Goldman Sachs downgrades AVIC Jonhon to Neutral as defense margin pressure offsets data center opportunities

Overview

In this company research report, Goldman Sachs downgrades AVIC Jonhon from Buy to Neutral, mainly because the implied upside to the target price is limited and the risk-reward profile has become more balanced. The company's share price has been broadly flat since being added to the Buy list on August 6, 2025, significantly underperforming the CSI300 Index and the average performance of Goldman Sachs' China industrial technology coverage. The report believes that the company will still benefit over the medium to long term from trends in defense electronics, data centers, liquid cooling, and electrification, but in the short term, the lack of acceleration in defense demand, limited recovery in overall gross margin, and a rising share of civilian business are diluting profitability.

Core views

The core views are: first, defense demand in 2026 is likely to remain stable but not accelerate meaningfully, with some weakness in traditional equipment installation-related demand; second, elevated silver and copper prices, together with limited pricing pass-through and product redesign flexibility in defense applications, will keep defense business gross margin under pressure; third, data center-related business has medium-term growth potential, especially in optical modules, high-speed connectivity, and liquid cooling components, but its current contribution remains small and is still in the early ramp-up stage; fourth, EV-related business growth has slowed somewhat and may weigh on the overall margin structure; fifth, the current valuation already fairly reflects both the medium-term growth opportunities and near-term operating uncertainties.

Analysis framework

The report uses a combination of fundamental forecasting, segment-level business trend analysis, and relative valuation: it first evaluates changes in demand and gross margin across businesses such as defense, EV, and data centers, then keeps its 2025-2030E EPS forecasts unchanged, and derives a 12-month target price of Rmb37.5 based on 22x 2027E P/E. The report also lays out upside and downside risks to assess whether the risk-reward balance remains appropriate after the downgrade.

Methodology notes

• Valuation methodsP/E Target Price Method

  22x 2027E P/E

  Goldman Sachs keeps its 2025-2030E EPS forecasts unchanged and derives a 12-month target price of Rmb37.5 based on 22x 2027E P/E.

• Factor analysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factors

  This framework normalizes and ranks a stock's growth, financial returns, and valuation multiples against the market and industry peers, and generates a composite percentile to supplement investment context assessment.

• M&A probability frameworkM&A Rank

  Acquisition target probability tiers

  Goldman Sachs uses a 1-to-3 M&A ranking to assess the probability of a company becoming an acquisition target; if the ranking is high, M&A factors may be incorporated into the target price.

• Data platformQuantum

  Goldman Sachs proprietary financial database

  Quantum provides historical financial statements, forecasts, and ratio data for in-depth single-company analysis and cross-company comparisons.

Asset mapping & comparison

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

• AVIC Jonhon (002179.SZ) stock

  Covered target in the report

  Strengths

  The company is a leading domestic optoelectronic connector player with diversified exposure to military, data center, EV, and industrial applications.

  Weaknesses

  Recently, defense demand has lacked clear acceleration, overall gross margin recovery has been limited, and the implied upside to the target price is insufficient.

  Comparison

  Since being added to the Buy list on August 6, 2025, the share price has been broadly flat, underperforming the CSI300 Index and the average performance of Goldman Sachs' China industrial technology coverage.

  Risks

  Rating downgrade, pressure on defense business gross margin, intensifying competition in civilian businesses, and slower-than-expected ramp-up of new businesses.

• Defense connector business

  Core source of revenue and profit

  Strengths

  Benefits from long-term demand in defense electronics and next-generation platforms, with continued growth in new areas such as unmanned systems and deep-sea applications.

  Weaknesses

  Demand related to traditional equipment installation has not shown significant growth and some demand may be slightly weaker; room for pricing pass-through and product redesign is limited.

  Comparison

  Defense business gross margin is expected to be about 35%, below the 45% level in 2024.

  Risks

  Defense spending, procurement activity, or next-generation platform development progress weaker than expected.

• Data center and liquid cooling products

  New medium-term growth driver

  Strengths

  Optical module-related products may grow rapidly this year, while high-speed and liquid cooling-related connectors, manifolds, cold plates, and piping systems are expected to continue scaling up next year.

  Weaknesses

  Current contribution remains relatively small, and the business is still in the early ramp-up stage.

  Comparison

  Compared with the mature defense business, the data center business has stronger growth potential, but its certainty and profit contribution still need to be validated.

  Risks

  Liquid cooling demand adoption may be slower than expected, or intensified competition may pressure market share and profitability.

• EV connectors and other civilian businesses

  Civilian growth exposure

  Strengths

  Benefits from the electrification trend as well as demand from communications, rail transit, and industrial applications.

  Weaknesses

  EV-related business growth may slow this year, and civilian business margins are lower than those of the defense business, which may dilute overall gross margin.

  Comparison

  Growth in civilian business brings revenue diversification, but profitability quality is lower than that of the defense business.

  Risks

  Domestic and overseas connector manufacturers entering EV, liquid cooling, and other high-growth civilian markets, increasing competitive intensity.

• Raw materials such as silver and copper

  Cost driver

  Strengths

  If prices decline or pass-through improves, it would help gross margin recovery.

  Weaknesses

  High silver and copper prices pressure profitability, while pricing pass-through in defense applications is limited.

  Comparison

  Raw material cost pressure is one of the key operating background factors behind the rating downgrade in the report.

  Risks

  Metal prices remain elevated or continue rising, further compressing margins.

Key data

• Report date2026-05-28 2:23PM HKTDisclosed on the report cover page.
• Rating changeDowngraded from Buy to NeutralThe downgrade is due to limited implied upside to the target price and a more balanced risk-reward profile.
• 12-month target priceRmb37.5The target price remains unchanged.
• Valuation basis22x 2027E P/EUsed to derive the 12-month target price.
• Closing price disclosedRmb38.71Appears in the company-specific disclosures.
• Implied return to target priceabout -3.1%Estimated based on the Rmb37.5 target price relative to the Rmb38.71 closing price.
• 2026E company gross margin29.8%Essentially flat versus 29.7% in 2025E.
• Defense business gross marginabout 35%Below the 45% level in 2024.
• Relative share price performanceBroadly flat since being added to the Buy listDuring the same period, the CSI300 Index rose 18%, while Goldman Sachs' China industrial technology coverage rose 57% on average.
• Overseas revenueUp 9% YoY in 1H24, accounting for 6% of total revenueIf overseas expansion in non-U.S. markets is faster than expected, it could provide upside.
• Revenue mixAbout half of revenue comes from military applicationsThe rest comes from communications, EV, data centers, rail transit, and other industrial applications.

Impact & implications

In terms of investment implications, the report shifts from a “buy driven by growth opportunities” to a “neutral stance with both opportunities and pressures.” Data centers, liquid cooling, and overseas expansion remain sources of medium-term upside, but in the short term the more critical questions are whether defense demand recovers, whether gross margin stabilizes, and whether raw material costs can be passed through. If data center business scaling falls short of expectations or civilian competition intensifies, valuation support may weaken further; if liquid cooling demand and overseas expansion exceed expectations, this could again drive earnings and valuation upside.

Risks

• Defense spending and procurement activity weaker than expected, or delays in next-generation platform development timelines, could weigh on demand for military connectors.
• Intensified competition in EV connectors, liquid cooling, and other high-growth civilian markets could compress market share and profitability.
• Slower-than-expected ramp-up in new growth businesses such as data centers and liquid cooling could weaken medium-term growth upside.
• Elevated prices for raw materials such as silver and copper, combined with limited pricing pass-through and product redesign flexibility in defense applications, could continue to pressure gross margin.
• Slowing growth in EV-related business could weigh on overall revenue growth and margin structure.

What to watch

• Whether liquid cooling adoption rates and related infrastructure demand are faster than expected.
• Orders and capacity ramp-up for data center products such as optical modules, high-speed connectors, manifolds, cold plates, and piping systems.
• Changes in 2026 defense procurement activity and demand in new areas such as unmanned systems and deep-sea applications.
• Whether the company's overall gross margin and defense business gross margin stabilize from the low 2026E level.
• Silver and copper price trends and the company's ability to pass through costs.
• The pace of overseas revenue expansion in non-U.S. markets.
• Competitive intensity in EV connectors and liquid cooling markets.