Revenue Growth Resumes, but Gross Margin and Customer-Mix Pressures Persist
AI summary card
Revenue Growth Resumes, but Gross Margin and Customer-Mix Pressures Persist
The company's 2Q26 revenue and earnings improved year over year, but gross margin fell to 33.27%; Nomura maintains a Neutral rating and CNY 138 target price.
- 1H26 revenue/earnings grew 20.8%/1.7% year over year, while 2Q26 revenue/earnings grew 44.1%/17.6% year over year.
- 2Q26 gross margin declined by 3.12 percentage points year over year and 4.53 percentage points quarter over quarter to 33.27%.
- Overseas revenue grew only 2.7% year over year in 1H26, materially lagging the 104.4% growth in the China market.
- Valuation is based on 45x FY27F EPS of CNY 3.06; the current share price implies 52.8x FY27F P/E.
Report interpretation
Overview
Following Shenzhen T&S Communication's 1H26 results release, revenue growth resumed, mainly driven by healthy demand for optical communication products such as MPO connectors and capacity expansion. However, gross margin declined notably and overseas-market performance was weak; the report believes the company continues to face profitability pressure amid customer supplier diversification.
Core views
The report recognizes the uptrend in the global optical communications market and the improvement in the company's revenue momentum, but believes rising costs for upstream components such as optical fiber and ceramic ferrules, together with an unfavorable regional revenue mix, are eroding gross margin. Supply-chain diversification by key global AI customers could heighten competition and market-share loss risk, supporting the maintained Neutral view.
Analysis framework
Assesses operating momentum and margins using 1H26 and 2Q26 year-over-year and quarter-over-quarter performance changes, together with regional revenue growth, customer mix, optical communications industry demand, and forward P/E.
Methodology notes
The target price uses a forward EPS multiple approach
The CNY 138 target price is based on 45x FY27F EPS of CNY 3.06; the report states that this multiple is consistent with an approximately 45% earnings CAGR from FY26 to FY28F.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Shenzhen T&S Communication (300570.SS)Company under coverage
- Strengths
- Improving demand for optical communication products such as MPO connectors, with capacity expansion supporting revenue recovery.
- Weaknesses
- Declining gross margin, with overseas revenue growth materially lagging that of the China market.
- Comparison
- Within the optical communications sector, the report prefers Zhongji InnoLight (300308 CH, Buy).
- Risks
- Optical component demand below expectations, CPO penetration below expectations, supply-chain diversification by major customers, and geopolitical risks.
- Zhongji InnoLight (300308 CH)Peer comparison and preferred name in the report
- Strengths
- The report assigns a Buy rating and identifies it as a preferred name in the optical communications sector.
- Weaknesses
- The report provides no further operating analysis.
- Comparison
- Compared with Shenzhen T&S Communication, the report explicitly indicates a preference for this company.
- Risks
- The report does not provide a dedicated discussion of its risks.
Key data
- 1H26 revenue growth year over year20.8%Revenue growth resumed.
- 1H26 earnings growth year over year1.7%Earnings growth was below revenue growth.
- 2Q26 revenue growth year over year44.1%Supported by optical communications demand and capacity expansion.
- 2Q26 earnings growth year over year17.6%Margin pressure limited earnings leverage.
- 2Q26 gross margin33.27%Down 3.12 percentage points year over year and 4.53 percentage points quarter over quarter.
- 1H26 overseas revenue growth year over year2.7%Materially weaker than the China market.
- 1H26 China-market revenue growth year over year104.4%Significant divergence in regional growth.
- FY27F P/E52.8xCalculated based on the current share price as stated in the report.
Impact & implications
The revenue inflection point may improve market expectations for demand, but if cost pressure, overseas share pressure, and customer supplier diversification persist, margin improvement may lag revenue growth. The target price is below the current share price, reflecting the report's cautious risk-reward assessment.
Risks
- Optical component market demand weaker than expected.
- CPO penetration below expectations.
- Major customers advancing supply-chain diversification.
- Geopolitical risks.
- Rising costs for components such as optical fiber and ceramic ferrules.
- Intensifying competition in overseas markets and market-share losses.
What to watch
- Sustainability of demand for MPO connectors and other optical communication products.
- Whether gross margin can stabilize as costs and product mix improve.
- Overseas-market revenue growth and order changes from leading global AI customers.
- The impact of customer supplier diversification on order share and pricing.
- Actual progress of CPO penetration and its effect on demand for optical components.