AXT’s Tongmei Problem: Great Asset, Fragile Economics

AXTI (overview): Tongmei (85.5% owned) is key InP substrate player w/ ~35% share in ~$200M 2026 market. Bulls see AI optics leverage + China indium access (70% global supply). Bears note: 1) Export license risk post-Feb'25 controls 2) Gross margin tied to offshore sales routing (pre-2021 cost-plus to AXT captured spread) 3) VGF capacity expanding fast (Yunnan Germanium + others) 4) MOCVD epi is real bottleneck, not substrates 5) Cross-license w/ 'Company M' (likely Sumitomo) expires 2029 6) Stalled Shanghai IPO since 2022 + minority put ($49M) 7) Even assuming $2B TAM by 2030, 35% share, 20% op margin, 20x P/E = ~$45/share (current price). Nvidia diversifying away from China. Margin compression risk high as domestic competition grows. Strategic asset but fragile economics—downside skewed.

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