Maintain Buy and Raise Target Price to CNY420; Positive on CPO and High-End Optical Component Upgrades

Overview

Suzhou TFC Optical Communication primarily provides active and passive optical components to cloud computing data center and telecommunications customers. Its FY25 revenue and earnings increased 59% and 50% YoY, respectively, although fourth-quarter sequential growth was affected by capacity constraints and shortages of 200G EML chips. The report maintains its Buy rating and raises the target price on a positive outlook for the CPO market and high-end product upgrades.

Core views

The report believes that, as an early mover in FAU, optical engine, and ELS-related products, and a supplier of FAU and optical engine products to NVIDIA's Mellanox, the company is well positioned to benefit from CPO adoption in scale-out and scale-up networks. Higher sales volumes and ASPs for high-end 1.6T/3.2T transceiver modules, CPO components, and related products are expected to drive revenue growth, optimize the product mix, and restore margins.

Analysis framework

Based on a review of FY25 results, segment revenue and gross margins, CPO market opportunities, product upgrade cycles, and earnings forecast revisions, with relative valuation using the industry median P/E multiple.

Methodology notes

• Earnings AnalysisReview of Revenue, Earnings, and Segment Gross Margins

  Assessing operating trends through YoY and QoQ performance as well as active and passive component segment results.

  FY25 passive component revenue increased 32% YoY, while gross margin declined 4.7 percentage points YoY to 63.7%; active component revenue increased 81% YoY, while gross margin declined 0.1 percentage point YoY to 46.6%.

• Earnings ForecastingForecast Revisions Driven by Product Upgrades

  Incorporating demand for CPO, high-speed transceiver modules, and high-end components, as well as their gross margin contribution, into forecasts.

  The report raises FY26-FY27 revenue and earnings forecasts and introduces FY28 forecasts, mainly reflecting a more constructive CPO market outlook and a stronger product upgrade cycle.

• Relative ValuationPrice-to-Earnings (P/E) Valuation

  Deriving the target price by multiplying forecast EPS by a comparable industry P/E multiple.

  The CNY420 target price is based on 50x rolling forecast EPS of CNY8.4, referencing the median P/E of the WIND China A-share CPO sector; the report is inconsistent across pages as to whether this EPS corresponds to FY26F or FY27F.

Asset mapping & comparison

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

• Suzhou TFC Optical Communication（300394 CH）

  Covered Entity

  Strengths

  Has a first-mover advantage in FAU, optical engine, and ELS-related markets; benefits from CPO demand, high-end transceiver module upgrades, and accelerating investment by Chinese cloud service providers.

  Weaknesses

  FY25 fourth-quarter growth was constrained by capacity limitations and shortages of 200G EML chips; margins in certain businesses remain under pressure.

  Comparison

  Nomura's FY26-FY27 revenue forecasts are 59%-86% above WIND consensus, while earnings forecasts are 31%-65% above.

  Risks

  Weaker-than-expected demand for optical components/modules, technological iteration that erodes competitiveness, changes in key customer strategies or supply chains, and geopolitical risks.

• NVIDIA CORP（NVDA US）

  Supply Chain Partner

  Strengths

  TFC supplies FAU and optical engine products to its Mellanox business; its promotion of CPO adoption could expand demand for related components.

  Weaknesses

  The report does not provide financial or valuation analysis of NVDA itself.

  Comparison

  Not applicable.

  Risks

  Changes in customer strategy, supply chain diversification, or the pace of CPO adoption could affect TFC's order opportunities.

Key data

• FY25 Revenue GrowthYoY +59%7.1% below Nomura's forecast.
• FY25 Earnings GrowthYoY +50%Near the midpoint of company guidance and 6.1% below Nomura's forecast.
• 4Q25 Revenue/Earnings GrowthYoY +45%/+50%; QoQ -15%/-3%Affected by capacity constraints and component shortages.
• FY26-FY27 Revenue Forecast Revisions+0.2% to +11.5%Reflecting a more optimistic CPO market outlook.
• FY26-FY27 Earnings Forecast Revisions+9.0% to +34.9%Driven by a stronger product upgrade cycle.
• FY28 Revenue/Earnings Growth ForecastYoY +33%/+39%Newly introduced FY28 forecasts in the report.
• CPO Revenue ForecastFY25 CNY129mn; FY27F CNY5.3bnExpected to account for 27% of total revenue in FY27F.
• Overall Gross Margin ForecastFY26F 46.3%; FY28F 51.0%Expected to improve through technology upgrades in high-end products.
• Target Price and ValuationCNY420; 50x P/EThe closing price is CNY337.00, implying 24.6% upside.

Impact & implications

If Chinese cloud service providers accelerate NPO/CPO investment, NVIDIA advances CPO adoption, and the company alleviates key chip and capacity bottlenecks, TFC's high-end product revenue mix and gross margins could improve. The report's forecasts are materially above WIND consensus: FY26-FY27 revenue forecasts are 59%-86% higher and earnings forecasts are 31%-65% higher, making the investment case sensitive to high-end product ramp-up, ASPs, and execution progress.

Risks

• Weaker-than-expected demand in the optical component and optical module markets.
• Changes in optical communications technology could erode the company's competitiveness.
• Major customers may adjust their strategies or pursue supply chain diversification.
• Geopolitical risks.
• Key component shortages and capacity constraints may persist longer than expected.
• The report's above-consensus growth assumptions may fail to materialize.

What to watch

• Progress in alleviating 200G EML chip supply and capacity bottlenecks.
• Orders and mass-production progress for 1.6T and 3.2T transceiver modules, FAU, optical engines, and ELS modules.
• The pace of CPO adoption in scale-out and scale-up networks.
• Capital expenditure and CPO/NPO investment by Chinese and overseas cloud service providers.
• Changes in the revenue mix, ASPs, and gross margins of active and passive components.
• Procurement strategies and supply chain diversification trends among major customers.