UBS maintains Buy on Hongfa Technology, cuts target price to Rmb40

Overview

This is UBS's company earnings review report on Hongfa Technology (600885.SS). The core tension in the report is that rising metal prices, including silver, are weighing on near-term gross margin and 1Q26 earnings, but the company is passing through costs through phased price increases while benefiting from higher industry concentration, expanding backlog orders, and market share gains amid industry headwinds. UBS therefore lowered its target price and earnings forecasts, but maintained a Buy rating.

Core views

UBS believes cost inflation may still weigh on 1Q26 earnings, but Hongfa Technology is likely to complete cost pass-through in 2Q26 and continue gaining market share in 2026. The company's market share rose by 4 percentage points to 27% in 2025, Q4 2025 revenue increased 33% YoY, and backlog orders climbed to Rmb5.0-5.5bn, all of which indicate its competitive position is still strengthening. Management guided for 10% revenue growth in 2026, which UBS views as conservative; UBS's own forecast is 19%.

Analysis framework

The report develops its view along three main lines: first, it estimates the negative impact of rising metal prices on 2026E gross margin and earnings; second, it tracks the company's price increase cadence and cost pass-through mechanism, including the 10% price hike in January and the second round of price negotiations in March; third, it assesses industry consolidation and the company's growth resilience through market share, peer performance, Omron's business sale, backlog orders, and revenue guidance. On valuation, it uses the DCF method and cross-checks with implied P/E multiples.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  UBS values Hongfa Technology using DCF, with WACC kept at 7.1%; the lowered Rmb40 target price implies 31x/24x 2026E/27E P/E.

• Earnings forecast adjustmentGross margin and revenue forecast revision

  Two-way adjustment between metal price volatility and share gains

  The report cuts 2026E gross margin by 3.9 percentage points to reflect metal cost pressure, while raising 2026-27E revenue forecasts by 4%-5% to reflect faster market share gains.

• Industry analysisMarket consolidation assessment

  Industry headwinds drive higher concentration

  The report combines peer revenue performance, Omron's sale of its relay business, and Hongfa Technology's share gains to judge that industry pressure may accelerate concentration toward leading companies.

Asset mapping & comparison

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

• Hongfa Technology (600885.SS)

  The covered company is a leading relay manufacturer in China, with 2024 relay shipments of Rmb12.7bn and the No. 1 global ranking in the relay industry.

  Strengths

  Leading industry position, rising market share, expanding backlog orders, stronger Q4 2025 revenue than peers, and the ability to pass through costs via price increases.

  Weaknesses

  Near-term gross margin is weighed by rising silver and other metal prices, and 1Q26 earnings may remain under pressure.

  Comparison

  Q4 2025 revenue rose 33% YoY, significantly outperforming peer Sanyou's -1%; Omron's plan to sell its relay-related business is seen as a sign of accelerating industry consolidation.

  Risks

  Sales to key customers below expectations, margin pressure from competition or material price increases, NEV sales below expectations, slower-than-expected progress in new businesses such as low-voltage electrical equipment, impairment of acquired assets, and loss of market share.

• Silver / metal prices

  A key cost-side variable affecting Hongfa Technology's gross margin and price increase requirements.

  Strengths

  If the price benchmark and rolling price adjustment mechanism are implemented smoothly, the company can gradually pass through cost pressure.

  Weaknesses

  Rising silver and other metal prices have already led to a downward revision of 2026E gross margin forecasts.

  Comparison

  No direct quantitative peer comparison of cost structure.

  Risks

  Further increases in metal prices or slower-than-expected customer acceptance of price increases will prolong margin pressure.

Key data

• 12-month target priceRmb40.00Cut by 11% from Rmb45.
• RatingBuyUBS maintains a Buy rating.
• 2026E gross margin adjustmentCut by 3.9pptTo reflect the negative impact of metal price volatility.
• Price increase clues10% price increase in January; full pass-through may require 20%-30%A second round of price negotiations began in March, with adjustments to roll with the metal price benchmark.
• 2025 market share27%Up 4ppt from before, and the company expects further gains in 2026.
• Q4 2025 revenue growth+33% YoYComparable company Sanyou was -1%.
• Backlog ordersRmb5.0-5.5bnA marked increase from the prior Rmb3.0-3.5bn.
• 2026 revenue growth guidance10%UBS views this as conservative; UBS-Se is 19%.
• WACC7.1%Unchanged in the DCF valuation.
• Implied P/E31x/24x 2026E/27E PECorresponding to the lowered DCF target price.

Impact & implications

For investment judgment, the main near-term pressure comes from higher metal prices weighing on gross margin and 1Q26 earnings; the key medium-term questions are whether price increases can be passed through smoothly, whether orders can convert into revenue, and whether industry consolidation continues to favor the leading player. If price pass-through proceeds as expected, Hongfa Technology may offset cost pressure through share gains and order growth; if pass-through falls short of expectations, the pace of earnings recovery and valuation support will come under pressure.

Risks

• Sales to key customers below expectations.
• Margin decline due to intensifying competition or rising material prices.
• NEV sales below expectations.
• Slower-than-expected development of new businesses such as low-voltage electrical equipment.
• Impairment of acquired assets.
• Loss of market share.
• Delayed earnings recovery if metal cost pass-through falls short of expectations.

What to watch

• Whether cost pass-through is completed as planned in 2Q26.
• The scale and customer acceptance of the second round of price increases.
• The trend in silver and other metal prices.
• The pace at which Rmb5.0-5.5bn of backlog orders converts into revenue.
• Whether actual 2026 revenue growth exceeds the company's 10% guidance and approaches UBS's 19% forecast.
• Progress in industry consolidation, especially the competitive landscape after Omron's relay-related business sale.
• Whether Hongfa Technology can continue to expand market share in 2026.