Expectations for Daehan Optical Communication's earnings recovery are resurfacing. The impact of higher selling prices for standard optical fiber is expected to be fully reflected starting from the second-quarter earnings, while order volumes for ultra-high-core-count optical cables for U.S. AI data centers will enter the supply phase in the second half of the year. However, the timing of when these two positive catalysts will be reflected in earnings differs. In the second quarter, whether the operating loss has narrowed due to the increased optical fiber prices will be confirmed first, while the revenue contribution of high-value-added products for AI data centers must be assessed from the third quarter onward, when supply begins.

Shinyoung Securities predicted on the 13th that Daehan Optical Communication's profitability will improve as the optical fiber prices that have been rising since the beginning of the year are fully reflected in the second-quarter earnings. However, it did not provide an investment opinion or a target price in this analysis.

■ An Optical Fiber and Cable Specialist with an Integrated Production System

Daehan Optical Communication manufactures optical fibers and cables used in telecommunications, power, and defense. The most significant characteristic of its business structure is that it possesses an integrated production system capable of producing everything in-house, from the preform—the raw material for optical fiber—to the finished optical fiber and cable products.

■ Rising Optical Fiber Prices… Changes in China's Demand Structure as the Core Driver

The first reason Shinyoung Securities cited for the earnings improvement is the price change in China's optical fiber market. According to the report, the price of standard optical fiber in China has surged from around $2.50 last November to over $10 recently.

The background is a shift in the demand structure. As demand for high-performance optical fiber for data centers in China has increased, local manufacturers have repurposed some of their standard product production lines for high-performance products. This reportedly reduced the supply of standard optical fiber, driving up prices. However, this price refers to an industry figure identified in the Chinese market and does not mean that the selling prices of all of Daehan Optical Communication's products have risen by the same margin.

In the first quarter of this year, Daehan Optical Communication's consolidated revenue was approximately 34.2 billion KRW, up about 35% year-on-year. Meanwhile, its operating loss stood at around 4 billion KRW; although reduced compared to the same period last year, the company remained in the red.

Despite optical fiber prices rising earlier in the year, the limited improvement in first-quarter profitability was due to production and transportation time lags. It typically takes about two to three months after production for products to be supplied to customers, meaning the effect of the price hike was not fully reflected in the first-quarter results.

■ Q2 Breakeven Possibility… Signifying 'Narrowed Loss' Rather Than 'Strong Earnings'

Shinyoung Securities estimated that the second-quarter operating profit or loss could improve to around the breakeven point. Here, the phrase 'strong earnings' does not imply recording a massive operating profit; rather, it should be understood as a relative assessment indicating that the company can significantly reduce its losses and escape the first-quarter operating loss of 4 billion KRW.

Therefore, the primary metrics to confirm in the second-quarter earnings are the gross profit margin and the operating profit, rather than the revenue growth rate. The key point is whether the increase in optical fiber selling prices translates into actual profit, overcoming the burdens of raw material, logistics, and fixed costs.

■ 864-Core Optical Cable for U.S. AI Data Centers… 5 to 10 Times Pricier Than Standard Cables

The second pillar of earnings improvement is the ultra-high-core-count optical cable designed for AI data centers. In June, Daehan Optical Communication announced it had signed a second contract to supply 864-core optical cables to a U.S. hyperscale AI data center.

The second contract is valued at $23.68 million, which the company converted at the time to approximately 35.5 billion KRW. Combined with the $3.78 million initial order secured in February, the cumulative supply volume stands at $27.44 million, or about 41.1 billion KRW based on the company's conversion rate. The supply period spans from July 2026 to the end of 2027.

The 864-core optical cable houses 864 optical fibers within a single cable, allowing more lines to be installed in the same space compared to existing 144-core or 288-core products. This makes it ideal for large-scale AI data centers and inter-data center connectivity.

Shinyoung Securities noted that the selling price of the 864-core product is approximately 5 to 10 times higher than that of standard cables. However, this price gap does not immediately translate to a comparable profit margin difference, as manufacturing is highly difficult and costs may simultaneously increase due to quality inspections, client certifications, and initial production yield rates.

Considering that the supply for this contract begins in July, the second-quarter earnings will primarily serve as a window to verify the impact of standard optical fiber price hikes. Conversely, the structural improvement effects of the 864-core cable are likely to become tangible from the third quarter onward, as actual shipment volumes increase. Furthermore, the entire cumulative contract amount will not be recognized as revenue all at once this year. Because the supply period extends to the end of 2027, revenue may be recognized fractionally across multiple quarters depending on the delivery schedule, client inspections, and accounting recognition milestones. Additionally, KRW-denominated revenue may differ from the initially announced figures due to exchange rate fluctuations.

■ North American Order Backlog at $73.54 Million… An Indicator of 'Revenue Possibility,' Not Guaranteed Profit

The scale of its North American operations is also expanding. In June, Daehan Optical Communication reported that its optical communication cable order backlog, secured through its local U.S. subsidiary, reached $73.54 million, or approximately 110.3 billion KRW based on the exchange rate at the time. This backlog includes not only large-capacity optical cables for AI data centers but also power optical cables for the North American power grid.

However, an order backlog is merely an indicator of future revenue potential, not a guaranteed profit. Actual profitability will depend on contract prices by product, costs, delivery schedules, production facility utilization rates, and client approvals.

■ Fiber Optic Price Volatility Remains a Variable… Need to Verify 'Two-Phase' Earnings Recovery

Whether the upward trend in optical fiber prices will persist also remains a variable. Since Daehan Optical Communication produces everything from preforms to finished products, it can benefit from vertical integration during periods of rising prices, but conversely, profitability volatility could increase if standard product prices fall again. Shinyoung Securities also noted that the company's existing business structure, heavily reliant on standard products, has historically amplified earnings volatility in response to optical fiber price fluctuations.

Ultimately, changes in Daehan Optical Communication's earnings must be examined in two phases. The benchmark for the second quarter is how much the higher optical fiber prices narrow the operating loss, while from the third quarter onward, the assessment criterion will be whether the 864-core cables for U.S. AI data centers improve not only revenue but the quality of profits. It is premature to conclude a full earnings recovery based solely on higher optical fiber prices and an expanded order backlog. The recovery of the breakeven point in the second quarter, shipment volumes of high-value-added products in the second half, and the actual conversion speed of the order backlog into revenue must all be verified together to determine whether Daehan Optical Communication's business structure is genuinely shifting from standard products to high-value-added data center products.

[This article was written with the assistance of AI. This article is for informational purposes only and does not recommend the purchase or sale of any specific stock. Securities firm forecasts and the company's announced order plans are subject to change based on market prices, exchange rates, production schedules, client inspections, and actual performance. Investment decisions and the resulting responsibilities lie solely with the investor.]