Three-Circle Group (300408) Report Interpretation

Overview

Nomura reviews Three-Circle Group’s 1H26 results and argues that MLCC recovery and data-center optical-communications demand should sustain growth. It maintains Buy, substantially lifts its earnings estimates and raises the target price to CNY140 from CNY70.

Core views

Three-Circle Group’s 1H26 results were slightly ahead of Nomura’s expectations. Revenue increased 54.8% year on year to CNY6.42bn, gross margin improved 2.4 percentage points to 44.3%, and net profit grew 56.2% to CNY1.93bn. In 2Q26, revenue reached CNY3.74bn, up 61.6% year on year and 39.6% quarter on quarter, while net profit rose 62.0% year on year and 44.3% quarter on quarter to CNY1.14bn. The report attributes the performance to rapid MLCC sales growth amid improving industry conditions, greater customer recognition and price recovery in certain products, as well as continuing demand for ferrules, sleeves and other optical-communication products used in data centers. Scale also created operating leverage: selling, administrative and R&D expense ratios declined by 0.3, 0.6 and 1.8 percentage points year on year, respectively, in 1H26. Margin expansion and lower expense ratios therefore amplified profit growth. Nomura expects MLCC and optical-communications conditions to remain supportive in 2H26F and beyond, underpinned by AI data-center demand. Following its H-share listing, the company plans to use proceeds for capacity expansion and product-portfolio upgrades, which Nomura believes can support longer-term revenue growth and profitability. The institution raises 2026-28F revenue forecasts by 20%/30%/28% to CNY13.67bn/CNY18.15bn/CNY22.33bn. By segment, the revised forecasts imply electronic-components revenue of CNY8.37bn/CNY11.30bn/CNY14.13bn for 2026F-28F and telecom-components revenue of CNY3.47bn/CNY4.28bn/CNY4.86bn. The revised outlook also assumes stronger profitability. Referring to the 2017-18 MLCC cycle, Nomura argues that a sharp rise in AI-server demand in 2027F could materially tighten industry capacity, creating further upside for MLCC pricing and gross margins. It raises 2026-28F gross-margin assumptions by 3.6/7.8/4.7 percentage points to 47%/52%/49%, and lowers operating-expense-ratio assumptions by 1.7/2.1/1.6 percentage points to 12.9%/13.6%/13.1%, reflecting operating leverage as the business scales. Consequently, 2026-28F net-profit forecasts rise by 27%/55%/41% to CNY4.30bn/CNY6.51bn/CNY7.49bn. The report forecasts 2026F-28F normalised EPS of CNY2.09/CNY3.13/CNY3.63 and ROE of 13.6%/18.1%/18.3%. For valuation, Nomura adds Fenghua Advanced Technology and MLCC-consumables supplier Jiemei Electronic & Technology to the peer group. It applies a 65x target 2026F P/E, up from 40x and above the peer-average 56x, because it expects Three-Circle’s earnings growth to exceed peers. After incorporating earnings revisions and dilution from the H-share listing, it raises the target price to CNY140 from CNY70, based on 65x 2026F EPS of CNY2.15, compared with its previous EPS estimate of CNY1.76. The CNY140 target implies 24.7% upside from the stated CNY112.24 closing price; the current share price implies 52.1x 2026F P/E. Nomura therefore maintains Buy.

Analysis framework

Nomura first assesses the 1H26 and 2Q26 operating results, linking sales and margin changes to MLCC conditions, optical-communications demand and operating leverage. It then revises segment revenue, margin and expense assumptions for 2026-28F, considers a tighter-capacity AI-server-demand scenario by reference to the 2017-18 MLCC cycle, and values the company using a forward P/E multiple against comparable companies.

Methodology notes

• Industry AnalysisSupply-demand framework

  MLCC supply-demand and pricing-cycle analysis

  The report links stronger MLCC demand, potential capacity tightness and product-price recovery to higher gross margins, using the 2017-18 MLCC cycle as a reference point.

• Corporate Fundamentals and FinanceOperating and Financial Leverage Analysis

  Operating leverage from business scale

  Nomura uses declining operating-expense ratios as sales scale to explain why revenue growth and gross-margin expansion translate into faster profit growth.

• Valuation methodsP/E and PEG Valuation

  Forward P/E multiple valuation

  The CNY140 target price is derived from a 65x target P/E applied to Nomura’s 2026F EPS forecast of CNY2.15, with the multiple set above peers because of expected faster earnings growth.

Asset mapping & comparison

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

• Three-Circle Group (300408.SZ)

  Primary covered company; Nomura expects MLCC and optical-communications demand to support earnings growth.

  Strengths

  Rapid MLCC sales growth, optical-communications demand, gross-margin expansion, operating leverage, and planned capacity and product upgrades.

  Comparison

  Nomura applies a 65x 2026F P/E, above the peer-average 56x, because it expects stronger earnings growth than peers.

  Risks

  Raw-material price volatility; delays in new-product development or technology upgrades; weaker downstream demand; slower capacity expansion; and weaker product-price increases.

• Fenghua Advanced Technology (000636 CH)

  MLCC-exposed comparable added to Nomura’s peer group.

  Comparison

  Rated Buy in the valuation-comparables table.

• Jiemei Electronic & Technology (002859 CH)

  MLCC-consumables supplier added to Nomura’s peer group.

  Comparison

  Rated Neutral in the valuation-comparables table.

Key data

• 1H26 revenueCNY6.42bnUp 54.8% year on year.
• 1H26 gross margin44.3%Up 2.4 percentage points year on year.
• 1H26 net profitCNY1.93bnUp 56.2% year on year.
• 2Q26 revenueCNY3.74bnUp 61.6% year on year and 39.6% quarter on quarter.
• 2Q26 net profitCNY1.14bnUp 62.0% year on year and 44.3% quarter on quarter.
• 2026-28F revenue forecastsCNY13.67bn / CNY18.15bn / CNY22.33bnRaised by 20%/30%/28%.
• 2026-28F net profit forecastsCNY4.30bn / CNY6.51bn / CNY7.49bnRaised by 27%/55%/41%.
• 2026-28F gross margins47% / 52% / 49%Raised by 3.6/7.8/4.7 percentage points.
• Target priceCNY140Raised from CNY70; based on 65x 2026F EPS of CNY2.15 and implies 24.7% upside.

Impact & implications

The report argues that a combination of MLCC volume growth, selective price recovery, AI-data-center optical demand and lower cost ratios can produce faster earnings growth than peers. Capacity expansion and product upgrades funded by the H-share listing are presented as additional longer-term supports, while a 2027F AI-server-driven capacity squeeze would create further upside to pricing and margins.

Risks

• Raw-material price volatility could pressure profitability.
• New-product development or technology upgrades could be slower than expected.
• Downstream demand could be weaker than expected.
• Capacity expansion could proceed more slowly than expected.
• Product-price increases could be weaker than expected.

What to watch

• MLCC volume growth and price recovery in 2H26F and beyond.
• Demand for optical-communication products from AI data centers.
• Whether AI-server demand in 2027F tightens MLCC industry capacity and lifts prices and margins.
• Progress in deploying H-share-listing proceeds for capacity expansion and product upgrades.