China:Communications Technology:Optical growth peaking,share gainer the winner,CL-Buy Accelink

2017optical investment still strong, growth slower off high baseOptical investment was robust in 2016, leading to 17% yoy optical networkhardware revenue growth in China and 6% yoy worldwide. Telecom andDatacom both contributed to the strength, by building/upgrading opticalfiber networks and expanding datacenter capacity. IHS expects opticalinvestment to remain high in 2017, however growth should decelerate asthe sector comes off a high base. IHS forecasts 4% revenue growth for theglobal optical network hardware industry in 2017, vs. 6% in 2016. Ourcovered companies experienced gross margin declines of between 170-370bp in 2016, as pricing power for new, large network rollout projectstypically lies with telco operators. However, we expect capacity expansionprojects on existing networks to generate higher margins for equipmentvendors, helping drive a recovery in profitability in 2017E/18E.