Goldman Sachs reassesses Japanese industrial electronics: downgrades Daihen to Neutral, remains positive on optical and data-center chains

Overview

This is a Goldman Sachs rating, earnings estimate, and target price reset report on selected Japan technology hardware and industrial electronics coverage names. The core discussion has three themes: first, the valuation gap between Japanese optical-related companies and U.S. peers; second, Panasonic HD's competitiveness in data-center BBU; and third, Daihen's lower relative valuation attractiveness after a sharp stock-price rise, leading to a downgrade from Buy to Neutral.

Core views

Goldman Sachs believes that while optical-related stocks have recently seen heightened volatility, the valuation gap between Japanese and U.S. peers is likely to narrow because end customers are largely in North American data centers. Preference among optical stocks is Sumitomo Electric, Anritsu, Fujikura, Furukawa Electric, and SWCC. Although Panasonic HD is an AI-related beneficiary stock, its FY3/28E P/E remains low and its BBU product competitiveness is strong. Daihen's SPE RF power and power equipment businesses remain drivers, but much of the earnings contribution is already reflected in the share price, and valuation is no longer clearly cheap.

Analysis framework

The report combines revisions to coverage-company earnings forecasts, 12-month target price revisions, relative valuation comparisons, and segment-level business-driver analysis. For optical stocks, it focuses on comparing FY3/28E P/E between Japanese companies and U.S. peers; for target prices, it mainly uses EV/EBITDA, SOTP, and peer mark-to-market methods; for Daihen, it also considers stock-price performance, upside, SPE business multiple contribution, and relative attractiveness versus Tokyo Electron.

Methodology notes

• Valuation methodsEV/EBITDA valuation

  EV/EBITDA multiple valuation

  Target prices for multiple companies are based on FY3/28E as the valuation anchor and use target EV/EBITDA multiples, for example 25.0x for Fujikura and Furukawa Electric, 12.0x for Daihen, and 9.0x for Panasonic HD.

• Valuation methodsrelative valuation

  relative valuation comparison

  The report compares P/E differences between Japanese optical stocks and U.S. optical peers, and argues that valuation convergence is possible because terminal customers and data-center demand conditions are similar.

• Valuation methodsSOTP

  sum-of-the-parts valuation

  Sumitomo Electric's target price is derived using an SOTP approach, with the Infocomm segment multiple raised to reflect mix changes driven by generative AI and data-center demand.

Asset mapping & comparison

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

• Daihen

  core name for downgrade

  Strengths

  SPE RF power, power-related equipment, and material processing businesses still have growth drivers, and the order book remains elevated.

  Weaknesses

  Shares have already risen sharply, FY3/28E P/E is around 22x, and Goldman Sachs sees it as no longer clearly undervalued; upside to target is only about 11%.

  Comparison

  Even if SPE is a core driver, Daihen's valuation multiple has often been below its client Tokyo Electron, so investors may prefer names with more direct SPE exposure.

  Risks

  Semiconductor and SPE market volatility, raw material cost increases in energy management, slower-than-expected recovery in FA business, and FX volatility.

• Panasonic HD

  AI and data-center BBU beneficiary

  Strengths

  BBU global market share of about 80%, with vertical integration from cell to system, US-made battery production, and differentiated CBU mix advantages.

  Weaknesses

  White goods business may be affected by rising raw material costs, and the ability to absorb higher costs in near-term 1Q profits is still to be observed.

  Comparison

  FY3/28E P/E is around 22x, below Sumitomo Electric at 24x and lower than many other AI-related stocks.

  Risks

  White goods material-cost pressure, BBU growth not materializing as expected, and a slowdown in data-center demand.

• Sumitomo Electric

  one of the top preferred optical stocks

  Strengths

  Infocomm business is supported by demand for multi-core optical cable, optical connectors, and optical components, with earnings contribution expected to rise materially.

  Weaknesses

  Automotive business remains affected by raw material costs and macro demand uncertainty.

  Comparison

  FY3/28E P/E is around 24x, below some U.S. optical peers; Goldman Sachs believes business-mix improvement could push valuation above historical averages.

  Risks

  A prolonged slowdown in hyperscaler capex, extended inventory normalization, peer catch-up, and vehicle production decline.

• Fujikura

  stock benefiting from optical and data-center demand

  Strengths

  Adoption of ultra-high-density optical cables and multi-core optical connectors is rising among U.S. hyperscalers, and telecom business growth is outpacing the industry.

  Weaknesses

  The full-year outlook had already been revised substantially before, so further upside revisions may be limited.

  Comparison

  FY3/28E P/E is around 36x and still below some U.S. peers; target price is ¥7,500 with a Buy rating maintained.

  Risks

  Delayed returns on hyperscaler investments, weak telecom operator spending, peer competition, and slower smartphone demand.

• Furukawa Electric

  stock benefiting from optical and communication solutions

  Strengths

  Improving profitability in communication solutions, FFOC returning to profitability, rising data-center cable demand, and expected profit contribution from rollable ribbon.

  Weaknesses

  OPM is lower than peers, and large-scale expansion plans may raise concerns about financing and dilution.

  Comparison

  Target price was lowered to ¥7,200, with Buy maintained; FY3/28E P/E is around 28x, below some U.S. peers.

  Risks

  Optical product sales below expectations, AI data-center investment slowdown, underperformance in high-voltage cable orders, and rising material prices.

• Anritsu

  optical test-equipment beneficiary

  Strengths

  Expected strong order conversion to sales in 3Q-4Q3/26, higher mix of 200G/Lane products, and contributions in national security and PCIe-related areas.

  Weaknesses

  Valuation multiple has risen, and order momentum may slow after the initial rebound.

  Comparison

  Target price raised to ¥5,300, with target EV/EBITDA increased from 15x to 17x.

  Risks

  Slowing order momentum, business-mix improvement below expectations, and weaker than expected data-center testing demand.

Key data

• Daihen ratingNeutral from BuyDownrated because limited upside remains relative to the target after recent share-price gains, and SPE RF power contribution to valuation expansion may be capped.
• Daihen 12-month target price¥19,000 from ¥20,900The revised target corresponds to about 11% upside, below the sector coverage average of about 26%.
• Panasonic HD 12-month target price¥5,000 from ¥4,220This is the largest target price increase among covered names, mainly reflecting BBU earnings growth and an increase in the valuation multiple.
• Sector EBIT forecast revisionsFY3/27-FY3/29 average -0.3%/-0.4%/-0.3%Mainly due to adjustments in raw material costs, energy management assumptions, and some optical business assumptions.
• Sector target price average revision+3%Despite modest downward revisions to earnings estimates, the average target price was still raised.
• Japan optical stock FY3/28E P/EFujikura 36x; Furukawa Electric 28x; Sumitomo Electric 24xThe report compares these with Corning 53x, Lumentum 40x, and Coherent 40x.
• Panasonic HD BBU global sharearound 80%The report says it has competitive advantages from vertical integration from cell to system, US-made battery supply, and CBU mix differentiation.

Impact & implications

For investors, the report indicates differentiated opportunities within Japan's industrial electronics sector: optical and data-center chains may still benefit from North American data-center capex and AI-related demand, and valuation discounts imply potential repricing upside; Panasonic HD's BBU business gives it characteristics of a low-multiple AI beneficiary; Daihen shifts from an aggressive allocation stance to neutral because of valuation and limited upside.

Risks

• Generative AI and data-center spending slowing, leading to optical, power-equipment, BBU, and test-equipment demand below expectations.
• Raw material price increases, including copper, optical fiber, naphtha, and other input costs, compressing margins if not passed through promptly.
• Daihen's SPE RF power, energy management, and FA recovery falling short of expectations, or valuation multiples continuing to lag names with more direct SPE exposure.
• Home-appliance cost pressure and underperformance of BBU order or profit contribution for Panasonic HD.
• Currency volatility, vehicle production volatility, changes in customer capex pacing, and potentially overpaying in M&A transactions.

What to watch

• Whether Sumitomo Electric's 1Q results show 3Q-4Q3/26-infused price revisions and data-center demand in its Infocomm business.
• Whether Fujikura still has upside in 1Q results after a large full-year upward revision.
• Whether Panasonic HD can absorb higher material costs in its home-appliance business and continue to deliver BBU profit growth.
• Whether Daihen's RF power order intake can be converted into higher margins and valuation multiples.
• Whether the valuation gap between Japanese optical stocks and U.S. peers such as Corning, Lumentum, and Coherent converges.