Goldman Sachs: Favor FA Segment with Strong Pricing Power, Preferred Stock is Inovance Technology
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Goldman Sachs: Favor FA Segment with Strong Pricing Power, Preferred Stock is Inovance Technology
Q1 2026 earnings review indicates that pricing capability becomes a key differentiating factor amidst raw material inflation. The firm shifts its recommendation to favor the factory automation (FA) subsector and designates Inovance Technology as the preferred stock choice.
- Rising prices of raw materials (copper, silver, etc.) and exchange rate losses pose significant headwinds in Q1; companies with strong pricing power perform better.
- Shift toward favorable view on the factory automation (FA) subsector, recommending Inovance Technology (300124.SZ), expecting improved revenue recognition from Q2 onwards.
- Hongfa Co., Ltd. (600885.SS) demonstrates robust pricing power, completing two rounds of price increase negotiations, with gross margin exceeding expectations.
- Maintains cautious stance on the humanoid robot sector, awaiting AI generalization capabilities to support large-scale deployment - the 'from zero to one' moment.
- Short-term weakness in AIDC power supply chain due to domestic chip supply constraints, but recovery expected by second half of 2026.
Report interpretation
Overview
This report provides a comprehensive overview of the Q1 2026 performance of Chinese industrial technology firms covered by Goldman Sachs. Overall performance met expectations, yet within the context of inflation in raw materials (sharp increases in copper, silver, tungsten, and memory chip prices) and forex losses affecting exporters, 'pricing ability' emerged as the core driver behind company performance differentiation. Based on these findings, the research adjusted its investment outlook, shifting focus from broad coverage to a stronger preference for the factory automation (FA) subsector with significant pricing power, naming Inovance Technology as the top pick. Simultaneously, caution was advised regarding the humanoid robotics sector, while maintaining sell ratings on certain process automation firms.
Core views
The factory automation (FA) sector has reached a turning point, where pricing power serves as a critical factor. Despite moderate growth in industrial automation revenue during Q1, order intake showed strength (e.g., 40% year-on-year increase in orders for Inovance Technology). Faced with rising raw material costs, companies possessing industry dominance and strong pricing power (such as Inovance Technology and Hongfa Co., Ltd.) successfully passed cost increases through price hikes, showing early signs of profit margin recovery in March-April. The report believes that with Inovance Technology's 30% capacity expansion in May, backlog will begin contributing to revenue in Q2, driving performance improvement. Individual stock performances were markedly diverse. Hongfa Co., Ltd. (600885.SS) achieved a 32% gross margin, surpassing expectations by two percentage points due to successful price adjustment following completion of 80% of two price negotiation rounds, alongside management's upward revision of full-year revenue guidance to 15-20%. Hanwei Technologies (002008.SZ) saw significantly outperforming results driven by demand from PCB and consumer electronics sectors. Conversely, companies lacking pricing power or facing challenging demand cycles underperformed, such as Baosight Software (600845.SZ) hampered by sluggish steel capital expenditure and Supcon Technologies (688777.SS) affected by weak process automation demand, both falling short of expectations. The humanoid robotics sector still requires patience. Although related companies (like Green Wave Harmonic) recorded multi-fold revenue growth, their base remains relatively small. The report notes that markets should wait for AI to demonstrate sufficient generalization abilities to enable large-scale real-world deployments, focusing now on whether leading players can advance from proof-of-concept stages to initial commercialization by late 2026. Tesla’s production timeline lags behind prior guidance, while domestic growth, although rapid, remains nascent. The AIDC power supply chain faces short-term pressure but holds long-term promise. Domestic infrastructure spending in data centers remained lackluster in Q1 due to chip supply limitations, impacting the near-term performance of firms like Invicta EnergyTech and Kehua Data. However, as chip supplies improve later in 2026 and overseas orders (such as Google’s liquid cooling project and UPS in the US) gradually materialize, a more pronounced upswing is anticipated from the latter part of 2026 to 2027. The adoption of 800VDC architectures will be incremental.
Analysis framework
The report employs a hybrid approach combining top-down and bottom-up analysis. Initially, by aggregating quarterly financial data from covered companies, common macro-level challenges (raw material inflation, currency fluctuations) and catalysts (specific end-market demands like PCB and energy storage recovering) across the industry are identified. Subsequently, 'pricing capability' is introduced as a central screening criterion to analyze which companies can offset cost pressures via price adjustments, thereby standing out in terms of profitability. Finally, cross-verifying mid-term market trends for each sub-sector (FA, robotics, AIDC) involves global peer comparisons (Siemens Energy, GE Vernova) and upstream-downstream supply chain dynamics (chip supply impacts on data center construction). This integrated methodology informs overall equity ratings and target prices.
Methodology notes
Supply-demand balance and pricing power analysis
Given the universal rise in raw material costs, the report evaluates a firm's ability to pass these costs downstream based on supply tightness and demand rigidity, determining 'pricing power'. This assessment is fundamental to gauging a company's resilience in sustaining profits amid inflation.
Supply chain propagation and time lag effects
The report examines how upstream chip supply constraints affect midstream data center equipment manufacturers (like Invicta EnergyTech), emphasizing time lags and interdependencies between various stages of the supply chain influenced by customer cap-ex rhythms.
Trailing P/E valuation method
When adjusting target prices, the report generally advances the valuation benchmark from 2026 to 2027 (Roll forward to 2027E P/E), incorporating latest performance insights and smoothing short-term volatility—a common practice in growth stock research.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Inovance Technology (300124.SZ)Primary Recommendation Benefiting from Strong Pricing Power and Reviving Orders
- Strengths
- 40% Year-on-Year Order Growth, 30% Capacity Expansion Planned for May, Early Signs of Marginal Recovery Observed in March-April, Better Performance Than Industry Average in Elevator and EV Components
- Weaknesses
- Revenue Lagged Behind Orders in Q1 Due to Production Constraints
- Comparison
- Demonstrates More Efficient Price Adjustment Compared to Peers, Appealing Valuation After Recent Pullback
- Risks
- Slower-than-Expected Market Share Acquisition in Industrial Automation; Sluggish Ramp-Up for EV Components
- Hongfa Co., Ltd. (600885.SS)Beneficiary of Robust Pricing Power and Diversified Demand
- Strengths
- Completed 80% of Two Price Negotiation Rounds, Achieved 32% Gross Margin Exceeding Expectations, Core Driver Being HVDC with Steady Multi-Terminal Demand
- Comparison
- Dominant Position in Relay Industry with Superior Pricing Power vs. Competitors
- Risks
- Continued Volatile Raw Material Prices; Slowdown in Overseas Demand
- Green Wave Harmonic (688017.SS)Representative of Humanoid Robotics Supply Chain, High-Growth But Low Base
- Strengths
- Over 30% Contribution of Revenue From Humanoid Robot Applications, Leading in Collaborative Robotics Sector
- Weaknesses
- Moderately Lowered Margins Due to Active Price Cuts to Accelerate Industry Consolidation
- Comparison
- Faster Growth in Emerging Fields Compared to Traditional Industrial Robot Components, Yet More Volatile
- Risks
- Commercialization Timeline for Humanoid Robots Falling Short of Expectations; Intensifying Industry Competition
- Baosight Software (600845.SZ)Hampered by Declining Steel Industry Capital Expenditure
- Strengths
- Proactively Expanding into Non-Iron Metals, Chemicals, and New End Markets
- Weaknesses
- Contraction in Steel Industry Cap-Ex, Expected Further 20% Decline in Related Party Sales in 2026
- Comparison
- More Severely Impacted by Downward Cycle in Single Industry (Steel) Than General Automation Companies
- Risks
- Slow Steel Industry Recovery; Delays in New Business Expansion
Key data
- Inovance Technology Order Growth Rate+40% YoYStrong order inflow in Q1 2026, sustained momentum observed in April
- Hongfa Co., Ltd. Gross Margin32%Two percentage points higher than projected, attributed to effective price adjustments
- Hanwei Technologies First Quarter Net Profit Growth Rate+117% YoYSignificantly exceeds expectations, primarily driven by demand from PCB and consumer electronics devices
- Green Wave Harmonic Humanoid Robot Revenue Contribution>30%Increased share of revenues from humanoid robot applications in Q1 2026 compared to >20% in 2025
- Inovance Technology Target PriceRMB 86.0Based on 35x P/E multiple for FY2027
Impact & implications
For investors, current strategy should shift from ‘broad coverage’ to ‘selective emphasis on industry leaders with pricing power’. Within the industrial tech sector, companies capable of passing through price hikes and backed by solid order books (like Inovance Technology, Hongfa Co., Ltd.) stand to gain re-rating. For humanoid robot concept stocks, avoid chasing high valuations short-term, waiting for clear signals of commercialization breakthroughs. Suppliers in the AIDC power chain face temporary setbacks due to chip restrictions but hold rebound potential from second-half recovery, thus monitoring overseas order progress closely. The report cautions about matching individual stock valuations against recent price moves and rolling forward forecasts.
Risks
- Delayed Key Customer Development or Operational Progress
- Intensifying Liquid Cooling Competition and Profitability Risks
- Barriers to Growth in Storage (ESS) Demand
- Geopolitical Shifts Impacting Global Server/Data Center and Energy Storage Supply Chains
- Tariff Impacts Between China and U.S. Influencing Trade Policies
- Global Electric Vehicle Adoption Rates Significantly Slowing Down
What to watch
- Inovance Technology’s Q2 Revenue Recognition and Profit Margin Recovery
- Progress of Leading Players in Humanoid Robotics Moving from Proof-of-Concept to Initial Commercialization by Late 2026
- Strength of Resurgence in Domestic Infrastructure Spending Post-Chip Supply Improvement in AIDC
- Subsequent Price Adjustments by Hongfa Co., Ltd., Invicta EnergyTech, and Their Impact on Gross Margins
- Delivery Status of Overseas Orders (Kstar U.S. Deals, Envicool Google Project) in Second Half of 2026