China optical communication sector update: Transceiver Act, new fiber capacity, switch chip localization

China's AI supply chain sector stocks experienced a significant correction on 28 Sept amid investor caution before the golden week holidays and an uncertain geopolitical and macroeconomic environment. Two news events in the optical communication sector may have increased investor concerns: the introduction of the "Chinese Optical Transceivers Act" by a bipartisan group of US senators, and Hengtong Optic-Electric's A-share private placement plan to expand optical fiber capacity. In addition, the Financial Times reported that China SASAC has been surveying state-owned data centers' reliance on Broadcom switches, signaling an accelerated push for supply chain localization. We see the Transceiver Act as affecting only government business, with limited direct commercial impact, though the potential of being added to the "Covered List" remains a long-term overhang. Given the supply-demand gap in 1.6T optical transceivers and potential commercialization of NPO, we expect optical transceiver l