in either category.
The only place optical modules appear in FCC Order 26-50 is in an example sentence regarding hardware/software material list disclosure requirements: "Should we list several key components, such as modular transmitters, IoT modules, semiconductors, and optical modules?" This sentence appears in the disclosure section, not the ban section. The status of optical modules as components is similar to that of chips in routers or sensors in drones.
Citi outlines three potential regulatory paths forward. The manufacturer-based scenario is the least likely, as Chinese suppliers meet 60% to 70% of U.S. hyperscalers' high-speed optical module demand. Banning major manufacturers would directly impact U.S. AI infrastructure construction. The country-of-origin scenario covering all foreign production is the most stringent but would have similarly massive impact, likely forcing the U.S. to implement broad exemption mechanisms, which could benefit equipment and automation companies. The country-of-origin scenario restricting only Chinese production leaves room for overseas capacity deployment, but the definition of "origin" remains unresolved, with factors like design, firmware, and supply chain control playing a role. Citi believes origin-based restrictions are more likely to be implemented than manufacturer-based ones, but the probability of near-term implementation is low.
Chinese Optical Modules Are Supply Mainstay; Ban Difficult to Enforce in Short Term
Citi estimates that Chinese optical module suppliers collectively hold a 60% to 70% share of the high-speed optical module market for U.S. hyperscale customers. U.S. optical module companies are already building domestic production lines, but ramping up capacity takes time and cannot meet the demand from AI data centers in the short term. If a ban were actually enforced, U.S. AI infrastructure construction would come under direct pressure, contradicting the Trump administration's publicly stated goal of advancing AI leadership.
The FCC explicitly reserves the right to modify or suspend restrictions, with similar precedents existing. The U.S.-China diplomatic calendar in September and November 2026 provides natural inflection points. Optical module restrictions could be incorporated into negotiations on topics like rare earths, agricultural product purchases, or other bilateral priorities, serving as a bargaining chip rather than necessarily being implemented.
The speed of domestic production line construction by U.S. optical module companies will be a key variable. Companies providing automation equipment and production line integration may benefit from this process, but it requires a ramp-up cycle spanning several quarters. Citi judges the probability of a ban being implemented in the near term as low, though the long-term trend of substitution is already established.
Sunny Optical (XYS) and Dongshan Precision Most Exposed; TFC Optical Relatively Insulated
If an optical module ban is implemented, the degree of impact will vary significantly among companies. Sunny Optical (XYS) and Dongshan Precision have the largest exposure to U.S. optical module exports, facing higher risks under both the manufacturer-based and the all-foreign-origin scenarios, only moderating under the China-only origin scenario due to overseas capacity ramp-up. TFC Optical, as a supplier of passive components, is only indirectly affected and relatively insulated.
Dongshan Precision: Citi gives a target price of RMB 350 based on a sum-of-the-parts valuation, with a Buy rating. This values the optical module business at 20x expected 2027 EPS, the optical chip business at 50x, the AI PCB business at 25x, and the traditional business at 15x. Dongshan Precision's optical module and optical chip businesses have dual exposure, but if the regulatory path ultimately remains at the origin level, its overseas capacity layout may provide some buffer.
Sunny Optical (XYS): Citi gives a target price of RMB 701 with a Buy rating, based on 20x expected 2027 EPS, 0.5 standard deviations below its five-year historical average. This valuation already reflects the strong 800G/1.6T cycle and ASIC/Scale-Up opportunities but does not fully account for the potential replacement risk from CPO for NVIDIA customers.
TFC Optical: Citi gives a target price of RMB 419 with a Buy rating, based on 34.3x expected 2027 EPS, in line with its five-year average. As a supplier of passive components, TFC's products are not covered by the restricted lists regardless of how a ban is formulated, making it the lowest-risk stock among the three.
Citi's conclusion is clear: Chinese optical module manufacturers hold an irreplaceable position in the U.S. AI supply chain, and the U.S. lacks sufficient capacity to fill this gap in the short term. Ban discussions will continue but are unlikely to materialize quickly. What investors should truly monitor is the pace of U.S. domestic capacity build-out and the negotiation trajectory of the optical module issue within the U.S.-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 compilation and interpretation by Trend Research of a third-party brokerage research report (Citi Research, August 9, 2026), combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited herein are the views of the analyst(s) from that brokerage, representing only the stance of their institution, and do not represent the views of Trend Research, nor do they constitute any investment advice.
The market carries risks, and decisions should be made independently. This article should not be used as a basis for trading any securities.
