Goldman Sachs Downgrades AVIC Jonhon to Neutral: Defense Margin Pressure Offsets Data Center Opportunities

Overview

Goldman Sachs has downgraded AVIC Jonhon (002179.SZ) from 'Buy' to 'Neutral', citing flat stock performance since its addition to the Buy list in August 2025—underperforming both the CSI 300 Index and sector peers—and limited implied upside from the target price. While the company sees opportunities in emerging areas like data centers, near-term defense margin pressure and intensifying competition in civil markets have resulted in a more balanced risk-reward profile.

Core views

The defense business faces structural adjustments and profit compression. Management noted that while overall defense demand remains stable in 2026, internal shifts are evident: new domains such as unmanned systems and deep-sea applications continue to grow, whereas demand linked to traditional equipment installation shows little growth or even slight declines. More critically, margins are under significant pressure. Goldman Sachs forecasts the company’s overall gross margin in 2026 at 29.8%, roughly flat versus 2025, but expects the defense segment’s gross margin to fall from a high of 45% in 2024 to around 35%. This is primarily driven by elevated silver and copper prices, coupled with limited pricing flexibility and product redesign options in defense applications. Emerging businesses offer medium-term potential but contribute minimally in the short term. In the data center segment, the company currently supplies three product categories and continues expanding capacity to support future demand. Management anticipates rapid growth in optical module-related products this year, while high-speed connectors and liquid cooling solutions—including connectors, manifolds, cold plates, and piping systems—are expected to scale significantly next year. Although these businesses remain small and in early ramp-up stages, they represent key areas to monitor over the medium term. Meanwhile, growth in the electric vehicle-related business also appears to be moderating this year, potentially negatively impacting the overall margin mix. Valuation and rating adjustment. Given these factors, Goldman Sachs maintains its EPS forecasts for 2025–2030 unchanged and keeps the 12-month target price at RMB 37.5, based on a 22x forward P/E multiple for 2027 (unchanged). With the current share price (~RMB 38.71) already close to the target and lacking clear near-term catalysts, the firm believes the current valuation broadly reflects both medium-term growth opportunities and near-term operational uncertainties, hence the Neutral rating.

Analysis framework

Goldman Sachs employed a typical 'segment-driven + margin sensitivity' analytical framework. First, the company’s operations were split into two major segments—defense and civil (including EVs and data centers)—to separately assess demand trends and growth potential. Second, the analysis focused on the alignment between cost-side pressures (silver and copper prices) and revenue-side pricing power to project gross margin trajectories. Finally, relative performance (vs. CSI 300 and sector average) and absolute valuation (P/E multiples) were combined to evaluate the risk-reward balance and justify the rating change. This approach emphasizes finding equilibrium between a compelling growth narrative (data centers) and real-world constraints (declining defense margins).

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward P/E-based valuation

  The report uses a 2027E P/E multiple of 22x as the valuation anchor to derive the target price. This is a common relative valuation approach that estimates fair value by multiplying projected future earnings by a reasonable industry or historical multiple.

• Industry/ Sector Analysis FrameworkVolume-price decomposition

  Demand structure and price pass-through analysis

  The report not only examines total demand volume but also dissects structural shifts within defense demand (e.g., unmanned systems vs. traditional equipment) and analyzes differences in pricing power across segments (defense vs. civil) amid rising raw material costs—key to forecasting margin trends.

• Company Fundamentals & Financial FrameworkEarnings Quality Analysis

  Gross margin mix effect analysis

  The report notes that higher contributions from civil businesses (e.g., EVs, data centers), which carry lower gross margins than defense, could dilute overall profitability. This helps investors understand potential margin erosion risks behind top-line growth.

Asset mapping & comparison

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

• AVIC Jonhon (002179.SS)

  Direct coverage subject; benefits from data center liquid cooling demand but constrained by defense margin erosion

  Strengths

  Domestic leader in optoelectronic connectors; stable long-term defense electronics demand; diversified data center product portfolio (optical modules, liquid cooling components)

  Weaknesses

  Sharp decline in defense gross margins; significant raw material cost pressure; intensifying civil market competition; slowing EV business growth

  Comparison

  Underperformed CSI 300 and China industrial tech coverage average

  Risks

  Persistently weak defense procurement; intense civil market competition leading to dual pressure on market share and profits; slower-than-expected ramp-up of new businesses

Key data

• 2026E Overall Gross Margin29.8%Largely flat vs. 29.7% in 2025E
• 2026E Defense Segment Gross Margin~35%Significant decline from 45% in 2024
• 12-Month Target PriceRMB 37.5Based on 2027E P/E of 22x
• Overseas Revenue Share6%H1 2024 data, up 9% YoY

Impact & implications

For short-to-medium-term investors, this report suggests tempering expectations for a near-term recovery in defense profitability. While long-term demand for defense electronics remains intact, recent structural shifts and cost pressures may lead to earnings volatility. For investors focused on AI infrastructure, the company’s liquid cooling and high-speed connector offerings provide a logical entry point into the data center theme, though current scale is too small to fully offset weakness in defense. The downgrade to Neutral implies limited upside potential; investors are advised to wait for clearer signals of margin stabilization or tangible scaling in new businesses.

Risks

• Defense spending and procurement weaker than expected: Continued softness in defense-related procurement or delays in next-generation platform development could suppress demand for military connectors.
• Intensifying civil market competition: As domestic and international connector manufacturers enter fast-growing segments like EVs and liquid cooling, heightened competition may erode market share and profitability.
• Slower-than-expected ramp-up in new growth areas: If contributions from emerging businesses like data centers fail to scale as anticipated, they may not sufficiently offset profit gaps from legacy segments.

What to watch

• Acceleration in liquid cooling adoption: Faster-than-expected uptake of liquid cooling and related infrastructure demand would positively impact revenue and earnings growth.
• Progress in overseas expansion: Faster-than-expected expansion into non-U.S. markets could provide additional upside potential.
• Margin recovery trajectory: Monitor whether the company can alleviate raw material cost pressures through product redesign or pricing negotiations.