Revenue Recovery, but Gross Margin and Customer Concentration Risks Continue to Constrain Valuation

Overview

T&S Communications reported 1H26 results, with revenue and profit increasing 20.8% and 1.7% YoY, respectively. Supported by improving demand for optical communication products such as MPO connectors and capacity expansion, the company ended three consecutive quarters of revenue declines, with 2Q26 revenue and profit rising 44.16% and 17.6% YoY, respectively. However, rising component costs and an unfavorable regional revenue mix weighed on gross margin, while overseas market growth was materially weaker than that in China.

Core views

The report believes global optical communications market trends are improving, but T&S Communications remains in a relatively challenging position. Improved near-term revenue momentum is insufficient to offset margin pressure; intensifying competition from key global AI customers, market-share losses, and supply-chain deconcentration could continue to weigh on profitability. Nomura maintains its Neutral rating and prefers InnoLight (300308CH, Buy) within the optical communications sector.

Analysis framework

Operating trends are assessed based on 1H26 and 2Q26 growth rates, gross-margin changes, domestic and overseas revenue performance, demand for optical communication products, and capacity expansion. Valuation uses an FY27F EPS multiple approach and incorporates the FY26-28F earnings CAGR.

Methodology notes

• Valuation methodsPrice-to-Earnings Method

  Target Price Valuation

  The CNY 138.00 target price is based on a 45x P/E multiple on FY27F EPS of CNY 3.06, which the report states is consistent with the FY26-28F earnings CAGR of 45%.

• Fundamental AnalysisEarnings and Profitability Analysis

  Revenue, Profit, and Gross Margin

  Operating quality is evaluated through YoY revenue and profit growth, YoY and QoQ gross-margin changes, and the domestic-versus-overseas revenue mix.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Shenzhen T&S Communication（300570.SS）

  Covered Company

  Strengths

  Demand for optical communication products such as MPO has improved, capacity expansion has supported revenue recovery, and 2Q26 revenue growth was rapid.

  Weaknesses

  Gross margin declined, overseas revenue growth was weak, and profit growth lagged revenue growth.

  Comparison

  Nomura prefers InnoLight (300308CH, Buy) within the optical communications sector.

  Risks

  Supply-chain deconcentration by key customers, intensifying competition, and market-share losses could continue to weigh on profitability.

• InnoLight（300308CH）

  Peer Comparison and Preferred Company

  Strengths

  Rated Buy by Nomura.

  Weaknesses

  The report does not provide further fundamental details.

  Comparison

  Compared with T&S Communications, Nomura explicitly prefers this company.

  Risks

  The report does not provide company-specific risk analysis.

Key data

• 1H26 Revenue YoY Growth20.8%Company revenue resumed growth.
• 1H26 Profit YoY Growth1.7%Below revenue growth, reflecting margin pressure.
• 2Q26 Revenue/Profit YoY Growth44.16% / 17.6%Driven by improving optical communications demand and capacity expansion.
• 2Q26 Gross Margin33.27%Down 3.12 percentage points YoY and 4.53 percentage points QoQ.
• 1H26 Overseas/China Market Revenue YoY Growth2.7% / 104.4%Overseas performance was significantly weaker than that in the China market.
• FY27F EPSCNY 3.06Basis for target-price valuation.
• FY27F P/E45x (target price)/52.8x (current share price)Current valuation is above the multiple implied by the target price.

Impact & implications

The revenue recovery validates the positive effects of optical communications demand and capacity expansion, but the gross-margin decline indicates that revenue growth has not yet translated fully into earnings leverage. If key customers advance supply-chain diversification, the company's pricing power, order share, and earnings expectations could face further pressure; with the current share price above the target price, the risk-reward profile remains unattractive.

Risks

• Weaker-than-expected demand in the optical component market.
• Slower-than-expected CPO penetration.
• Supply-chain diversification by major customers.
• 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

• Whether demand for optical communication products such as MPO can continue to improve.
• Whether gross margin can stabilize as costs and product mix evolve.
• Whether overseas revenue growth can improve and narrow the gap with the China market.
• Changes in order share and supply-chain strategy among key global AI customers.
• Progress in CPO penetration and industry capital expenditure.