New product cycle begins, target price sharply raised to CNY173

Overview

The report believes SG Micro is entering a new product cycle jointly driven by AI networking infrastructure, industrial, and automotive applications. As the share of consumer electronics revenue declines and optical module and other non-consumer electronics businesses expand rapidly, the company is transforming from a traditional analog chip supplier into a semiconductor platform covering more broad AI scenarios. On this basis, Nomura raises its earnings forecasts and valuation benchmark, while maintaining its Buy rating.

Core views

The core logic consists of three points: first, optical module demand is surging, with the analog chip market value per optical module estimated to exceed USD5—10, and combined with China’s accelerated domestic substitution since the end of 2025, this creates structural growth opportunities for SG Micro; second, networking, industrial, and automotive applications account for nearly 70%, and the improved revenue structure is expected to bring stronger sales and earnings momentum; third, expanding sales scale and slower R&D expense growth will reduce the expense ratio and improve net margin. The report expects the company’s 2026 revenue and earnings to be about 10% above current market expectations.

Analysis framework

The report revises 2026—2028 earnings based on end-application revenue mix, optical module industry trends, domestic substitution of analog chips, industry cycle recovery, and operating leverage; valuation uses the P/E methodology commonly applied to fabless semiconductor companies, with reference to the company’s historical valuation range and the CSI 300.

Methodology notes

• Relative valuationP/E valuation method

  Estimates fair share price by multiplying forecast earnings per share by a target P/E multiple.

  The CNY173 target price is based on 80x 2027E EPS of CNY2.16. The 80x multiple is in the middle of the company’s historical 40—120x P/E range; the previous target price used 70x 2026E EPS of CNY1.29.

• Earnings forecastProduct cycle and operating leverage analysis

  Assesses future earnings based on end demand, product mix, and changes in expense ratios.

  The report incorporates analog chip cycle recovery, optical module demand growth, a higher share of non-consumer electronics, and slower R&D expense growth into its 2026—2028 earnings forecasts.

Asset mapping & comparison

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

• SG Micro（300661.SS）

  Core covered stock and beneficiary of domestic substitution in optical module analog chips

  Strengths

  Among Chinese analog chip companies, its optical module-related sales scale is considered to be leading; it has two major product lines, power management ICs and signal chain ICs, with more than 1,900 products sold.

  Weaknesses

  Valuation is at a relatively high level, and performance is sensitive to the realization of new product ramp-up, customer project wins, and margin improvement.

  Comparison

  The report believes its optical module-related sales scale is ahead of 3Peak and Silergy, but it still competes with global vendors such as TI, MPS, and Renesas.

  Risks

  Analog chip demand falling short of expectations, intensifying competition, pressure on gross margin, new product delays, oversupply, and escalation of China-U.S. technology friction.

• 3Peak（688536.SS）

  Chinese analog chip peer and competitor in the optical module market

  Strengths

  Participates in the localization of analog chips for 400G/800G optical modules and benefits from the localization procurement trend among Chinese customers.

  Weaknesses

  The report judges that its related sales scale currently ranks behind SG Micro.

  Comparison

  In the ranking of optical module-related sales among Chinese analog chip vendors, the report places it behind SG Micro and ahead of Silergy.

  Risks

  Faces risks from industry competition, demand volatility, technical specification upgrades, and trade restrictions.

• TI、MPS及Renesas

  Global analog chip competitors

  Strengths

  Possess advantages in technology, product portfolio, and global customer base, and are advancing toward 1.6T and 3.2T optical module specifications.

  Weaknesses

  In China’s 400G/800G optical module market, they face rapid penetration by local vendors and pressure from domestic substitution.

  Comparison

  Global vendors previously dominated the supply of optical module analog chips, while Chinese vendors are accelerating share gains in the 400G/800G market.

  Risks

  Localized procurement in the Chinese market, more cautious capital expenditure, and slow recovery of the analog chip cycle.

Key data

• Target priceCNY173Raised from CNY90, implying 62.8% upside from the current price of CNY106.24.
• Valuation basis80x 2027E P/ECorresponds to 2027E EPS of CNY2.16; the current share price is about 47x 2027E P/E.
• Earnings forecast adjustment2026—2027 raised by 8%—39%2028 forecasts are also raised to reflect industry recovery and demand growth in the optical module business.
• Share of non-consumer electronics salesNearly 70%The combined share of networking, industrial, and automotive applications has risen significantly from about 50% in 2025.
• Optical module-related sales growthAbout 400%Cumulative increase since the first quarter of 2025.
• Analog chip market value per optical moduleExceeds USD5—10Nomura’s estimate, reflecting the potential pull-through of optical module demand on the analog chip market.
• Relative to market expectationsAbout 10% higherNomura expects SG Micro’s 2026 revenue and earnings to both be about 10% above current market expectations.

Impact & implications

The migration of the revenue structure toward high-growth applications such as networking, industrial, and automotive is expected to reduce the company’s dependence on the consumer electronics cycle, while improving net margin through scale effects and lower expense ratios. If domestic substitution in optical modules continues and 400G/800G demand remains strong, the company’s earnings and valuation may be re-rated simultaneously; however, potential U.S. restrictions on imports of Chinese data center components could create geopolitical disruption to the growth path.

Risks

• Analog chip demand is weaker than expected.
• Intensified competition leads to pressure on average selling prices or gross margins.
• Delays in new product launches or poor execution result in fewer new customer project wins than expected.
• Supply chain capacity oversupply.
• Escalation of China-U.S. technology friction, including potential U.S. restrictions on imports of Chinese data center components or optical modules.
• Earnings forecasts and high-valuation assumptions fail to materialize.

What to watch

• Whether second-quarter 2026 results and management’s full-year guidance exceed market expectations.
• Growth rate of optical module-related revenue and share of 400G/800G products.
• Whether the share of networking, industrial, and automotive applications can remain near 70% or continue to rise.
• Impact of 1.6T and 3.2T specification upgrades on the company’s product positioning and competitiveness.
• Progress in improving the R&D expense ratio, overall expense ratio, and net margin.
• Potential U.S. import restrictions targeting Chinese data center components.
• Analog chip inventory digestion, supply-demand balance, and price competition.