Hirose Electric: Target Price Raised to JPY 33,300; Four Business Lines Show Strong Profitability

Overview

JPMorgan has released an earnings model update report on Hirose Electric (6806.T), maintaining its Overweight rating and raising the December 2026 target price from JPY 32,100 to JPY 33,300. The report notes that while volatility in precious metal prices remains a potential risk, the company's profit growth momentum remains robust and diversified. General industrial machinery connector market recovery is stronger than expected, demand for AI server-related connectors continues to climb, automotive ADAS and xEV connectors maintain growth, and the sales outlook for subsidiary Hirose SER's probe modules has improved significantly. Based on these positive factors, the institution has substantially revised future three-year earnings forecasts, which now clearly exceed both Bloomberg market consensus and the company's own guidance, suggesting current valuations remain attractive.

Core views

Earnings forecasts comprehensively revised upwards and significantly above consensus. The report raises FY2026 operating income forecast from JPY 48.9 billion to JPY 51.6 billion (Company Guidance: JPY 46 billion, Consensus: JPY 47.5 billion); FY2027 from JPY 56.5 billion to JPY 61.3 billion (Consensus: JPY 53.4 billion); and adds a FY2028 forecast of JPY 69.0 billion (Consensus: JPY 58.1 billion). Regarding adjusted EPS, FY2027E is raised from JPY 1,160.69 to JPY 1,202.01 (+3.6%), and FY2028E from JPY 1,357.92 to JPY 1,437.57 (+5.9%). The institution believes the company and the market are overly cautious in sales assumptions for general industrial and telecommunications (AI server) businesses. Additionally, gold prices have fallen from JPY 26,000/gram at the time of guidance to JPY 23,000/gram, potentially providing a tailwind to the cost side. Four business lines drive growth in synergy. For industrial equipment connectors, the overall market recovery strength exceeds previous expectations, driving up sales estimates. In the AI server sector, not only is demand for accelerator connectors increasing, but also due to capacity constraints faced by US manufacturers in switch and router connectors, Hirose Electric's inquiry volume is rising, signaling potential future incremental growth. Regarding the automotive business, demand for xEV connectors from Korean and Japanese OEMs continues to grow, coupled with volume increases in ADAS connectors; the institution will also begin monitoring SDV (Software-Defined Vehicle) connector demand starting around 2028. For probe modules, although specific end applications remain unclear, Hirose SER's probe pin module sales are expected to far exceed prior forecasts, becoming a new growth engine. Valuation and upside potential. The target price of JPY 33,300 implies a ~20x P/E ratio based on FY2028E derived using a zero-growth ROIC model. Compared to the current stock price of JPY 26,690, this implies approximately 24.8% upside. The report points out that while stock performance has been steady since the FY2025 earnings release, considering the magnitude of earnings expectation revisions, current valuation remains discounted, hence the continued Overweight recommendation.

Analysis framework

The report employs an analytical framework of "Sector-wide Prosperity Tracking + Earnings Forecast Revision + Absolute Valuation Anchoring." First, revenue drivers are disaggregated by application scenario (industrial, communication/AI, automotive, probes, etc.), combining industry chain research information (e.g., competitor capacity bottlenecks, customer inquiry trends, raw material price changes) to make independent judgments on the recovery pace and growth elasticity of each sub-sector, rather than simply linearly extrapolating company guidance. Second, bottom-up business judgments are aggregated into financial forecasts and cross-validated against company guidance and Bloomberg consensus to identify market expectation gaps. Finally, in the valuation phase, the ROIC model is selected as the core anchor, emphasizing the matching relationship between return on invested capital and cost of capital, while supplemented by P/E multiples for reasonableness checks to ensure the target price is supported by fundamentals while maintaining a safety margin.

Methodology notes

• Valuation MethodologyROIC–WACC spread

  Zero-Growth ROIC Valuation Model

  The report uses the EV/IC = ROIC/WACC formula to calculate enterprise value, assuming a distant-zero growth scenario, anchoring target valuation at the equilibrium level where return on invested capital equals the weighted average cost of capital. This method is suitable for capital-intensive manufacturing, avoiding subjective assumptions about long-term growth rates, and focuses more on assessing whether current profitability is sufficient to cover capital costs.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Order Shift Effect Driven by Competitor Capacity Constraints

  When analyzing AI server connector growth, the report focuses not only on its own demand but also critically examines capacity bottlenecks faced by competitors (primarily US manufacturers) in switch/router connectors. When industry supply is constrained, even if total demand remains unchanged, orders shift to manufacturers with idle capacity; this is a key supply-side logic for judging short-term market share changes.

• Company Fundamentals and Financial FrameworkProfitability Quality Analysis

  Non-linear Impact of Raw Material Price Changes on Gross Margin

  The report pays special attention to the variable of gold prices falling from JPY 26,000/gram to JPY 23,000/gram, believing it could lead to actual sales costs being lower than the guidance formulated based on high-price assumptions. In the connector industry with significant precious metal usage, marginal changes in raw material prices often directly transmit to gross margins, serving as an important leading indicator for earnings forecast revisions.

Asset mapping & comparison

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

• Hirose Electric (6806.T)

  Core Beneficiary: Earnings revisions driven by industrial machinery recovery, AI server demand, automotive electrification, and probe module growth

  Strengths

  Diversified downstream layout reduces single-industry cyclical risks; AI server connectors secured order shift opportunities; probe modules open new growth curve; cost control benefits from declining gold prices

  Weaknesses

  Volatility in precious metal prices increases cost management difficulty; lower transparency on terminal applications for some new businesses (e.g., probe modules)

  Risks

  Sharp rise in raw material prices; downward price pressure on high-end smartphone connectors; appreciation of the yen eroding overseas profits

Key data

• FY2027E Operating Income ForecastJPY 51.6 BillionRaised 5.5% from previous forecast of JPY 48.9 billion, exceeding company guidance of JPY 46 billion and Bloomberg consensus of JPY 47.5 billion
• FY2028E Operating Income ForecastJPY 61.3 BillionRaised 8.5% from previous forecast of JPY 56.5 billion, approximately 14.8% higher than Bloomberg consensus of JPY 53.4 billion
• FY2028E Adjusted EPSJPY 1,437.57Raised 5.9% from previous forecast of JPY 1,357.92
• Implied P/E at Target Price20xBased on FY2028E earnings per share calculation
• WACC Assumption5.48%Risk-free rate 2.52%, equity risk premium 5.15%, Beta 1.06

Impact & implications

The report suggests that Hirose Electric is in an earnings upswing cycle driven by synergies across multiple tracks, and the market's pricing of its profitability remains insufficient. For investors, this means the company is expected to continue delivering earnings exceeding expectations over the coming quarters, thereby driving valuation repair. Simultaneously, the increasing proportion of high-value-added businesses such as AI servers and automotive electronics will help improve the stability of the medium-to-long-term earnings structure. However, note that current optimistic expectations are partially reflected in the revised target price, and subsequent monitoring of actual demand realization is crucial to verify the high-growth assumptions.

Risks

• Sharp rise in raw material (precious metal) prices compressing gross margins
• Downward price pressure on high-end smartphone connectors
• Significant appreciation of the yen affecting conversion of overseas revenues and competitiveness

What to watch

• Whether the actual recovery strength of industrial equipment connector demand continues to exceed expectations
• Progress and share changes of order shifts for AI server switch/router connectors
• Specific terminal applications and sales realization status of Hirose SER's probe modules
• Pacing of SDV (Software-Defined Vehicle) connector demand onset starting in 2028