Against a backdrop of strong demand for high-end optical chips and modules, Suzhou Dongshan Precision Manufacturing Co.,Ltd. (002384.SZ) has announced that its subsidiary, Source Photonics, is initiating an expansion project for optical chips and modules with a total investment of approximately $1.2 billion.

It has been observed that the company's several major acquisitions in recent years have not only inflated goodwill but also intensified its short-term debt repayment pressure. This new expansion plan is set to consume nearly ninety percent of the company's available funds, further straining its financial situation. In this context, the company plans to list in Hong Kong to raise capital and alleviate this pressure.

Behind the substantial first-quarter earnings growth at Suzhou Dongshan Precision Manufacturing Co.,Ltd., the acquired entity Source Photonics contributed nearly ninety percent of the net profit increase. Meanwhile, the company's legacy businesses, touch panels and LCD modules, are facing shrinking revenue, and its PCB products are also grappling with slowing growth and declining average selling prices and gross margins.

M&A as a Profit Engine

Public information shows that Suzhou Dongshan Precision Manufacturing Co.,Ltd. has established four core business segments: electronic circuits, optoelectronic display, precision manufacturing, and optical modules. Its products include flexible/rigid printed circuit boards (FPC/PCB), touch display modules, precision structural components for new energy vehicles, and optical communication modules.

An investment announcement revealed that the subsidiary Source Photonics and its subsidiaries are implementing the optical chip and module capacity expansion project in locations like Changzhou. The total project investment is $1.2 billion (approximately RMB 8.1 billion), aimed at boosting Source Photonics' overall production capacity to meet industry and downstream customer demand. The funding for the project will come from the company's own resources.

It is important to note that Source Photonics was acquired by Suzhou Dongshan Precision Manufacturing Co.,Ltd. last year. In 2025, the company, through its wholly-owned subsidiary Hong Kong Chaoyi, acquired 100% of the global optical module leader Source Photonics for no more than RMB 5.935 billion (including a $629 million equity consideration and RMB 1 billion in convertible bonds). This acquisition successfully allowed Suzhou Dongshan Precision Manufacturing Co.,Ltd. to enter the optical communication field and add optical module (including optical chip) related business.

It was noted that before completing this acquisition, Suzhou Dongshan Precision Manufacturing Co.,Ltd. had experienced two consecutive years of revenue growth without corresponding profit growth. In 2023 and 2024, pressured by factors like declining gross margins in electronic circuits and persistent losses in the LED business, the company's profitability was under strain for two years. Net profit attributable to shareholders was RMB 1.965 billion and RMB 1.086 billion, down 17.05% and 44.74% year-on-year respectively.

It wasn't until Source Photonics was consolidated into the financial statements starting October 2025 that Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s performance saw a significant rebound. In Q1 2026, the company's operating revenue and net profit attributable to shareholders were RMB 13.138 billion and RMB 1.11 billion, representing year-on-year increases of 52.72% and 143.47% respectively. Source Photonics contributed 16.02% of the revenue and 52.92% of the net profit for that quarter.

In other words, excluding the contribution from Source Photonics, Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s Q1 net profit would have been approximately RMB 523 million, a growth of only about 14.7% compared to RMB 456 million in the same period last year. This demonstrates that Source Photonics contributed nearly ninety percent of the net profit increase.

Acquisitions Fuel Short-Term Debt, Controlling Shareholders Inject Capital

It has been observed that external mergers and acquisitions have consistently been a primary method of expansion for Suzhou Dongshan Precision Manufacturing Co.,Ltd..

In 2014, the company entered the touch display panel field by acquiring Mudong Optoelectronics. In 2016, it spent RMB 3.984 billion to acquire MFLEX, thereby entering the Apple supply chain and FPC business. In 2018, it acquired PCB manufacturer Multek for RMB 1.992 billion to strengthen its rigid and rigid-flex board portfolio. In 2023, it completed the acquisition of Suzhou Jingduan, expanding its business into automotive display modules.

In 2025, besides acquiring Source Photonics, the company completed the acquisition of French automotive parts manufacturer GMD Group for RMB 814 million, gaining a foothold in the European market.

It is noteworthy that the multiple acquisitions have inflated Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s goodwill, which rose from RMB 155 million at the end of 2014 to RMB 4.769 billion at the end of Q1 2026. The acquisition of Source Photonics alone generated approximately RMB 2.8 billion in goodwill.

According to incomplete media statistics, since 2014, Suzhou Dongshan Precision Manufacturing Co.,Ltd. has spent around RMB 15 billion on acquisitions. To support this expansion and meet working capital needs, the company has repeatedly raised funds through private placements for asset acquisitions, project construction, and working capital supplementation.

Data shows that since its IPO in 2010, the company has conducted four private placements, raising a cumulative total of RMB 9.971 billion. The most recent placement was completed in 2025, fully subscribed by controlling shareholders Yuan Yonggang and Yuan Yongfeng, raising a total of RMB 1.4 billion entirely for working capital.

It was noted that despite this capital injection from the controlling shareholders, Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s financial position remains under pressure. Due to the acquisitions of Source Photonics and GMD Group, coupled with the need for more working capital to match expanded sales, the company's short-term borrowings increased by 66.53% year-on-year to RMB 8.011 billion by the end of 2025.

By the end of Q1 2026, short-term borrowings had further increased to RMB 8.861 billion. During the same period, non-current liabilities due within one year amounted to RMB 3.275 billion, bringing total short-term debt to RMB 12.136 billion. The company's monetary funds and tradable financial assets totaled RMB 9.092 billion, indicating insufficient cash on hand to cover short-term debt.

Against this backdrop of strained short-term solvency, Suzhou Dongshan Precision Manufacturing Co.,Ltd. now plans to invest nearly ninety percent of its funds in the optical chip and module expansion project. This suggests that as the project progresses, the company's financial pressure is likely to intensify further.

PCB Margins Decline, Optoelectronic Display Module Revenue Contracts

It has been observed that to alleviate funding pressure, Suzhou Dongshan Precision Manufacturing Co.,Ltd. has initiated plans for a Hong Kong listing, submitting an updated prospectus in May of this year.

The prospectus shows that in 2025, revenue from the company's mainstay electronic circuit (PCB) products reached RMB 25.62 billion, a year-on-year increase of 3.3%, with growth slowing from 6.62% in the previous year. Simultaneously, influenced by factors such as product mix adjustments, market demand dynamics, and customer specification requirements, the average selling price of PCB products declined from RMB 5,846.1 per square meter in 2023 to RMB 3,827.6 per square meter in 2025. Consequently, the gross margin for PCB products fell from 20.3% in 2023 to 16.7% in 2025.

While revenue from the company's precision component products continued to grow, the gross margin for this business also declined. In 2025, revenue from this product line was RMB 5.93 billion, up 30.61% year-on-year, accounting for 14.8% of total revenue. The gross margin was 7.3%, down 3.3 percentage points year-on-year.

Meanwhile, the company's touch panel and LCD module business not only saw a decline in revenue but also had the lowest gross margin among the three major businesses. During the reporting period, this segment generated revenue of RMB 5.986 billion, down 6.03% year-on-year, accounting for 14.9% of total revenue. Affected by stronger pricing pressure in the end market, the segment's gross margin was 4.5%, below the company's overall gross margin level.

Additionally, the risk associated with Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s high customer concentration cannot be overlooked. In 2025, sales to the top five customers amounted to RMB 25.8 billion, representing 64.4% of total revenue. Revenue from the largest single customer accounted for nearly fifty percent.

It was noted that as Suzhou Dongshan Precision Manufacturing Co.,Ltd.'s business scale has expanded, its inventory level has risen correspondingly. By the end of 2025, inventory stood at RMB 8.929 billion, a year-on-year increase of 45.12%, significantly outpacing revenue growth. By the end of Q1 2026, inventory had further increased to RMB 9.745 billion. The growth in inventory impacted its cash flow performance. During the reporting period, net cash flow from operating activities was RMB 1.127 billion, a decrease of 17.48% year-on-year.