TFC's second-quarter revenue missed expectations, but a higher share of passive optical components drove earnings and gross margin above expectations

Overview

This report reviews TFC's 1H26 and 2Q26 results. Revenue fell short of Nomura's expectations due to EML chip supply constraints, but the increased contribution from high-margin passive optical components drove significant improvements in gross margin, net margin, and profit. Nomura also remains positive on the demand opportunities arising from capacity expansion and Nvidia's CPO mass production and therefore reiterates its Buy rating and CNY 282.00 target price.

Core views

TFC reported 1H26 revenue of CNY 2.83bn and profit of CNY 1.20bn, up 15.2% and 33.9% YoY, respectively. Nomura believes the growth was driven by demand for 800G/1.6T optical engines in active optical components and passive optical components such as FAUs. This implies 2Q26 revenue of approximately CNY 1.498bn, down 0.9% YoY and up 13% QoQ, and profit of approximately CNY 803mn, up 26.8% YoY and 45% QoQ. Due to continued EML chip supply constraints, 2Q26 revenue was 19.6% below Nomura's forecast, while profit was 16.8% above forecast, resulting in a clear "revenue miss, earnings beat." The key driver of the earnings beat was the product mix shift toward high-margin passive optical components. Overall gross margin in 1H26 was 60.9%, up 10.1 percentage points YoY; 2Q26 gross margin reached 64.7%, up 15.3 percentage points YoY and 8.1 percentage points QoQ. By business segment, 1H26 passive optical component revenue increased 77.4% YoY, with gross margin rising 8.33 percentage points YoY to 71.9%; meanwhile, active optical component revenue declined 19.6% YoY. This mix shift strengthened profitability even as active component supply and shipment constraints limited revenue growth. The 1H26 net margin rose to 42.6%, up 6.0 percentage points YoY; the 2Q26 net margin reached 47.5%, up 10.4 and 10.5 percentage points YoY and QoQ, respectively. Capacity and supply-chain progress provide a foundation for subsequent shipment improvement. The company stated that production of both active and passive optical components at its Thailand manufacturing base ramped steadily in 1H26, while Phase II of its Jiangxi manufacturing base has commenced operations. Nomura believes these additional capacities may alleviate pressure on shipment growth, although current EML chip supply constraints remain a limiting factor for active component revenue and overall revenue realization. On the demand side, Nvidia announced on August 14, 2026, that its Spectrum-X CPO switches had entered full-scale production. Nomura views TFC as a partner in Nvidia's CPO supply chain and believes CPO deployment will increase demand for key components such as high-end FAUs and ELS external laser modules, positioning the company as a potential beneficiary. This assessment links Nvidia's CPO mass-production progress to order demand for TFC's passive optical components and related modules. Nomura reiterates its Buy rating and CNY 282.00 target price. The main text applies 50x FY27F EPS of CNY 5.63 and states that this multiple is in line with the median P/E of China's A-share CPO sector; the report also notes that the stock currently trades at 49x FY27F EPS. However, the valuation methodology section labels the same CNY 5.63 EPS as 2026F, creating a discrepancy in the forecast-year labeling within the original report. The rating framework corresponds to performance relative to the benchmark over the next 12 months, and the report identifies the CSI 300 as the benchmark index.

Analysis framework

Nomura first derives second-quarter data from the half-year results and identifies revenue and profit variances from three perspectives: YoY, QoQ, and relative to its own forecasts. It then breaks down revenue and gross margin by active and passive optical components to explain how the product mix enabled earnings to outperform revenue. The report subsequently assesses the operating outlook by considering capacity progress at the Thailand and Jiangxi facilities, EML chip supply constraints, and the transmission of Nvidia's CPO mass production into FAU and ELS demand. Finally, it determines the target price using the median P/E of China's A-share CPO sector as the relative valuation benchmark.

Methodology notes

• Event-driven analysis and behavioral financeExpectation gap/expectation management

  Analysis of the revenue miss and earnings beat relative to forecasts

  The report compares actual 2Q26 results with Nomura's prior forecasts: revenue was 19.6% lower, while profit was 16.8% higher, and it then explains the opposing directions through supply constraints and changes in product mix.

• Corporate fundamentals and financial frameworkEarnings quality analysis

  Gross margin, net margin, and product mix analysis

  Rather than examining only profit growth, the report also tracks the share of passive optical components, segment gross margins, and overall net margin to determine that the earnings improvement was primarily driven by a greater contribution from high-margin businesses.

• Industry/value-chain analysis frameworkUpstream-midstream-downstream value-chain transmission

  Transmission from CPO mass production to demand for key optical components

  Starting from the full-scale production of Nvidia's Spectrum-X CPO switches, the report infers rising supply-chain demand for high-end FAUs and ELS modules and uses this to assess how TFC may benefit.

• Valuation methodologyPE/PEG valuation

  Relative P/E valuation

  The report multiplies forecast EPS of CNY 5.63 by a 50x P/E multiple to derive a target price of approximately CNY 282.00 and aligns the 50x multiple with the median P/E of China's A-share CPO sector. The main text labels the EPS as FY27F, while the valuation methodology section labels it as 2026F.

Asset mapping & comparison

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

• Suzhou TFC Optical Communication (300394.SZ)

  The company is the report's core coverage target; Nomura believes it can benefit from growth in high-margin passive optical components, capacity ramp-up, and demand from Nvidia's CPO supply chain.

  Strengths

  1H26 passive optical component revenue increased 77.4% YoY, with gross margin reaching 71.9%; overall gross margin and net margin in 2Q26 rose to 64.7% and 47.5%, respectively, and the company has supply-chain exposure to high-end FAUs and ELS modules.

  Weaknesses

  1H26 active optical component revenue declined 19.6% YoY, while continued EML chip supply constraints caused 2Q26 revenue to come in 19.6% below Nomura's forecast.

  Comparison

  The target price applies a 50x forecast P/E, in line with the median P/E of China's A-share CPO sector; the stock currently trades at 49x FY27F EPS.

  Risks

  Weaker-than-expected demand for optical components or modules, technological changes that weaken competitiveness, strategic adjustments or supply-chain diversification by the largest customer, and geopolitical risks.

Key data

• 1H26 revenueCNY 2.83bnUp 15.2% YoY
• 1H26 profitCNY 1.20bnUp 33.9% YoY
• 2Q26 revenueApproximately CNY 1.498bnDown 0.9% YoY, up 13% QoQ, and 19.6% below Nomura's forecast
• 2Q26 profitApproximately CNY 803mnUp 26.8% YoY, up 45% QoQ, and 16.8% above Nomura's forecast
• 1H26 gross margin60.9%Up 10.1 percentage points YoY
• 2Q26 gross margin64.7%Up 15.3 percentage points YoY and 8.1 percentage points QoQ
• 1H26 passive optical component revenue growth+77.4% YoYGross margin was 71.9% during the same period, up 8.33 percentage points YoY
• 1H26 active optical component revenue growth-19.6% YoYThe report believes EML chip supply constraints affected active components and overall shipments
• 1H26 net margin42.6%Up 6.0 percentage points YoY
• 2Q26 net margin47.5%Up 10.4 percentage points YoY and 10.5 percentage points QoQ
• Target price valuationCNY 282.0050x forecast EPS of CNY 5.63, in line with the median P/E of China's A-share CPO sector
• Current valuation49x FY27F EPSThe report lists the August 19, 2026 closing price as CNY 277.40

Impact & implications

The report believes that current revenue realization remains constrained by EML chip supply, but the high growth and high gross margin of passive optical components are enabling earnings to grow significantly faster than revenue. The ramp-up of the Thailand facility and commissioning of Phase II of the Jiangxi facility may alleviate shipment pressure, while full-scale production of Nvidia's CPO switches may further boost demand for high-end FAUs and ELS modules. Together, these factors support Nomura's reiterated Buy rating and target price.

Risks

• Weaker-than-expected market demand for optical components or optical modules could hinder achievement of the target price.
• Technological changes in the optical communications market could weaken the company's competitiveness.
• A strategic change or supply-chain diversification by the largest customer could affect demand and orders for the company.
• Geopolitical risks could affect the company's operations or achievement of the target price.