Citi: Dongshan Precision’s 1.6T optical modules to ramp up in the fourth quarter of 2026; target price cut

What changed in the optical module business?

In the third quarter of 2026, optical module revenue rose more than 50% quarter on quarter, profitability improved from the preceding quarter, and the business contributed more than seventy percent of the company’s net profit. On that basis, Citi estimates that the optical business’s net margin could exceed 29%, above its previous expectation.
The 1.6T products were mainly undergoing customer qualification in the third quarter and are expected to begin commercial shipments on a larger scale in the fourth quarter. Citi’s model forecasts that 1.6T optical module shipments will rise from 200 thousand units in 2026 to 5 million units in 2027.

Management believes DSPs remain the company’s main supply bottleneck and that deliveries in the fourth quarter of 2026 and first quarter of 2027 may be constrained. Suppliers expect a significant release of capacity after the second quarter of 2027.
Management expects the DSP shortage not to disrupt overall deliveries, with delays in the first half of 2027 recoverable in the second half. Across the market, PCB shortages are becoming more severe than laser shortages; the company says its in-house supply of PCBs and lasers helps it win optical module business and alleviate material shortages.
The first phase of AI-PCB capacity has entered production, and its capacity for the year has been fully allocated to several major North American customers. Management expects revenue from rigid RPCBs to exceed that from flexible FPCBs in 2028.

CPO and NPO remain at the sampling or joint development stage. The company’s 450mW CPO product has passed internal reliability tests and is undergoing back-end packaging, with customer testing planned for the fourth quarter of 2026.
Management expects industry CPO shipments to grow from 2028; it sees no significant demand for NPO in 2027, with limited shipments possible in 2028. Optical module capacity at the Thailand plant has passed initial audits by major customers, and management expects the plant to become profitable once output expands.

Citi lowered its target price from 275 yuan to 159 yuan, primarily because the recent weakening in AI investment sentiment has lowered segment valuation multiples: the 2027 forward price-to-earnings multiple used for the optical module business fell from 15 times to 7 times, and that for optical chips fell from 50 times to 35 times.
Earnings forecast revisions were modest. Citi expects company net profit of 28.1 billion yuan in 2027, broadly unchanged from its previous forecast and about 49% above the Bloomberg consensus estimate of 18.9 billion yuan cited in the report; the AI optics business is expected to contribute 23.4 billion yuan in net profit.
Citi maintained its Buy rating, viewing the recent share-price decline as excessive and expecting strong earnings in 2027. Its forecast depends on expanding optical module shipments and growing optical chip capacity: the model projects production of 344 million 100G EML-equivalent lasers in 2027, of which 145 million will be sold externally.