CICC has upheld its earnings forecasts for CONANT OPTICAL for 2026 and 2027. The current share price implies a 2026/2027 P/E ratio of 27/21 times. The firm reiterates its Outperform industry rating and a target price of HK$65, corresponding to a 2026/2027 P/E ratio of 42/32 times, suggesting a potential 53% upside from the current price. The bank believes the company's 2026 revenue is poised to return to double-digit growth, driven by advantages in raw material costs, capacity expansion at Asahi Fuji, and an upgrade in high-index products. Additionally, the XR business is expected to begin contributing to performance as mass production for a major client commences, indicating promising potential from this dual-driver strategy.
Key views from CICC are outlined below:
**Reasons for the 2025 Performance Slowdown** The slowdown in the company's 2025 revenue is attributed to several factors: 1) a high revenue base in 2024; 2) currency effects, with overseas revenue accounting for 66% of total revenue; the Renminbi generally appreciated against the US dollar in 2025, contrasting with its depreciation trend in 2024; 3) tariff impacts, as US-China tariff rates increased significantly in 2025, with the company and its US customers sharing nearly 40% of the export tariffs; and 4) effects in the Southeast Asian business, where clients advanced inventory building in 2024, pulling forward 2025 demand, coupled with the company's proactive adjustment of its customer structure by optimizing low-margin clients in Thailand and India.
**Potential for a Return to Rapid Growth in the Core Business by 2026** Three key drivers are identified: 1) On the raw materials front, the company has renewed its annual agreement with its supplier of 1.74 index resin, securing additional volume without a price increase, thereby solidifying its cost advantage; 2) Regarding branding, the Asahi Fuji brand has already achieved its target of 5% of China revenue in 2025, with the customized production line in Japan set for expansion in the second half of 2025; the Asahi brand is also entering new markets like China, enhancing brand premium; and 3) In terms of product mix, the penetration rate of 1.74 high-index lenses continues to rise, driving increases in both average selling price and gross margin. Looking ahead to 2026, CICC expects that as external disruptions subside, the company's revenue is likely to re-enter a double-digit growth trajectory, with a clear path for improvement in profit quality.
**Imminent Mass Production of XR Business and Its Performance Delivery** It is projected that the company's smart glasses business will see significant volume growth in 2026. Compared to traditional lenses, which average around RMB 20 per pair, the unit price for optical lenses used in smart glasses can reach tens to 100 US dollars per pair, indicating strong potential for value enhancement. A notable increase in revenue contribution is anticipated, with the XR business expected to become a core catalyst for valuation reassessment starting from 2026.
Risk factors include tariffs and geopolitical risks, slower-than-expected commercialization of AI glasses, and intensifying industry competition.
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