Yesterday, China Mobile (CHL) announced on its Chinese language website a major coherent transport order of 42K-70K ports. Commenting on the news, Needham analyst Alex Henderson said it may cause “a meaningful change” in the demand trajectory out of China, helping optical names. While his peer at B. Riley acknowledged that the tender could be “a needle-mover,” he pointed out that the 10G/100G mix is still unclear.

CHANGE IN DEMAND TRAJECTORY: Following the announcement, Needham analyst Alex Henderson told investors that the order announced by China Mobile looks “significant in scale” and material for a broad swath of optical stocks and is likely to be delivered starting in the fourth quarter and into the first half of 2018. Further, the analyst argued that it could cause “a meaningful change” in the demand trajectory out of China, helping optical names including NeoPhotonics (NTPN), Acacia Communications (ACIA), Oclaro (OCLR), Lumentum (LITE), Finisar (FNSR), and Fabrinet (FN). As Huawei and ZTE (ZTCOY) have been drawing down inventory, the impact could be larger than the scale of the order as it pushes companies to rebuild inventory, Henderson added. Nonetheless, the analyst pointed out that it is too early to pen this demand in for the fourth quarter, and could use more proof and clarity of scale and timing. His peer at Stifel voiced a similar opinion as he sees the news as a positive for the optical industry, particularly for investor sentiment. Analyst Patrick Newton believes the China Mobile tender is indicative of a thawing in metro tenders and deployments in China, which should eventually bode positively for those exposed to China, specifically Oclaro, Lumentum, and Finisar. Nonetheless, the analyst told investors that he continues to see a challenging environment in China, but hopes the September quarter will represent a bottom for fundamentals.

MORE INFORMATION NEEDED: In a research note of his own, B. Riley analyst Dave Kang noted that while China Mobile has issued a procurement notice for approximately 42,000 ports, there was no information on the mix of 10G/100G, which would be the most relevant information to determine its significance. As such, the analyst believes it is inconclusive to determine the impact on the optical industry at this point. Nonetheless, Kang argued that while it would be a relative non-event if the tender is mostly 10G, it would be meaningful for the industry if it is mostly 100G. Given that Lumentum is the primary supplier of datacom products to Huawei, a primary allocation to 100G ports would be incrementally positive for it, the analyst added. Moreover, Kang believes that if this is mostly a 100G tender, it could be a “needle-mover” for the optical component industry.