Hongjing Precision 1Q26 Results Beat Expectations; Optimistic Capacity Expansion Guidance; Target Price Raised to NT$12,000

Overview

Goldman Sachs issued an earnings review on Hongjing Precision's 1Q26 results, noting robust and better-than-expected performance, with management's capacity expansion guidance serving as a key positive surprise. Based on stronger capacity growth guidance and robust AI/HPC demand, Goldman Sachs has raised its 2026–2027 EPS estimates by 25%/40% and introduced its first 2028 forecast. The target price has been significantly increased from NT$5,700 to NT$12,000, maintaining a Buy rating, implying approximately 75% upside potential.

Core views

In terms of performance, 1Q26 gross margin was 56.2%, exceeding Goldman Sachs' expectation of 55.4%; operating margin was 50.0%, beating the forecast of 48.6%; and EPS reached NT$25.7, significantly higher than Goldman Sachs' estimate of NT$22.58 and market consensus of NT$22.86. The earnings beat was primarily driven by increased contribution from the high-margin cold plate business and an operating expense ratio of 6.3%, below the expected 6.8%. Capacity expansion guidance was the core highlight of this earnings call. Management plans to expand capacity by over 40% in 2026 (specific guidance to be announced next quarter). Given strong demand prospects and customer migration toward higher testing/thermal requirements, the 2027 target is an additional 50% increase, with a long-term plan for another 50% expansion thereafter. Based on this, Goldman Sachs sets 2026–2028 revenue growth expectations at 92%/78%/66%, corresponding to EPS of approximately NT$137/NT$250/NT$426. Business drivers are diversified. Regarding FT processors, CPU demand from U.S. cloud service providers is increasing, and AI chips from a U.S. EV customer are expected to ramp up starting 3Q26. In the CPO segment, demand for ASIC switch chips from an Israeli customer remains steady, with shipment timing between late 2026 and early 2027. For SLT processors, in addition to CPU demand from U.S. customers, the company has begun engineering testing with a U.S. GPU customer (a area previously less涉足) and is developing next-generation >10kW solution SLT processors with an AI ASIC customer. The cold plate business will be a key driver of revenue growth and gross margin expansion starting in 2026. The company guides that cold plate revenue share will increase by 3–5 percentage points in 2026, growing faster than the equipment business. Goldman Sachs expects cold plate revenue share to rise from 22% in 2025 to 26%/29%/33% in 2026–2028, driving overall gross margin from 57.6% to 60.4%.

Analysis framework

Goldman Sachs employs a P/E valuation method, with the target price based on 32x 2028E P/E (referencing comparable company analysis), discounted to 2027 using a cost of equity of 13.6%. Key assumptions for the cost of equity include: beta coefficient of 1.5 (from Bloomberg), risk-free rate of 4.25% (consistent with Goldman Sachs' internal view), and equity risk premium of 6.25%. The 2028 discounted P/E method was chosen as it best reflects the company's clear capacity expansion plans and strong demand visibility over the coming years. The analytical logic follows the主线 of capacity expansion → revenue growth → margin improvement → valuation re-rating. First, revenue growth expectations are derived from management's capacity guidance; second, the impact of rising cold plate business share on overall gross margin is analyzed; finally, combining AI/HPC demand trends and the company's >90% market share advantage in FT processors, the potential for valuation re-rating is substantiated.

Methodology notes

• Valuation MethodPE/PEG valuation

  Valuation method based on target P/E applied to future-year EPS and discounted

  Goldman Sachs uses 32x 2028E P/E, discounted to 2027 to calculate the target price. This approach is suitable for high-growth companies, discounting future earnings expectations to the present, better reflecting long-term growth potential driven by capacity expansion plans.

• Quantitative/Factor/Portfolio TheoryCAPM Capital Asset Pricing

  Capital Asset Pricing Model for calculating cost of equity

  Cost of equity of 13.6% is based on the CAPM model: risk-free rate 4.25% + beta 1.5 × equity risk premium 6.25%. The beta coefficient measures a stock's volatility relative to the market; 1.5 indicates the stock's volatility is approximately 1.5 times that of the market, used for discount rate calculation.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Supply-demand analysis for the semiconductor test equipment industry

  The report analyzes both demand-side factors (growth in AI GPU/ASIC shipments, increasing chip package sizes, longer test times, higher power and thermal requirements) and supply-side factors (capacity expansion plans) to assess whether the company can fully capture the AI/HPC growth dividend.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Demand transmission between test equipment suppliers, chip design firms, cloud service providers, and EV customers

  The report analyzes how increased upstream chip design complexity transmits to midstream test equipment demand, and how downstream AI chip demand from cloud service providers and EV customers drives test equipment orders, illustrating the industry chain demand transmission logic.

• Competition & Strategy FrameworkMoat / competitive advantage

  Competitive advantage of FT processors holding >90% market share in AI/HPC applications

  The company holds over 90% market share in FT processors for AI/HPC applications, establishing a significant market position advantage, enabling it to fully capture growth in AI GPUs and AI ASICs, which is a key support for valuation re-rating.

Asset mapping & comparison

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

• Hongjing Precision (7769.TW)

  Direct beneficiary; as Taiwan's leading semiconductor test equipment supplier, focused on test processors and active thermal control systems, holding over 90% market share in FT processors for AI/HPC applications

  Strengths

  FT processors hold >90% market share in AI/HPC market; high growth and margin expansion in cold plate business; strong capacity expansion guidance; diversified business drivers (FT, SLT, CPO, cold plates)

  Weaknesses

  Previously less involved in SLT processors for GPU customers; valuation remains low relative to peers' forward P/E (report views this as a re-rating opportunity rather than a weakness)

  Comparison

  The report considers the company one of the most attractive names within Taiwan's advanced semiconductor coverage; valuation is low relative to forward P/E of Taiwanese/global peers, indicating re-rating potential

  Risks

  Weak AI/HPC demand; slower adoption of SLT in AI ASICs; intensified competition

Key data

• 1Q26 EPSNT$25.7Exceeded Goldman Sachs estimate of NT$22.58 and market consensus of NT$22.86
• 1Q26 Gross Margin56.2%Exceeded Goldman Sachs estimate of 55.4%; in line with market consensus
• 1Q26 Operating Margin50.0%Exceeded Goldman Sachs estimate of 48.6% and consensus of 48.4%
• 2026–28E Revenue Growth92%/78%/66%Revised upward based on capacity expansion guidance
• 2026–28E EPSNT$137/NT$250/NT$4262026–27 estimates raised by 25%/40%; first-time 2028 forecast introduced
• 2026–28E Gross Margin57.6%/59.4%/60.4%Gross margin expansion driven by increasing cold plate business share
• Cold Plate Business Revenue Share26%/29%/33% (2026–28E)Continuously increasing from 22% in 2025
• Target PriceNT$12,000Raised from NT$5,700, based on 32x 2028E P/E discounted to 2027E
• Implied Upside74.7%Relative to current share price of NT$6,870
• FT Processor Market Share>90%In AI/HPC application market

Impact & implications

For Hongjing Precision, strong capacity expansion guidance and diversified business drivers (FT, SLT, cold plates) will accelerate revenue and earnings growth over the next three years. The rising share of the cold plate business not only contributes to revenue growth but also drives continuous gross margin expansion, improving earnings quality. Current valuation remains low relative to forward P/E ratios of Taiwanese and global peers; as the market begins to reflect its strong earnings growth prospects, significant valuation re-rating potential exists. For the semiconductor test equipment industry, sustained AI/HPC demand growth and increasing chip design complexity will extend test times and raise power and thermal requirements, benefiting test equipment suppliers with technological advantages.

Risks

• Weak AI/HPC demand
• Slower adoption of SLT in AI ASICs
• Intensified competition

What to watch

• Specific 2026 capacity expansion guidance to be announced next quarter
• Actual growth performance and gross margin contribution of the cold plate business
• Progress in engineering testing of SLT processors with U.S. GPU customers
• Mass production progress of AI chips from U.S. EV customer in 3Q26
• Shipment status of CPO FT processors for Israeli customer in late 2026/early 2027