Foreign-exchange losses weigh on near-term profit, but an improving business mix keeps Morgan Stanley bullish on Luxshare Precision's Hong Kong-listed shares

Overview

The report reviews Luxshare Precision's 02475.HK 2Q26 results and attributes the pressure on 1H26 profit primarily to foreign-exchange losses. Morgan Stanley believes the company's revenue growth, business-mix optimization, Leoni integration, and ramp-up of communications and data center products continue to strengthen, making the short-term foreign-exchange impact what it calls a good buying opportunity.

Core views

Luxshare Precision's 2Q26 profit was broadly in line with expectations. 1H26 revenue reached RMB174.5 billion, up 40% year over year, with growth driven by both organic volume increases and the consolidation of Leoni; net profit was RMB7.84 billion, up 18% year over year. The key reason profit growth lagged revenue growth was foreign-exchange losses: finance expenses surged from RMB160 million in 1H25 to RMB2.24 billion. The company generated RMB1.297 billion in hedging gains, partially offsetting the foreign-exchange losses, but these gains were classified as non-recurring items and therefore did not fully improve core earnings performance. The company also announced an interim cash dividend of RMB1.1 per 10 shares. Morgan Stanley accordingly believes that near-term profit is being suppressed by foreign-exchange factors, which does not alter its assessment that the core business is improving. Automotive electronics was the fastest-growing business, with 1H26 revenue rising 274% year over year, mainly driven by the consolidation of Leoni. The report states that Leoni integration is progressing smoothly, overall operating performance has exceeded previous forecasts, and synergies have already emerged across the global manufacturing network, customer resources, supply chain, and operational management capabilities. Morgan Stanley expects that, as integration synergies continue to be realized and the global automotive customer base expands, automotive electronics will not only contribute faster revenue growth but also improve the company's business mix. Communications and data center revenue grew 50% year over year, driven by high-speed electrical interconnects, optical transceivers, thermal management, and power management products. The rapid expansion of this business and automotive electronics jointly improved the earnings mix: consolidated gross margin rose to 11.78%, up 0.17 percentage points year over year; automotive electronics gross margin was approximately 17%, while communications and data center gross margin was approximately 14%, both above the company's consolidated level. The report's logic is that a higher share of high-margin businesses can offset some foreign-exchange and expense pressure and support subsequent improvement in earnings quality. Looking ahead to 2H26, the report identifies three main drivers: new consumer electronics product launches; accelerated mass production of high-speed electrical interconnects, optical transceivers, and thermal management products; and positive contributions from Leoni integration synergies and expansion among global automotive customers. The company expects 9M26 earnings to grow 15% to 25% year over year. These factors form the core basis for Morgan Stanley's view that growth momentum will improve in the second half, although the pace of customer qualification for AI infrastructure products, demand for smartphones and wearables, and competitive margin pressure will continue to affect the degree of delivery. Morgan Stanley ModelWare lists earnings per share of RMB2.3, RMB2.4, RMB3.0, and RMB4.1 for FY25, FY26e, FY27e, and FY28e, respectively; revenue of RMB332,344.4 million, RMB396,372.1 million, RMB457,921.4 million, and RMB541,144.7 million, respectively; EBITDA of RMB34,515.6 million, RMB39,391.0 million, RMB44,832.9 million, and RMB56,227.0 million, respectively; and ModelWare net profit of RMB16,599.8 million, RMB18,898.6 million, RMB22,932.7 million, and RMB31,831.0 million, respectively. P/E ratios for FY26e through FY28e are 20.6x, 17.0x, and 12.2x, respectively, while P/B ratios are 3.2x, 2.8x, and 2.3x, respectively. EV/EBITDA for FY25 through FY28e is 12.6x, 10.8x, 9.1x, and 6.8x, respectively; ROE is 19.6%, 18.2%, 19.0%, and 22.7%, respectively; RNOA is 16.1%, 14.6%, 14.1%, and 19.2%, respectively; and period-end leverage is 17.2%, 25.9%, 8.0%, and -7.0%, respectively. Dividend yields for FY26e through FY28e are 0.6%, 0.8%, and 1.1%, respectively, while free-cash-flow yields are -3.3%, 5.9%, and 7.0%, respectively. The HK$80.00 target price is derived from the base case of a residual income model, which assumes an 11% cost of equity, an 18% medium-term growth rate, and a 3% perpetual growth rate. Relative to the HK$58.85 share price on August 24, 2026, Morgan Stanley maintains its Overweight rating and an In-Line industry view; its definition of Overweight indicates that the risk-adjusted total return over the next 12 to 18 months is expected to exceed the average for the analyst's industry coverage universe.

Analysis framework

The report first compares the 2Q26 results with market expectations, then breaks down changes in 1H26 revenue and profit into factors including organic volumes, Leoni consolidation, foreign-exchange losses, and hedging gains. It subsequently analyzes changes in revenue mix and gross margin based on drivers in automotive electronics, communications and data centers, and consumer electronics, using these findings to assess the 2H26 and 9M26 earnings trajectory. Finally, it uses Morgan Stanley ModelWare to generate financial forecasts and a residual income model to estimate base-case value while outlining upside and downside risks.

Methodology notes

• Valuation MethodologyRIM Residual Income Model

  Residual Income Model

  This method estimates a company's value based on the book value of shareholders' equity and future residual income exceeding the cost of equity. The report uses it to derive the base-case target price of HK$80.00, applying an 11% cost of equity, an 18% medium-term growth rate, and a 3% perpetual growth rate.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Distinction Between Recurring and Non-Recurring Profit and Loss

  The report distinguishes among foreign-exchange losses, finance expenses, and hedging gains classified as non-recurring items to explain why core earnings remained under pressure despite strong revenue growth.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare Forecasting Framework

  The report uses Morgan Stanley ModelWare to present revenue, earnings, return, leverage, and valuation metrics for FY25 through FY28e and compares them with consensus expectations to determine whether results were in line.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Luxshare Precision Industry Co., Ltd. (02475.HK)

  The report's core covered company; near-term earnings are pressured by foreign-exchange losses, but growth in automotive electronics and communications and data centers, together with Leoni synergies, supports medium-term operating improvement.

  Strengths

  Strong revenue growth, rapid expansion in automotive electronics and communications and data centers, an improving business mix that is lifting consolidated gross margin, and Leoni integration performance exceeding forecasts.

  Weaknesses

  Foreign-exchange volatility has significantly increased finance expenses, some hedging gains are non-recurring, and uncertainty remains around consumer electronics demand and customer qualification for AI infrastructure products.

  Comparison

  2Q26 profit was broadly in line with expectations; the report did not provide a direct peer operating comparison.

  Risks

  Weaker-than-expected smartphone and wearable demand, slower customer qualification for AI infrastructure products, and margin pressure from intensifying competition.

Key data

• 1H26 RevenueRMB174.5 billionUp 40% year over year, jointly driven by organic volume growth and the consolidation of Leoni
• 1H26 Net ProfitRMB7.84 billionUp 18% year over year
• 1H26 Finance ExpensesRMB2.24 billionCompared with RMB160 million in 1H25, mainly due to foreign-exchange losses
• Hedging GainsRMB1.297 billionOffset part of the foreign-exchange losses but were classified as non-recurring items
• Interim Cash DividendRMB1.1 per 10 sharesAnnounced by the company following its 1H26 results
• Automotive Electronics Revenue GrowthUp 274% year over yearThe fastest-growing business, mainly driven by the consolidation of Leoni
• Communications and Data Center Revenue GrowthUp 50% year over yearGrowth contributed by high-speed electrical interconnects, optical transceivers, thermal management, and power management products
• Consolidated Gross Margin11.78%Up 0.17 percentage points year over year
• Segment Gross MarginsAutomotive electronics 17%; communications and data centers 14%Faster growth in high-margin businesses drove improvement in the overall product mix
• 9M26 Earnings Growth GuidanceUp 15%-25% year over yearThe company's expectation for earnings growth in the first three quarters
• FY25-FY28e Earnings per ShareRMB2.3, RMB2.4, RMB3.0, RMB4.1On a Morgan Stanley ModelWare basis
• FY25-FY28e RevenueRMB332,344.4 million, RMB396,372.1 million, RMB457,921.4 million, RMB541,144.7 millionFY26 through FY28 are estimates
• FY25-FY28e EBITDARMB34,515.6 million, RMB39,391.0 million, RMB44,832.9 million, RMB56,227.0 millionOn a Morgan Stanley ModelWare basis
• FY25-FY28e ModelWare Net ProfitRMB16,599.8 million, RMB18,898.6 million, RMB22,932.7 million, RMB31,831.0 millionFY26 through FY28 are estimates
• FY26e-FY28e P/E20.6x, 17.0x, 12.2xDeclining as forecast earnings grow
• FY26e-FY28e P/B3.2x, 2.8x, 2.3xOn a Morgan Stanley ModelWare basis
• Target PriceHK$80.00Residual income model base case
• Valuation Model AssumptionsCost of equity 11%; medium-term growth rate 18%; perpetual growth rate 3%Used for the residual income model base case

Impact & implications

The report believes that pressure on 1H26 earnings primarily came from foreign-exchange losses rather than a slowdown in core business growth. Rapid expansion in automotive electronics and communications and data centers is increasing the share of high-margin businesses, while Leoni integration is expanding the company's global manufacturing, customer, and supply-chain capabilities. If new products, data center product mass production, and automotive customer expansion proceed as planned in 2H26, earnings growth is expected to improve. Based on this assessment, Morgan Stanley maintains its Overweight rating and HK$80.00 target price.

Risks

• Faster-than-expected growth in AI infrastructure and data center businesses could create upside risk to valuation and earnings forecasts.
• Higher-than-expected penetration of foldable-screen iPhones and greater component value per device for the company could provide upside.
• Better-than-expected growth in communications and automotive electronics could create further upside.
• Weaker-than-expected demand for smartphones and wearables could weigh on the consumer electronics business.
• Slower-than-expected customer qualification of AI infrastructure products could delay revenue realization.
• Intensifying competition could pressure margins.

What to watch

• Track whether 9M26 earnings can achieve the company's expectation of 15% to 25% year-over-year growth.
• Monitor demand and shipment performance following new consumer electronics product launches in 2H26.
• Monitor mass-production progress for high-speed electrical interconnects, optical transceivers, and thermal management products.
• Track Leoni integration synergies, operating performance, and expansion among global automotive customers.
• Monitor the pace of customer qualification for AI infrastructure products.
• Assess whether a rising share of automotive electronics and communications and data center businesses can continue to improve consolidated gross margin.