Stronger Pricing Power and Market-Share Gains Support Earnings Forecast Upgrades; Maintain Overweight
AI summary card
Stronger Pricing Power and Market-Share Gains Support Earnings Forecast Upgrades; Maintain Overweight
JPMorgan believes Hongfa Technology - A has moved past concerns over prior cost shocks; orders, utilization, and price pass-through jointly improve the earnings trajectory, with a Rmb43.00 target price.
- 2Q26 revenue and profit reached record highs, together with the 1Q26 beat easing market concerns over the 4Q25 earnings miss.
- Excluding pricing effects, constant-price revenue growth still exceeded 20%, reflecting improving end demand and market-share gains.
- Management stated that the order backlog can cover approximately three to six months of production, with some orders extending into 2027.
- FY27E/FY28E net profit forecasts were raised by 10%/15%, while the Overweight rating was maintained.
- AIDC opportunities are progressing from a thematic concept toward customer sampling and product portfolio expansion, though near-term revenue contribution remains conservatively treated.
Report interpretation
Overview
JPMorgan maintains its Overweight view on Hongfa Technology - A. The report believes the company delivered strong second-quarter results, demonstrating that the mismatch between prior raw-material cost shocks and product price pass-through was more a timing issue than a deterioration in demand or competitiveness. With price increases progressing, orders remaining robust, and capacity utilization staying high, the margin recovery path is clearer.
Core views
As a global leading relay supplier, the company benefits from raw-material inflation and delivery pressures forcing some smaller competitors to reduce capacity. Its procurement advantages, capacity flexibility, and product breadth support market-share gains. Its mix across power relays, high-voltage DC, new energy, automotive low-voltage, and industrial relays is relatively balanced; data-center-related opportunities offer medium-term growth optionality, but should not yet be a primary basis for near-term revenue forecasts.
Analysis framework
The report assesses growth sustainability through quarterly performance, order backlog, capacity utilization, constant-price revenue growth, competitive dynamics, and demand by business segment, and uses discounted cash flow valuation.
Methodology notes
Determine the target price by discounting future free cash flows
The Rmb43.00 target price is based on DCF valuation, assuming a weighted average cost of capital of 8.8% and a perpetual growth rate of 0%.
Assess underlying demand and share changes excluding the impact of price increases
Constant-price revenue growth exceeded 20%, supporting the view that growth is not driven solely by price increases.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- 600885.SSCovered company
- Strengths
- Global leadership in relays, procurement advantages, capacity flexibility, broad product lines, diversified end-market demand, and relatively stable operating cash flow and ROE performance.
- Weaknesses
- Near-term margins remain affected by raw-material costs and the pace of price pass-through; AIDC revenue contribution has not yet been fully incorporated into near-term forecasts.
- Comparison
- Compared with smaller competitors, the company is better able to withstand raw-material inflation and delivery pressures, with stronger capacity-expansion and delivery capabilities.
- Risks
- Major downstream demand for home appliances and EVs falls short of expectations; unexpected copper-price increases; changes in trade policy; delays in data-center buildout.
Key data
- RatingOverweightRating maintained.
- Target PriceRmb43.00Target date is December 2027; previously Rmb45.00 (December 2026).
- Current PriceRmb34.65As of August 12, 2026.
- Potential UpsideApproximately 25%Relative to the current price stated in the report.
- FY27E/FY28E Net Profit Forecast Revision+10% / +15%Based on stronger through-cycle pricing power.
- Order Backlog Coverage3 to 6 monthsSome orders extend into 2027.
- FY26E/FY27E/FY28E RevenueRmb22,509mn / Rmb26,028mn / Rmb29,701mnReport forecasts.
- FY26E/FY27E/FY28E Adjusted EPSRmb1.39 / Rmb1.74 / Rmb2.03Report forecasts.
- FY26E/FY27E/FY28E Adjusted P/E25.0x / 19.9x / 17.0xReport forecasts.
Impact & implications
If price pass-through, cost stability, and market-share gains persist, the company's earnings growth could remain strong in FY27E, with valuation potentially continuing to de-rate. Data-center, high-voltage DC, and energy-storage demand could provide further upside optionality, although the timing of realization remains uncertain.
Risks
- Demand from key downstream end markets such as home appliances and new energy vehicles is weaker than expected.
- An unexpected rebound in copper prices compresses margins and challenges cost assumptions.
- Trade policy changes beyond expectations.
- Differences in data-center architecture choices and deployment schedules may delay realization of related demand until 2027 or after 2028.
What to watch
- Progress of customer price pass-through and gross-margin recovery.
- Capacity utilization, order backlog size, and order visibility.
- Revenue growth excluding price effects and changes in market share.
- Demand performance for high-voltage DC, new energy, automotive low-voltage, and industrial relays.
- Data-center customer sampling, product adoption, and actual order conversion.
- Copper-price trends and trade policy changes.