Mid-Year Report X-ray: Who Is Actually Capturing the Profits Along the AI Power Supply Chain?

The real money is being made by passive components—those indifferent to architecture. Film capacitors are essential for DC bus applications: whether it’s 800V or 48V, every technical pathway requires them. Faratronic’s first-half revenue grew 10.6%, with operating cash flow reaching RMB 825 million and a net profit cash conversion rate of 142%—every yuan of profit was backed by actual cash inflow. Jianghai’s aluminum electrolytic capacitor and supercapacitor business grew over 50%, with a cash conversion rate of 103%; Zhongrong Electric, a circuit protection device maker, saw its profits surge 82%. These segments avoid betting on specific technology routes, operate in oligopolistic markets, and enjoy captive demand—any customer building a factory must buy from them. They’re the ‘rent-collecting’ businesses inside the Token factory. Next door to rent collection lies the beating. Companies manufacturing power supply systems and magnetic components generally face revenue growth without corresponding profit growth. Megmeet’s power supply revenue rose 59%, yet its non-GAAP profit fell 16%—though Q2 non-GAAP profit rebounded nearly 60% sequentially; Eurotech’s data center power supplies now account for 45% of its revenue, yet its attributable net profit plunged 94%, with negative operating cash flow; magnetic component maker Kelike’s profit dropped 52%, while Xinleinen has posted consecutive losses. The cause is straightforward: heavy upfront R&D investment for AI power supplies, expanded capacity stocking, and intensified price wars amid homogenized magnetic components—climbing the production curve means profits get squeezed from both ends: rising costs and falling prices. This is the most ironic twist under the question “How many Tokens does each MW generate?”—the highest-value segment often gets flattened first by price competition. Distribution Layer: Strongest Realization—but Profit and Cash Have Divorced The distribution layer delivers the strongest earnings realization across the entire chain—but cash quality diverges dramatically upstream versus downstream. Upstream optical devices and interface chips represent the industry’s quality ceiling. TFC Communications boasts a gross margin of 60.9%, a net profit cash conversion rate of 83%, and a 44% sequential increase in Q2 profit; Longsys achieves a gross margin of 65.3%, an ultra-low asset-liability ratio of just 7.5%, and a cash conversion rate of 66.5%; its DDR5-compatible RCDs and next-generation memory interface chips are seeing simultaneous volume and price growth. Oligopolistic structure, high barriers to entry, and light inventory requirements—when all three conditions align, both the income statement and cash flow statement shine equally. Downstream optical module assemblies present a starkly different picture: profits are genuinely high, but cash is genuinely tight. ACCTech’s first-half attributable net profit reached RMB 13.65 billion—a 242% increase—but operating cash flow stood at only RMB 1.8 billion (a conversion rate of just 13%), with accounts receivable totaling ~RMB 15 billion; NeoPhotonics’ profit nearly doubled, yet its cash conversion rate was only 21%, with inventories hitting RMB 11.6 billion—and an additional RMB 64 million in foreign exchange losses; Accelink’s profit rose 56%, yet its operating cash flow was negative RMB 1.24 billion (a conversion rate of -212%), with inventories up 47%. The root cause is extreme customer concentration, massive pre-stocking of 1.6T products, and long payment cycles—profits are real, but large portions remain trapped in receivables and inventory, requiring valuation discounts for poor cash generation. This structure is not unfamiliar. During the 5G optical module cycle from 2019 to 2021, industry leaders similarly experienced explosive profit growth alongside negative operating cash flow and ballooning receivables and inventories—followed by a sharp deceleration in growth and inventory write-downs after the network rollout peak in H2 2021. This time, 1.6T modules have only just entered mass production, and CPO and 800V technologies will extend the cycle through 2027—potentially making it longer. Yet history offers one hard validation point: cash flow must recover during Q4—the year-end collection season—and accounts receivable aging must contract.

International Investment Banks Are Uniformly Bullish on Innoscience

I. Innoscience (02577.HK) Investment Rationale: 1. Dongzi Securities: Within the past 90 days, 10 institutions have issued ratings on this stock—6 Buy and 4 Overweight recommendations. The average 90-day target price stands at HK$49, representing a 29% premium to the current share price. According to Dongzi Securities’ big-data analysis, the company has received investments from STMicroelectronics and Jiangsu Provincial State-owned Capital Fund. (Date: April 28, 2025) 2. CLSA: Financially, the company has incurred losses over recent years, but with growing market demand and expanding production capacity, profitability is expected to be achieved in 2027. In 2023, Innoscience generated RMB 593 million in revenue; this is projected to reach RMB 8.01 billion by 2028, representing a compound annual growth rate (CAGR) of 76%. Its 2023 gross margin stood at -61.1%, but is forecast to improve to 48% by 2028. Operating expense ratios are also expected to decline gradually as economies of scale take effect. Innoscience holds a leading position in the gallium nitride (GaN) power semiconductor market, and GaN demand is surging rapidly amid growth in electric vehicles (EVs), AI servers, and renewable energy sectors. CLSA assigns the stock an ‘Outperform’ rating. (Source: Reuters, cn.tradingview.com/news… Date: April 28, 2025) 3. China Merchants Securities: Benefiting from rising GaN application penetration and market expansion, the company’s revenue grew from RMB 68 million in 2021 to RMB 828 million in 2024, and is projected to reach RMB 3.098 billion by 2027—a CAGR of 55.2% from 2024 to 2027. As scale-driven efficiencies materialize, Innoscience’s gross margin and net profit margin are expected to improve progressively: gross margin is forecast to turn positive in 2025, and net profit margin in 2027. Based on a 30x P/E multiple applied to 2030 earnings (aligned with peers’ five-year average), a weighted average cost of capital (WACC) of 12.0%, and an RMB/HKD exchange rate of 1.07, China Merchants Securities assigns an ‘Add’ rating. (Source: Reuters, cn.tradingview.com/news… Date: April 28, 2025) II. Powertech New Materials (300811.SZ) Investment Rationale: 1. Dongzi Securities: Within the past 10 days, four institutions have issued ratings—two Buy and two Recommend recommendations. The average 10-day target price is RMB 52, representing a 30% premium to the current share price. Dongzi Securities’ big-data tracking shows the stock has seen three consecutive days of net institutional buying. (Date: April 28, 2025) 2. AVIC Securities: The company’s core magnetic powder core business serves the new energy sector. By strategically extending into upstream chip inductors for computing infrastructure—and forging business partnerships with globally leading GPU chipmakers—it has further solidified its status as an ‘expert in metal soft magnetic materials and their applications.’ Its second growth engine is now fully activated, positioning it to capture robust tailwinds from the AI era.

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