2Q Gross Margin Beat Expectations; HDD and Optical Communications Expected to Take Over as Growth Drivers from 2027

Overview

This report reviews Crystal-Optech's 2Q26 results and updates the outlook for its HDD, optical communications, Apple camera optics, AR, and automotive optics businesses. The 2Q gross margin exceeded expectations, but upfront preparation expenses for new businesses reduced near-term earnings forecasts. BofA still believes that the ramp-up of new businesses from 2027 and share gains in existing businesses can support medium-term growth, and therefore cut its target price but reiterated Buy.

Core views

Crystal-Optech's 2Q26 results were slightly better than expected. Adjusted earnings were CNY278mn, broadly flat YoY; revenue was CNY1.8bn, up 14% YoY and 2% QoQ, in line with BofA's forecast and market consensus. Gross margin reached 33.8%, 4.1 percentage points above BofA's forecast, mainly because the expansion of the Apple business delivered better economies of scale. This means revenue did not materially exceed expectations, but improvements in the product and customer mix made earnings quality better than anticipated. Management's mass-production roadmap for HDD glass substrates is central to the new growth thesis: small-volume ramp-up beginning in 2026, several million units in 2027, and several hundred million units in 2028. Based on an average selling price of US$2 per unit, BofA believes the business could generate more than CNY1.5bn in revenue in 2028, approaching 15% of the company's total revenue. BofA had not previously included any HDD contribution in its 2028 forecast but has now incorporated it; as a result, despite higher near-term expenses, its 2028 earnings forecast was still raised. The optical communications business is also expected to begin contributing in 2027. Management believes that progress in filters and microlenses could be faster due to tight equipment supply across the industry chain, with large-volume shipments expected to commence in 1H27. Over the longer term, the company's collaboration with industry-chain partners to develop glass substrates and waveguides required for CPO could provide additional upside, although the report did not quantify this potential in an explicit revenue forecast. The existing Apple business is considered resilient. BofA expects the company's share in infrared cut-off filters (IRCF) to rise from the current 20%-30% to 50% over the next one to two years. By 2028, periscope cameras are expected to adopt a second-generation design, potentially increasing the average selling price of the company's prism products and improving gross margin. These increases in share and content per device are among BofA's primary reasons for reiterating its Buy rating. Production lines for the AR business are already in place, but demand realization remains conditional. The reflective waveguide production line has been completed, and management said it is the only solution being considered by a key customer for models with a field of view exceeding 50 degrees. However, actual volume growth will still depend on the emergence of killer applications and whether product pricing and performance are attractive. In the automotive business, the company entered the market in 2021, with key products including LiDAR protective covers and AR-HUDs. BofA cites automotive business expansion driven by HUD and LiDAR product deliveries as part of its investment thesis, while also believing that AR and AI server-related optical products could provide further upside. Forecast revisions reflect the timing gap between near-term investment and medium-term returns. Because operating expenses required to prepare new businesses were higher than previously assumed, BofA cut its 2026 and 2027 earnings forecasts by 3% each, while raising its 2028 earnings forecast by 2% because the HDD contribution exceeded its previous zero-contribution assumption. EPS forecasts were reduced from CNY1.08 to CNY1.05 for 2026 and from CNY1.32 to CNY1.28 for 2027, while the 2028 forecast was raised from CNY1.61 to CNY1.63. The corresponding adjusted net profit forecasts are CNY1,462mn, CNY1,780mn, and CNY2,268mn. The report expects an earnings CAGR of approximately 25% from 2026 to 2028 and states that its 2026-2028 forecasts are broadly in line with market consensus. EBITDA forecasts in the model were raised from CNY2,162.3mn, CNY2,658.7mn, and CNY3,217.2mn to CNY2,241.4mn, CNY2,839.6mn, and CNY3,498.0mn, respectively. The cash flow model reflects pressure from upfront investment: forecast capital expenditure for 2026 is CNY1.7bn, while free cash flow is negative CNY662mn, or negative CNY0.48 per share. Free cash flow is expected to recover to CNY908mn and CNY1,480mn in 2027 and 2028, equivalent to CNY0.65 and CNY1.06 per share, respectively. Over the same period, the forecast P/E declines from 24.0x in 2026 to 19.7x in 2027 and 15.5x in 2028, reflecting earnings growth absorbing the valuation. BofA cut its target price from CNY37 to CNY35 due to lower near-term earnings forecasts, but maintained its 32x valuation multiple, based on forecast earnings from 2H26 to 1H27. The 32x multiple is close to one standard deviation above the company's historical average of 27x. BofA believes that an earnings CAGR of approximately 24% from 2025 to 2028, the company's position in the Apple and AR glasses supply chains, and its expansion into AI server optics can support this premium. The report also notes that the company's one-year forward P/E is below its historical average, and therefore reiterates Buy despite the target price reduction.

Analysis framework

The report first compares 2Q revenue, earnings, and gross margin with BofA's forecasts and market consensus to determine whether the performance variance came from revenue or margins. It then estimates the future contributions of the HDD, optical communications, and Apple optics businesses based on management's mass-production timeline, shipment volumes, average selling prices, and customer-share trajectory. Next, it incorporates upfront expenses for new businesses and incremental HDD revenue into the 2026-2028 earnings model and checks the forecasts against consensus. Finally, it applies a 32x P/E multiple to forecast earnings from 2H26 to 1H27 to derive the target price and explains the basis by reference to the historical valuation range.

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward P/E Target Price Method

  The report uses forecast earnings from 2H26 to 1H27 as the pricing basis and applies a 32x P/E multiple to derive a CNY35 target price, comparing this multiple with the company's historical average of 27x and the level one standard deviation above that average.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  HDD Shipment Volume Multiplied by Average Selling Price to Estimate Revenue

  The report combines potential shipment volume of several hundred million units in 2028 with an average selling price of US$2 per unit to estimate that HDD business revenue could exceed CNY1.5bn, approaching 15% of total revenue.

• Corporate Fundamentals and Financial FrameworkEarnings Quality Analysis

  iQmethod Standard Financial Metrics Framework

  BofA uses a standardized methodology to track metrics including return on capital, operating margin, operating cash flow, capital expenditure, cash realization ratio, and asset replacement ratio, allowing it to assess business performance, earnings quality, and investment pressure over the forecast period.

• (Out-of-Vocabulary Method)

  Comparison of Actual Results with Institutional Forecasts and Consensus Expectations

  The report compares quarterly revenue and gross margin with both BofA's own forecasts and market consensus, then rolls forward its earnings forecasts for the next three years based on the sources of the variances.

Asset mapping & comparison

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

• Crystal-Optech (002273.SZ)

  The report believes the company will benefit from higher share and content per device in Apple camera optics and could receive new business contributions from HDD and optical communications beginning in 2027.

  Strengths

  Improved economies of scale in the Apple business; IRCF share could rise from 20%-30% to 50%; established positions in HDD glass substrates, optical communications filters and microlenses, AR reflective waveguides, AR-HUDs, LiDAR protective covers, and AI server-related optics.

  Weaknesses

  Upfront preparation expenses for new businesses led to cuts in the 2026 and 2027 earnings forecasts; free cash flow is expected to be negative in 2026; the ramp-up of the AR business still depends on killer applications and price-performance competitiveness.

  Comparison

  BofA's 2026-2028 earnings forecasts are broadly in line with market consensus; the report states that the company's one-year forward P/E is below its historical average.

  Risks

  Slower-than-expected penetration of periscope cameras and 3D sensing lenses, weaker-than-expected consumer electronics demand, slower-than-expected penetration of automotive HUDs and LiDAR, and intensifying competition.

Key data

• 2Q26 RevenueCNY1.8bnUp 14% YoY and 2% QoQ, in line with BofA and market consensus expectations.
• 2Q26 EarningsCNY278mnBroadly flat YoY and slightly better than expected overall.
• 2Q26 Gross Margin33.8%4.1 percentage points above BofA's forecast, benefiting from economies of scale in the Apple business.
• Expected IRCF Share50% over the next 1 to 2 yearsThe current share is 20% to 30%.
• HDD Mass-Production RoadmapSmall volumes in 2026; several million units in 2027; several hundred million units in 2028Management's ramp-up schedule for glass substrates.
• HDD Average Selling Price AssumptionUS$2Used to estimate the 2028 revenue contribution.
• Potential HDD Business Revenue in 2028CNY1.5bn+Expected to approach 15% of the company's total revenue.
• Timing of Large-Volume Optical Communications Shipments1H27Primarily involving filters and microlenses.
• 2026-2028 EPS ForecastsCNY1.05 / CNY1.28 / CNY1.63Previously CNY1.08, CNY1.32, and CNY1.61, respectively.
• 2026-2028 Adjusted Net Profit ForecastsCNY1,462mn / CNY1,780mn / CNY2,268mnThe report expects an earnings CAGR of approximately 25% from 2026 to 2028.
• 2026-2028 Free Cash Flow ForecastsCNY-662mn / CNY908mn / CNY1,480mnNegative in 2026 due to upfront capital investment, then expected to turn positive and improve.
• Target PriceCNY35.00Cut from CNY37.00, applying a 32x P/E multiple to forecast earnings from 2H26 to 1H27.
• Report PriceCNY25.24The share price stated in the report.
• Valuation Multiple32xClose to one standard deviation above the company's historical average of 27x.

Impact & implications

The report believes that Crystal-Optech's growth structure is evolving from share gains in traditional smartphone optics toward HDD, optical communications, AR, automotive, and AI server-related optics. Preparations for new businesses will pressure expenses and free cash flow in 2026-2027, but if mass-production plans are realized, revenue contributions should gradually emerge from 2027, with HDD potentially becoming a significant business by 2028. The target price cut reflects near-term earnings pressure, while the reiterated Buy rating is based on higher Apple share, a medium-term earnings CAGR of approximately 24%-25%, and expansion into new optical businesses.

Risks

• The penetration of periscope cameras and 3D sensing lenses may be slower than expected.
• Consumer electronics demand may be weaker than expected.
• The penetration of automotive HUDs and LiDAR may be slower than expected.
• Industry competition may intensify further.

What to watch

• Monitor whether HDD glass substrates can ramp up in small volumes as planned in 2026, reach several million units in 2027, and increase to several hundred million units in 2028.
• Monitor whether filters and microlenses can begin large-volume shipments in 1H27.
• Monitor whether IRCF share can rise from 20%-30% to 50% over the next one to two years.
• Monitor whether the second-generation periscope camera design in 2028 can increase the average selling price and gross margin of prisms.
• Monitor whether AR reflective waveguides can gain support from killer applications and meet commercialization requirements for pricing and performance.
• Monitor consumer electronics demand, automotive HUD and LiDAR penetration, and changes in industry competition.