Explosion of AI Optical Interconnects Drives Volume and Price Growth in PCBs; Top Pick is Zhen Ding Technology

Overview

This report provides an in-depth analysis of how the surging demand for optical interconnects in AI infrastructure construction drives the Printed Circuit Board (PCB) industry. As hyperscalers expand AI cluster sizes from tens of thousands to hundreds of thousands of GPUs, demand for optical modules has surged, driving the upstream PCB market into a golden period of "volume and price growth." The report focuses on three core beneficiary companies: Zhen Ding Technology (ZDT), Unimicron, and Shennan Circuits. Based on technological barriers and market share potential, we view ZDT as the most attractive investment target, while raising target prices and earnings forecasts for all three companies.

Core views

The AI optical module PCB market is undergoing structural growth. The report points out that the Total Addressable Market (TAM) for this segment will rapidly expand from approximately $620 million in 2025 to approximately $3.77 billion in 2028, achieving a Compound Annual Growth Rate (CAGR) of 83%, significantly outpacing the 60% growth rate of optical module shipments. This excess growth is primarily driven by increases in "content value": as optical modules evolve from 400G to 800G and 1.6T, PCB technical specifications upgrade significantly. Specifically, layer counts increase from 10-12 to 14-16, Copper Clad Laminate (CCL) grades upgrade from M6 to M7/M8, and manufacturing processes shift from HDI to more advanced mSAP (Modified Semi-Additive Process). These changes cause the PCB value per optical module to jump from approximately $10 to $25, with gross margins rising from 20-30% to over 40-50%. Zhen Ding Technology (ZDT) is viewed as the primary beneficiary. The report argues that the transition to 1.6T and higher speeds raises certification thresholds, highlighting the importance of advanced manufacturing know-how, particularly the mSAP process. As a primary supplier of HDI/SLP PCBs for Apple iPhones, ZDT possesses mature mSAP technology reserves and can capture disproportionate market share growth as the market expands and customers seek additional qualified suppliers. Combining secular AI demand, increased content intensity, and share gains, ZDT's investment thesis is the most compelling. Therefore, we raise ZDT's target price to NT$666 (implying a 20x PE for 2028). For the other two manufacturers, Unimicron also benefits from the supply-demand imbalance in the high-end ABF substrate market and AI chip demand. We maintain its "Overweight" rating, raising the target price to NT$1,285. Shennan Circuits also benefits from AI optical module PCB demand and the trend of semiconductor localization in China. However, given that its valuation already reflects some expectations, we maintain an "Equal-weight" rating, raising the target price to RMB 400.

Analysis framework

The research report employs a combined approach of top-down industry sizing and bottom-up company fundamental analysis. First, by breaking down the expansion path of AI data center cluster sizes, it derives optical module shipment forecasts (citing updated data from the global team) and determines baseline demand based on a one-to-one PCB matching relationship. Second, it introduces a "volume-price split" framework to analyze in detail how technological iterations (400G->800G->1.6T) affect PCB layer counts, material grades, and manufacturing processes, thereby quantifying the increase in single-module value (ASP) and gross margins, concluding that market size growth outpaces shipment growth. Finally, it values each company using a Residual Income Model, focusing on technological barriers in high-end processes like mSAP, capacity expansion capabilities, and differences in customer structure to judge the distribution of market shares.

Methodology notes

• Industry/Industrial Analysis FrameworkVolume-Price Split

  Decomposes market size growth into two drivers: "shipment volume growth" and "single-unit value growth (ASP)."

  In this report, the institution not only looks at how many optical modules are sold (volume) but emphasizes that due to technological upgrades, the PCBs inside each module become more expensive and complex (price). This logic of "volume and price growth together" is key to identifying excess returns in specific segments within high-growth tracks.

• Valuation MethodRIM Residual Income Model

  Uses a multi-stage Residual Income (RI) Model to calculate intrinsic company value.

  This is a fundamental valuation method that calculates the target price by discounting the future "residual income" created by the company (returns exceeding the cost of capital) back to the present and adding the beginning equity value. It reflects a company's long-term ability to create value better than simple PE multiples, especially suitable for capital-intensive tech companies in growth phases.

• Competition and Strategy FrameworkMoat / competitive advantage

  Technological barriers (such as the mSAP process) constitute a company's competitive advantage and entry threshold.

  The report emphasizes that as products evolve to 1.6T, manufacturing difficulty increases significantly. Only manufacturers mastering advanced processes like mSAP can pass certification. This technological "moat" allows leading firms (like ZDT) to achieve faster share growth than competitors during industry expansion.

Asset mapping & comparison

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

• Zhen Ding (4958.TW)

  Core beneficiary. Leveraging mSAP technology advantages and Apple supply chain background, it is expected to secure high market share in the AI optical module PCB market, while expanding its ABF substrate business to international clients (e.g., Google TPU).

  Strengths

  Leading mSAP process, significant potential for margin improvement (40%+), successful expansion of international clients, active capacity expansion.

  Weaknesses

  Still dependent on iPhone sales; failure in execution may impact share acquisition.

  Comparison

  Compared to peers, ZDT has the deepest accumulation in mSAP technology and is seen as the company best positioned to capture the incremental AI optical module market, offering high valuation attractiveness (15x 2028E PE).

  Risks

  iPhone demand below expectations, failure in executing Google TPU substrate projects, Nvidia AI PCB share falling below 5%.

• Unimicron (3037.TW)

  Major beneficiary. As a leader in high-end ABF substrates, it directly benefits from the supply-demand shortage in substrates driven by AI ASICs and Server CPUs.

  Strengths

  Dominant position in the AI chip substrate field, recovery in capacity utilization, enhanced pricing power.

  Weaknesses

  Weak PC demand may drag down some general-purpose server businesses.

  Comparison

  Solid position in the ABF substrate field with high certainty, but valuation is relatively higher (17x 2028E PE).

  Risks

  Weakening AI server demand, ABF capacity oversupply, shortages in raw materials like T-glass affecting low-end products.

• Shennan Circuits (002916.SZ)

  Regional beneficiary. Benefits from improved cloud demand in Chinese data centers and the trend of semiconductor localization, but holds a relatively small share in the global AI optical module competition.

  Strengths

  Primary beneficiary of domestic substitution in China, stable 5G base station and automotive PCB businesses, rapid growth in IC substrate business.

  Weaknesses

  Slow recovery in 5G base station demand, limited share in the global high-end optical module market.

  Comparison

  High valuation (25x 2028E PE) reflects a localization premium, but global competitiveness is slightly inferior to ZDT and Unimicron.

  Risks

  Delays in 5G deployment, intensified US-China trade friction, price pressures due to market competition.

Key data

• AI Optical Module PCB Market Size (2025E)~$620 millionStarting base
• AI Optical Module PCB Market Size (2028E)~$3.773 billionExpected to grow more than 6 times in three years
• AI Optical Module PCB Market CAGR (2025-28)83%Far higher than the 60% growth rate of optical module shipments
• Single Module PCB Value (400G vs 1.6T)$10 vs $25Technological upgrades drive value increase of approximately 2.5 times
• 1.6T Optical Module PCB Gross Margin40-50%+Significantly higher than the 20-30% for 400G products
• ZDT Target Price (New/Old)NT$666 / —Implies 20x PE for 2028
• Unimicron Target Price (New/Old)NT$1,285 / NT$1,225Implies 25x PE for 2028
• Shennan Circuits Target Price (New/Old)Rmb400 / Rmb320Implies 25x PE for 2028

Impact & implications

For the industry, AI optical interconnects are becoming the new engine driving the evolution of HDI/advanced PCB technologies and profitability improvement after Apple, potentially reshaping the competitive landscape of the PCB industry and allowing manufacturers with high-end capabilities like mSAP to stand out. For companies, ZDT is expected to successfully transform from reliance on traditional consumer electronics to becoming a core beneficiary of AI infrastructure, with its ABF substrate and optical module PCB businesses becoming new profit growth engines; Unimicron will continue to benefit from tight supply and demand in high-end ABF substrates; Shennan will maintain steady growth in domestic substitution and server PCB fields in China, but with relatively smaller valuation elasticity.

Risks

• AI server and optical module demand below expectations
• Early large-scale commercialization of CPO (Co-Packaged Optics) technology weakening pluggable optical module demand
• Shortages or significant price fluctuations in raw materials (e.g., T-glass)
• Yield rates during new capacity ramp-up below expectations
• Decline in smartphone (iPhone) sales impacting ZDT's traditional business

What to watch

• Progress in the penetration rate of 1.6T and 3.2T optical modules
• ZDT's share acquisition in Google TPU and Nvidia AI PCB projects
• Changes in the supply-demand gap in the high-end ABF substrate market
• Supply status of key raw materials such as T-glass
• Progress in yield rates and gross margin improvements for each company's mSAP process