UBS Raises Largan Precision's Target Price to NT$5,000, Optimistic About CPO and iPhone Cycle

Overview

UBS released a research report maintaining a 'Buy' rating for Largan Precision (3008.TW) while substantially raising its target price from NT$3,150 to NT$5,000. This adjustment is primarily driven by two key factors: first, significant acceleration in R&D progress for critical components in Co-Packaged Optics (CPO), opening new avenues for growth; second, the core smartphone lens business benefiting from the robust iPhone 17 cycle, resulting in better-than-expected short-term performance. The report notes that although the stock price already reflects some CPO expectations, given the company’s deep technological expertise and potential multi-billion-dollar market opportunities, current valuations still have room to rise.

Core views

Core Viewpoint One: Breakthroughs in the CPO business have opened up long-term growth potential. Largan Precision is developing key sub-components for Fiber Array Units (FAU) within Co-Packaged Optics (CPO), including multi-row fiber arrays and prism micro-lens arrays (PMLA). At Computex, the company showcased prototypes and outlined an aggressive timeline: an automated sample production line is expected to be completed by September 2026, followed by mass production within 6–12 months. Its technical advantage lies in leveraging precision molds and automation capabilities to achieve alignment accuracy below 0.3 microns—compared to the industry standard of 0.5–0.8 microns—and enabling denser four-row fiber placements. UBS estimates that under a baseline scenario, the CPO switch market could reach US$1 billion by 2028–2029, and if Largan captures a 15% market share, it could contribute approximately NT$35 per diluted share in earnings per share (EPS). Core Viewpoint Two: Strong iPhone 17 cycle drives steady growth in the core lens business. Driven by robust demand for the iPhone 17 series, Largan Precision reported a 20% year-over-year increase in sales during the first half of 2026. Sales tracking through Q2 indicates performance exceeding both UBS and market consensus forecasts. Consequently, UBS has revised upward its sales growth projections for 2026 and 2027, from 11%/10% to 15%/13%, respectively. Additionally, increased penetration of variable-aperture lenses in high-end models—adding US$2–3 per phone—and support for foldable smartphones further bolster average selling prices (ASPs). Core Viewpoint Three: Shift in valuation methodology fully captures CPO option value. UBS transitioned from a single P/E-based valuation approach to a Sum-of-the-Parts (SOTP) method. The core smartphone lens business is valued at 15x P/E for 2027, corresponding to NT$3,300; meanwhile, the CPO business is assigned NT$1,700 based on projected EPS of NT$35 and a 48x P/E multiple, referencing peer optical companies’ averages. Combined, this yields a target price of NT$5,000. With the current stock price around NT$4,420, the market appears to have priced in roughly NT$12 of CPO contribution—below UBS’s estimated NT$35—suggesting that the full potential of successful CPO implementation has yet to be fully absorbed by the market.

Analysis framework

UBS adopts an analytical framework structured around ‘short-term execution vs. long-term second curve.’ First, in short-term fundamental analysis, UBS leverages high-frequency monthly sales data (QTD tracking ratios) and supply chain surveys to validate the strength of the iPhone cycle, thereby refining near-term financial forecasts. Second, for long-term growth logic, UBS employs a three-step approach: assessing technological feasibility, estimating total addressable market (TAM), and projecting market share scenarios. Starting with confirming Largan Precision’s technological barriers in CPO components—such as high precision and automation—the firm calculates global demand for FAUs tied to AI switch bandwidth upgrades, then incorporates competitive dynamics to generate conservative, baseline, and optimistic market share scenarios, ultimately deriving expected values. Finally, regarding valuation, recognizing that the CPO business is early-stage but highly promising, traditional P/E multiples fail to fully capture its option value. Thus, UBS introduces the SOTP method, separately valuing mature and emerging businesses to more accurately reflect each stage’s unique value characteristics, particularly relevant when evaluating high-risk, high-reward ventures like CPO.

Methodology notes

• Valuation MethodologySOTP Sum-of-the-Parts Valuation

  Sum-of-the-Parts (SOTP) valuation method

  When a company encompasses both mature operations and rapidly growing emerging businesses, a single valuation multiple may distort the true value. SOTP assigns appropriate multiples to different business segments and sums them up, providing a more accurate reflection of each component’s worth—especially useful for assessing new ventures like CPO that carry high risk and high reward potential.

• Industry Analysis FrameworkSupply-demand framework

  TAM Market Size Estimation and Penetration Rate Analysis

  By disaggregating downstream applications—such as AI switch bandwidth upgrades—to determine upstream component requirements (e.g., FAUs), combined with unit pricing (ASP) and penetration rate assumptions, this bottom-up approach estimates the total addressable market (TAM)—a standard method for evaluating the commercialization potential of new technologies.

• Competitive & Strategic FrameworkMoat / competitive advantage

  Precision Manufacturing and Automation Barriers

  Emphasizing the company’s longstanding expertise in micron-level precision machining, custom tooling, and automated mass production, these capabilities form a competitive moat against pure newcomers in areas such as CPO, enabling faster ramp-up of high-precision component yield rates.

Asset mapping & comparison

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

• Largan Precision (3008.TW)

  Direct beneficiary, core developer of CPO components and primary supplier of iPhone lenses

  Strengths

  Leading precision optics manufacturer with rigorous Apple supply chain certification experience, superior CPO component precision (<0.3um) compared to peers, ample net cash reserves

  Weaknesses

  CPO business remains in early stages, facing pressure from competitors such as Himax and FOCI, as well as vertically integrated manufacturers

  Comparison

  Compared to Genius Optics, Largan is advancing faster in high-precision CPO components, whereas Genius has yet to participate in variable-aperture lens supply; compared to traditional optical communication firms, Largan enjoys unique advantages in miniaturized precision assembly

  Risks

  Delays in CPO mass production, slower-than-expected recovery in smartphone demand, mounting price competition pressures

Key data

• Target PriceNT$5,000Significantly raised from the previous NT$3,150, implying about 13% upside potential
• 2026E EPSNT$195Revised upward from earlier forecast, surpassing the market consensus of NT$183.87
• 2027E EPSNT$220Revised upward from earlier forecast, exceeding the market consensus of NT$195.65
• Potential EPS Contribution from CPONT$35Based on baseline scenario expectations, corresponding to a NT$1,700 valuation
• Net CashNT$127bnEquivalent to NT$953 per share, providing strong downside protection
• H1 Sales Growth Rate for iPhone 17+20% YoYDriving robust growth in Largan Precision’s first-half sales

Impact & implications

For Largan Precision, breakthroughs in the CPO business signify a transformation from a mere smartphone lens supplier to a core provider of optical components for AI infrastructure, greatly elevating its long-term valuation anchor. In the short term, the strong performance of the iPhone 17 cycle ensures solid earnings floor, while CPO progress offers upward elasticity. From an industry perspective, this demonstrates how traditional optics giants are leveraging their precision manufacturing capabilities to swiftly enter the AI optical communications space, potentially intensifying competition—but also validating the commercial viability of the CPO technology pathway. Investors should closely monitor the progress of CPO production line construction and subsequent customer certifications.

Risks

• Ongoing price pressure from smartphone OEM customers and intensifying competition among lens suppliers
• Slower-than-expected recovery in China’s smartphone market demand
• CPO technology adoption lagging behind expectations or facing competition from alternative pathways such as NPO/XPO
• Failure of the CPO business to secure design wins from major customers

What to watch

• Completion of the CPO automated production line by September 2026 and progress in customer validation
• Volume and penetration trends of variable-aperture lenses in the iPhone 18 lineup
• Actual market adoption scale of CPO switches in 2028–2029
• Specific design win outcomes for Largan Precision in the CPO domain