Dongshan Precision: The Complete Logic Behind Its Valuation Upgrade—from RMB 300 Billion to RMB 400 Billion

Company 2026 Q1 Net Profit Attributable to Shareholders Consensus Market Expectation YoY Growth QoQ Growth (vs. 2025 Q4) Core Issue TFC Communications RMB 492 million (official financial report) RMB 520 million +45.79% -10.8% QoQ decline; financial expenses surged 326% (dragged down by foreign exchange losses) Dongshan Precision RMB 1.0–1.15 billion (earnings forecast) RMB 850 million +119%–152% +843%–984% None; quarterly net profit exceeded RMB 1 billion for the first time TFC is an outstanding optical device company, but its business model remains fundamentally that of a 'shovel seller'—dependent on demand from downstream optical module manufacturers. Moreover, competition in the optical device segment has intensified, gross margins are declining, and foreign exchange losses have further weighed on earnings. Still, TFC’s long-term growth potential remains promising. By acquiring Source Photonics, Dongshan Precision has transformed from an optical module packaging house into an IDM (integrated device manufacturer) covering both optical chips and optical modules. The moats of these two companies are simply incomparable. Thanks to its self-developed EML optical chips, Source Photonics has achieved gross margins above 30%, far exceeding the industry average of 15%–20%. More importantly, Dongshan’s earnings rebound has been explosive and structural: its net profit attributable to shareholders in 2025 Q4 was only RMB 106 million (RMB 92 million non-recurring), down 80% QoQ—triggering widespread market pessimism and claims of an 'earnings surprise'. Yet just one quarter later, it delivered over RMB 1 billion in single-quarter profit—not a one-off gain, but genuine earnings release following Source’s consolidation. Put plainly, the endgame of the optical module industry will be won by vertically integrated IDM players. Companies lacking core optical chip technology will inevitably become contract manufacturers, earning thin margins. II. From RMB 300 Billion to RMB 400 Billion: Three Core Logics Driving the Valuation Upgrade In my article dated April 8, I assigned Dongshan Precision a conservative valuation of RMB 250–300 billion using a sum-of-the-parts approach. Over the past two weeks, three key variables have shifted, prompting me to raise my first target price to RMB 400 billion. 1. External sales of optical chips progressing faster than expected Previously, I conservatively assumed Source’s optical chips would be used exclusively internally, with negligible contribution from external sales. However, feedback from the industrial chain now indicates that the global supply-demand gap for high-end EML optical chips is even wider than anticipated—many mid- and small-sized optical module vendors have already begun purchasing chips from Source. Currently, Source’s yield for 100G EML optical chips has stabilized above 65%, and its 200G EML yield has surpassed 50%; capacity is fully booked through Q3 2026—this forms the fundamental basis enabling external sales. Once external sales scale meaningfully, Source will no longer be priced merely as an optical module company, but re-rated as a premium optical chip company—lifting its valuation multiple from ~35x P/E to over 50x. 2. Meta’s order volume exceeding expectations The market previously expected Meta’s 800G optical module orders for this year to total 2 million units. However, the latest North American industry survey data shows this figure has been revised upward to 3 million units.

From PCBs to Optical Chips: Dongshan Precision’s RMB 400-Billion Market-Cap Bet

Yet behind these astonishing growth rates lies an easily overlooked fact: organic growth is nearly stagnant. According to the company’s unusual trading announcement released on June 4, Source Photonics contributed 52.92% of Dongshan Precision’s total profit in Q1 2026. Given that Q1 2025 fell within the transitional period before the acquisition closed, comparability requires adjusting for Source’s contribution. This subtraction reveals a striking signal: excluding the optical module business, the company’s core traditional businesses generated approximately RMB 520 million in net profit in Q1 2026—essentially flat versus RMB 456 million in Q1 2025. Against the backdrop of overall Q1 YoY growth exceeding 140%, organic growth in traditional businesses stands at only ~14%, creating a stark divergence. Structural concerns regarding operational quality likewise warrant attention: in Q1 2026, operating cash flow net amounted to RMB 1.127 billion, down 17.48% YoY. Despite record-high revenue and profits, operating cash flow declined—a typical sign of rapidly expanding working capital, i.e., accumulating accounts receivable and inventory eroding the 'cash quality' of reported profits. This signal closely aligns with the company’s aggressive expansion: newly built AI-focused high-end PCB factories and optical module production capacity remain in heavy investment phases, significantly increasing the ratio of productive assets and working-capital deployment relative to mature business segments. Source Acquisition: The Real Substance Behind the Dual-Engine Narrative Understanding Dongshan Precision’s valuation hinges not on its traditional PCB business reflected in financial statements, but on the strategic value of Source Photonics. Source Photonics does not rank among the 'first-tier' optical module players. According to LightCounting’s 2024 annual report, in the global 800G optical module market share, InnoLight holds ~40%, Eoptolink ~22%, Accelink ~15%, while Source and others fall under the 'Others' category—reflecting a quantitative gap versus top-tier vendors. In Q1 2026, InnoLight’s quarterly revenue reached ~RMB 19.5 billion, whereas Source’s stood at only ~RMB 2.1 billion—a vast disparity. Moreover, Source incurred losses continuously during 2022–2023; although it turned profitable in 2024, its profitability sustainability still awaits further validation. Source’s true scarcity lies in its in-house optical chip capability. Amid rapid iteration in AI data centers, the 200G PAM4 EML optical chip represents the critical bottleneck component in 800G and 1.6T modules—its technical barrier far exceeds that of module packaging. Globally, aside from Source and Lumentum, very few suppliers can stably mass-produce EML chips at this speed tier. Under today’s market conditions—acute shortages of high-end 400G/800G optical modules and extremely tight optical chip capacity—Source’s IDM (vertically integrated manufacturing) model enables full-chain self-sufficiency, from optical chips to modules. This allows flexible capacity allocation, rapid response to urgent customer orders, and cost and yield advantages derived from co-design across chips and modules. The company is concurrently developing single-wavelength 400G optical chips to prepare for next-generation 1.6T to 3.2T modules.

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