CIG’s strong profit forecast fails to excite, hinting at fading AI euphoria

The maker of networking equipment used in homes and data centers said its profit grew strongly last year, but its stock fell sharply on the news

Key Takeaways:

• CIG Shanghai said it expects to report its profit rose more than 50% last year, boosted by improving margins from its growing wireless and photonics business
• The company’s stock fell sharply after the announcement, but still trades at an inflated P/E ratio of more than 100

By Doug Young

AI has taken the world by storm, pumping up many associated stocks to levels that some say are dangerously overinflated. That might explain the market reaction to a strong profit forecast on Friday from recently listed CIG Shanghai Co. Ltd. (6166.HK; 603083.SH), showing the company’s strong growth in the first half of last year largely continued in the second half.

Investors reacted to the news by dumping CIG’s shares when trading began on Monday, the first day after the announcement. The stock opened down more than 8% and continued to trade weakly on Monday morning, showing that good news doesn’t always produce the desired effect. Even after the drop, the stock is still up 24.6% from its IPO price of HK$68.88 last September, when CIG raised a tidy HK$4.5 billion ($577 million) from the new listing.

The company has traveled down a long road to get to its current state, with a history dating back to the original telecoms boom that produced internet bubble of the 1990s. So, it seems only fitting that its stock is getting swept up in the latest bubble, which a growing number of market watchers are predicting could burst at any time.

The company’s Hong Kong stock currently trades at a price-to-earnings (P/E) ratio of more than 100, based on its latest profit forecast and current market cap, which looks quite inflated. By comparison, more traditional networking equipment makers like Cisco (CSCO.US) and AsiaInfo (1675.HK; 688225.SH) trade at far lower multiples of around 18.

CIG probably thought it would excite investors with its latest forecast, saying it expects to report a profit of 252 million yuan ($35.7 million) to 278 million yuan for 2025, representing a gain of 51% to 67% from the previous year. Our calculations using previously announced data show that at the midpoint of that range, the company’s profit rose about 46% in the second half of the year, which represents a slight but not too worrisome slowdown from 51% growth in the first half.

Thus, the big drop in its share price really looks like some profit taking. The big question now is whether the profit taking continues until the stock reaches more reasonable valuation levels, which could herald the start of an AI bubble correction.

All that said, CIG’s business fundamentals look relatively sound, presuming demand for AI infrastructure continues to advance. CIG is the brainchild of Gerald Wong, an MIT graduate and industry stalwart who was 72 years old at the time of the company’s IPO last year. Wong, who is listed as an American citizen on Chinese websites, came out of U.S. telecoms equipment pioneer Lucent Technologies, formerly known as Bell Labs, before co-founding the company that would go on to become CIG back in 2005 in Silicon Valley.

He set up another company in Hong Kong that same year, and set up Xinqiao Network Equipment in Shanghai in 2006, which would later get renamed as CIG in 2011.

Already global

The company first listed in Shanghai in 2017, and is part of a wave of companies already listed on China’s domestic markets in Shanghai and Shenzhen that are now seeking second IPOs in Hong Kong. Many of those are listing in Hong Kong to raise their global profiles as they try to expand beyond China.

CIG is a bit different in that way, as it is already quite global. Apart from its original founding in the U.S., the company gets the vast majority of its sales from outside China. Its biggest market is the U.S., accounting for 48% of its revenue in the first half of 2025. Its other big market is Finland, accounting for 39% of its revenue, which sounds suspiciously like the customer is global telecoms equipment giant Nokia.

The company got its start not long after the original internet bubble of the 1990s, and, reflecting that, the largest of its three main business lines is selling broadband equipment to telecoms carriers, internet service providers and large residential property companies. That business accounted for 59% of its 2.03 billion yuan in revenue in the first half of last year. Its newer business selling wireless equipment to consumer electronics companies accounted for 20% of the revenue total in the first half of last year.

But it’s the company’s recent move into photonics technology that has investors most excited. The main customers for such technology are the cloud computing and data center operators that are expected to host a future generation of AI applications that require huge amounts of computing power. The company entered that business in 2018 through a Japanese acquisition, and it has grown steadily to make up 19% of its revenue in the first half of last year.

The newer photonics and wireless businesses are also CIG’s most profitable, with gross margins of about 24% in the first half of last year, well ahead of the 18.6% for its legacy broadband equipment business.

The company’s revenue growth has been relatively steady lately, slowing slightly from 18% in 2024 to 15% in the first half of last year. But improving margins on the growing contributions from photonics and wireless equipment have helped to fuel the stronger profit growth.

CIG also looks relatively well situated to withstand the ongoing tariff wars between the U.S. and China. It jointly operates a major production facility in Malaysia, which it is using to supply most of its U.S. customers. It is also in the process of commissioning a new production facility in the U.S. That led it to say in its IPO prospectus that it expected to feel no material adverse effects as a result of the trade war.

At the end of the day, the company looks relatively solid, even if its revenue growth doesn’t quite live up to the hype of the AI boom that everyone is expecting. The big stock decline after the latest strong profit announcement is probably the most revealing new development for the company, hinting that the long-expected correction for AI stocks could be coming in the not-too-distant future.

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