Goldman Sachs maintains Buy on Ruijie Networks, lowering target price to Rmb83.4

Overview

This is a Goldman Sachs company research and rating adjustment report on Ruijie Networks (301165.SZ). The core view is that Ruijie's data center switch business is benefiting from rising AI capex by Chinese cloud vendors, as well as demand and specification upgrades for network equipment driven by Supernodes and large-scale AI clusters. The company's product mix is upgrading toward 400G/800G high-speed switches and extending from switches into 400G LPO optical modules. Despite lowering earnings forecasts and the target price, Goldman Sachs maintains a Buy rating.

Core views

Goldman Sachs' core views include: first, rising cloud AI capex in China will continue to drive demand for data center networking equipment; second, Ruijie's sharp increase in prepaid expenses shows the company is procuring key raw materials such as switch ASICs for order backlog; third, the company has delivered 400G LPO optical modules, demonstrating that its solution offering has expanded from switches to optical modules; fourth, short-term revenue is affected by tight raw material supply, while the expense ratio has risen due to higher R&D investment, leading to lower 2026-30E net profit; fifth, product mix upgrades support higher gross margin assumptions, but expansion toward leading CSPs means blended gross margin still faces downward pressure.

Analysis framework

The report uses a combination of fundamental forecast revisions and relative valuation: it first incorporates 4Q25 and 1Q26 results to revise 2026-30E revenue, gross margin, expense ratio, and net profit; it then rolls the valuation base year forward to 2027E and derives the 12-month target price using a target 2027E P/E of 52x and 2027E EPS. The target P/E is based on the correlation between peers' forward P/E and EPS growth, while also referencing the company's historical valuation range.

Methodology notes

• Valuation methodsTarget P/E method

  Use 52x 2027E P/E to derive the 12-month target price

  Goldman Sachs rolls the valuation base year forward to 2027E and uses a target P/E of 52x to derive the 12-month target price of Rmb83.4; this multiple is lower than the 54x 2027E P/E implied by the previous target price.

• Fundamental forecastingEarnings forecast revision

  Revise 2026-30E forecasts based on 4Q25 and 1Q26 results

  The report lowers 2026-30E revenue and net profit due to weaker-than-expected 1Q26 revenue, tight supply of key raw materials, and a higher R&D expense ratio; at the same time, it raises gross margin assumptions to reflect the product mix upgrade toward 400G/800G high-speed switches.

• Investment frameworkGS Factor Profile

  Compare stocks by growth, financial returns, valuation multiples, and composite metrics

  Goldman Sachs discloses its Factor Profile framework to compare company characteristics against the market and peers. Growth metrics include sales, EBITDA, and EPS growth; financial returns include ROE, ROCE, and CROCI; valuation multiples include P/E, P/B, EV/EBITDA, etc.

• M&A analysisM&A Rank

  Use a 1-to-3 ranking to assess the probability of becoming an acquisition target

  Goldman Sachs discloses its M&A Rank framework for globally covered stocks, where 1 represents a higher M&A probability, 2 represents a medium probability, and 3 represents a lower probability; this is a general methodology disclosure rather than a main investment thesis of the report.

Asset mapping & comparison

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

• Ruijie Networks (301165.SZ)

  Covered company/investment target

  Strengths

  Benefiting from rising cloud AI capex in China, upgrades to 400G/800G high-speed switches, delivery of LPO optical modules, and a more complete data center network solution.

  Weaknesses

  1Q26 revenue missed expectations, key raw material supply is tight, the R&D expense ratio is rising, and blended gross margin still faces downward pressure.

  Comparison

  The target 2027E P/E of 52x is lower than the previously implied 54x, but still lies between the company's historical average and one standard deviation above the average.

  Risks

  China cloud capex expansion slower than expected, weaker-than-expected demand for high-speed switches, and fiercer-than-expected price competition.

• China cloud CSP data center networking chain

  Demand driver and customer scenario

  Strengths

  AI clusters, Supernodes, and large-scale clusters increase demand for network throughput and low latency, driving penetration of high-speed switches and LPO optical modules.

  Weaknesses

  Demand timing depends on cloud vendors' capex, and supply of upstream key components such as switch ASICs may constrain deliveries.

  Comparison

  The report emphasizes that, relative to traditional DSP optical modules, LPO has technical advantages including lower bit error rate, lower average operating temperature, lower latency, and lower power consumption.

  Risks

  Capex volatility, changes in technology roadmap, customer concentration, and price competition.

Key data

• 1Q26 prepaid expensesRmb501mn, +1028% QoQRmb44mn at the end of 4Q25; management attributed this to procurement of key raw materials such as switch ASICs.
• 400G LPO optical module deliveries16.8k unitsDelivered to a leading Chinese CSP, reflecting the company's extension from switches into optical modules.
• 2026-30E net profit revision-15%/-6%/-5%/-5%/-4%Mainly due to revenue cuts and higher expense ratios.
• Gross margin assumptionRaisedReflects the product mix upgrade toward 400G/800G high-speed switches, but blended gross margin still trends downward due to expansion toward leading CSPs.
• 12-month target priceRmb83.4 (previously Rmb92.1)Derived based on 52x 2027E P/E and 2027E EPS.
• Target P/E52x 2027EBased on an update to the correlation between peers' forward P/E and EPS growth, lower than the previously implied 54x.
• Current priceRmb57.70Price shown on the report disclosure page.
• RatingBuy/BuyGoldman Sachs maintains a Buy rating.

Impact & implications

The report's implication for Ruijie Networks is broadly positive: AI data center capex and high-speed network upgrades provide growth drivers for the company, while expansion into LPO optical modules also improves the completeness of its solution offering. However, the short-term earnings forecast cut suggests that pressure remains on revenue realization, raw material supply, and expense investment. The lower target price implies a reassessment of valuation and earnings expectations, but maintaining Buy indicates that Goldman Sachs still sees substantial upside from the current price relative to the 12-month target price.

Risks

• China cloud capex expansion is slower than expected.
• Demand for high-speed switches is lower than expected.
• Price competition is more intense than expected.
• Tight supply of key raw materials may continue to affect revenue recognition and delivery pace.
• Rising R&D investment may push up the expense ratio and pressure short-term profit.

What to watch

• The actual rollout pace of AI capex by Chinese cloud vendors.
• Orders, deliveries, and gross margin changes for 400G/800G high-speed switches.
• Improvement in the supply of key raw materials such as switch ASICs.
• Follow-on order expansion and customer adoption for 400G LPO optical modules.
• The impact of expansion toward leading CSPs on blended gross margin and price competition.
• Whether 2026-30E revenue, net profit, and the R&D expense ratio continue to be revised.