New Stock Interpretation | Riding the AI Tailwind, How Substantial is the High Growth Potential of Nazhen Technology?

With the explosive growth of generative artificial intelligence and large model technologies, global computing power infrastructure construction has sparked an unprecedented investment boom. As an indispensable "lifeblood" within computing power clusters, the optical communication industry is undergoing rapid upgrades and reshaping. Recently, optical communication and optical connection product supplier Nazhen Technology has passed the listing hearing at the Hong Kong Stock Exchange and plans to be listed on the main board of the Hong Kong Stock Market. According to Frost & Sullivan data, based on global optical module revenue in 2025, Nazhen Technology ranks fifth among global professional optical module manufacturers with a market share of 4.0%; in the Chinese market, it ranks third with a share of 10.1%. Furthermore, the company is one of the few vertically integrated enterprises globally that possess independent research and development and production capabilities for both optical modules and optical chips. In the face of the rapid release of AI computing power dividends and the swift updates in downstream technologies, can Nazhen Technology lead the fierce global competition and successfully leverage the capital market for valuation elevation and advancement? Betting on the high-speed interconnection of AI, ushering in a performance turning point It is understood that Nazhen Technology's business scope includes data communication optical modules, telecom optical modules, optical chips, and optical network terminals. Reviewing its financial performance during the past record period, the company's revenue is expected to grow from RMB 4.239 billion in 2023, an increase of 20.0%, to RMB 5.087 billion in 2024, and then accelerate to RMB 8.355 billion in 2025. In the first half of 2026, the company achieved revenue of RMB 5.393 billion, continuing to maintain high-speed growth year-on-year. On the profit side, the company's net profit is projected to rise from RMB 89.5 million in 2024 to RMB 873 million in 2025, with the net profit margin increasing from 1.8% to 10.4%. The steep increase in profitability is attributed to a higher proportion of high-margin products and a gain of RMB 353 million from the sale of a joint venture confirmed in 2025. The fundamental driving force behind the company's performance leap is its strategic shift in product structure toward the data communication sector. In the past, the investment cycles of domestic telecom operators and the rhythm of 5G construction played a decisive role in the demand for telecom optical modules and FTTx terminals. Around 2024, the demand in the domestic telecom market experienced a stage adjustment, leading to a slow down in revenue from telecom optical modules. However, the global demand for data communication optical modules with speeds of 200G and above, driven by AI clusters and cloud computing, has surged exponentially, quickly filling the gap and boosting the overall performance of the company. In the first half of 2026, the companys gross margin increased to 24.2%, with an absolute rise attributed to increased shipments in overseas markets and high-end data communication products. It is noteworthy that the vertical integration of technology is one of Nazhen Technology's core competitive advantages. It is understood that as the most costly and technically demanding component within optical modules, optical chips have long been heavily reliant on external supplies or overseas imports. Nazhen Technology has achieved a fully controllable process from external growth, grating technology, optical waveguide etching to automated packaging and testing. The CW-DFB laser chip developed by the company is set for commercialization in the second quarter of 2025, gradually shifting from internal use to large-scale external sales, and achieving scaled production in the first quarter of 2026. This not only opens up the second growth curve but also significantly improves the cost structure of upstream core components. Despite the halo, there are still hidden reefs: how to navigate the industry cycle? Although Nazhen Technology has achieved considerable success amidst the AI wave, a detailed examination of the prospectus reveals that the competitive landscape and operational risks it faces remain objectively present. The optical communication industry overall shows characteristics of high dispersion and intense competition. While Nazhen Technology ranks fifth among global specialized manufacturers, its market share in the global optical module market is only 4.0%, indicating a significant gap compared to leading giants. Currently, the top five specialized manufacturers globally hold a combined market share of 61.1%, indicating a high market concentration, and there are numerous specialized players and new entrants in various vertical fields within the industry. In the optical network terminal box segment, the combined share of the top ten manufacturers is only 34.8%, indicating even higher dispersion, which exerts continuous pressure on pricing power. Additionally, the high concentration of major customers is a significant feature of the company's operations. In 2023, 2024, 2025, and the first half of 2026, the revenue contributions from the top five customers were 55.8%, 66.9%, 70.2%, and 71.8%, respectively, showing an upward trend year by year. The revenue share from the single largest customer has consistently remained above 20%. It is understood that the downstream buyers in both the data communication and telecom sectors are large cloud service giants, network equipment manufacturers, and telecom operators. This customer structure means that any adjustment in capital expenditure plans by core clients, changes in procurement suppliers, or elongation of product certification cycles will have a severe impact on the company's order stability and cash flow. Moreover, rapid technological iterations and capital expenditure pressures are common challenges in the industry. Today, optical communication technology is evolving quickly, with data communication optical modules transitioning from 400G/800G to 1.6T and even higher rates, while optical chips are advancing to single-channel 400G and higher power technologies. If the company's research and development layout does not precisely align with technological nodes, or if the commercialization of new technologies falls short of expectations, the considerable sunk costs in research and development will face the risk of irretrievability. From 2023 to 2025, the companys R&D spending is expected to reach RMB 553 million, RMB 623 million, and RMB 664 million, maintaining a very high level. In the future, the company plans to invest the majority of the funds raised from the IPO into research and development and talent acquisition, intending to recruit over 450 research and development personnel in the next five years. Under the pressure of high-intensity R&D investments, how to continuously maintain product iteration advantages and ensure the stability of profitability will be a long-term balancing challenge for the company post-listing. In summary, Nazhen Technology, leveraging its collaborative research and development capabilities in optical chips and optical modules, has successfully capitalized on the computing power expansion dividend of the AI era, achieving a qualitative change in its financial data. However, facing real challenges such as overseas expansion, high customer concentration, and intense industry price competition, the company still needs to rely on continuous technological innovation and upgrading of the global manufacturing supply chain to solidify its barriers. Its future valuation anchor will depend on the expansion of high-end optical chip sales and the penetration progress among overseas hyperscale data center clients.