Core-business margin improvement, XR revenue surges 14.75x YoY, Maintain OW

Overview

Shanghai Conant Optical's 1H26 results show continued resilience in its core lens business. Its revenue mix continued to shift toward higher-value products, including proprietary-brand, functional, and customized lenses, driving margin improvement. Rapid growth in XR revenue provides important validation of a new medium-term growth driver.

Core views

The institution believes the higher proprietary-brand mix and product-mix optimization are the core drivers of gross-margin improvement; 1,475% YoY XR revenue growth confirms that smart-glasses lens orders are ramping up rapidly. Although ODM revenue declined YoY due to a high base, the core business and XR business jointly supported earnings performance. The institution expects XR to make more substantive revenue and profit contributions over the next 1-2 years.

Analysis framework

Based on 1H26 operating data, the analysis examines structural changes in revenue by business model and product type, gross margins by business, expense ratios, and profitability excluding FX impacts, and assesses traditional lens and AR/AI-related new businesses through an RIM-derived SOTP valuation framework.

Methodology notes

• Valuation frameworkRIM-derived SOTP

  Residual income model combined with sum-of-the-parts valuation

  RIM valuation is applied to Greater China hardware companies, while SOTP reflects the differing growth characteristics of traditional businesses and AR/AI new businesses.

• Operating analysisRevenue mix and margin analysis

  Business-mix optimization

  The impact of product-mix changes on profitability is assessed through proprietary-brand and ODM revenue, growth in standardized/functional/customized lenses, and gross margins by business.

Asset mapping & comparison

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

• 2276.HK

  Directly covered stock

  Strengths

  Growth in proprietary-brand revenue, relatively rapid growth in functional and customized lenses, gross-margin improvement, and rapid scaling of the XR business.

  Weaknesses

  ODM business declined YoY, the current revenue scale of the XR business remains relatively limited, and earnings were affected by FX losses.

  Comparison

  The institution expects its risk-adjusted total return over the next 12-18 months to exceed the average of the industry under analyst coverage.

  Risks

  Trade disputes, intensifying industry competition, and supply-chain disruptions could affect overseas operations, production volume, or product quality.

Key data

• Proprietary-brand revenueRmb788.9mn, up 17% YoYRevenue mix increased from 62% to 68%.
• ODM revenueRmb378.3mn, down 7.2% YoYMainly affected by a high comparison base.
• XR business revenueRmb50.5mn, up 1,475% YoYSmart-glasses lens orders are accelerating in volume ramp-up.
• Overall gross margin42.9%Up 190 bps YoY; 1H25 was 41.0%.
• Proprietary-brand gross margin45.5%1H25 was 43.8%.
• Expense ratio13.3%1H25 was 13.8%.
• Reported net profitRmb301mn, up 10% YoYExcluding Rmb57mn of FX losses, adjusted net profit grew 27.6% YoY.
• Target priceHK$50.00Implies approximately 22% upside versus the HK$40.94 closing price on 2026-08-17.

Impact & implications

If the mix of proprietary-brand and high-value-added lenses continues to rise, the margin-improvement trend is likely to persist. The XR business is moving from a low base into a volume ramp-up phase and could become a key catalyst for upward revisions to valuation and earnings expectations. The institution maintains OW, reflecting its expectation that the company's risk-adjusted total return over the next 12-18 months will outperform the average of its covered industry.

Risks

• Trade disputes could negatively affect businesses with substantial overseas exposure.
• Intensifying industry competition could pressure pricing or margins.
• Supply-chain disruptions could affect production volume, delivery, and product quality.
• Currency fluctuations could continue to affect reported profit.
• Order continuity and scaling progress in the XR/smart-glasses business could fall short of expectations.

What to watch

• The continued ramp-up in XR smart-glasses lens orders, revenue scale, and profit contribution.
• The revenue mix of proprietary brands and the sustainability of growth in functional and customized lenses.
• Whether improvements in overall and segment gross margins and expense ratios can continue.
• Demand recovery in the ODM business after the high-base period.
• Overseas trade conditions, supply-chain stability, and changes in FX gains/losses.