Goldman Sachs maintains Buy on Hongfa Technology with a 12-month target price of Rmb45.5

Overview

This report is Goldman Sachs' review of Hongfa Technology's 2Q26 results. The company's 2Q26 results were in line with expectations. Goldman Sachs only slightly adjusted 2026-2030E EPS by less than 1% and set a 12-month target price of Rmb45.5. The core thesis is that relay industry supply-demand remains tight, while rising raw material prices compress the cash flow and profitability of smaller manufacturers. Hongfa Technology, leveraging pricing power, market share gains, global customer coverage, and improving capacity utilization, is well positioned to accelerate revenue growth and restore gross margins.

Core views

Goldman Sachs maintains a Buy rating on Hongfa Technology and expects 2026E revenue growth of 27% YoY. Growth drivers include strong cost pass-through amid rising raw material prices, with price increases contributing more than 10 percentage points to revenue growth; robust end demand for HVDC, general, automotive, power, industrial control, and signal relays; and continued share gains in global EV OEMs, European and Southeast Asian customers, smart meters, ESS, and AIDC-related applications. Goldman Sachs also believes that even if raw material prices decline, the company faces limited price-cut risk under the current supply shortage environment.

Analysis framework

The report uses earnings comparison, revenue growth forecasts by business line, gross margin trend assessment, industry competitive landscape analysis, and a relative valuation framework. Goldman Sachs compares 2Q26 revenue, margins, and profits with its forecasts, and assesses future earnings elasticity from the perspectives of pricing power, raw material costs, end demand, global customer penetration, capacity utilization, and industry supply pressure.

Methodology notes

• Valuation methodsP/E valuation

  Target price based on 2028E P/E

  The 12-month target price of Rmb45.5 is based on 2028E 24x P/E and discounted back to 2027E.

• factor_profileGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs' factor framework uses forward-looking sales, EBITDA, and EPS growth, financial return metrics such as ROE/ROCE/CROCI, and valuation multiples such as P/E, P/B, and EV/EBITDA to compare stocks with the market and industry peers.

• event_riskM&A Rank

  Potential M&A score

  Goldman Sachs assesses the likelihood of covered companies becoming acquisition targets using qualitative and quantitative factors and assigns a score from 1 to 3; the report discloses this framework but does not treat it as a core investment thesis for Hongfa Technology.

Asset mapping & comparison

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

• 600885.SS

  Covered stock, rated Buy

  Strengths

  Global relay leader with about 27% global share in 2025; has pricing power, global customer coverage, room for capacity utilization improvement, and benefits from demand in EV, ESS, AIDC, and smart meters.

  Weaknesses

  2Q26 gross margin, operating margin, and net margin all declined by 1 percentage point YoY, and the company remains exposed in the short term to raw material prices such as copper and silver.

  Comparison

  Goldman Sachs believes the valuation is attractive relative to its China industrial technology coverage universe; the company's market share gains outpace some smaller competitors and reinforce its leadership amid intensifying global competition.

  Risks

  Weaker-than-expected smart meter revenue recognition, weaker-than-expected front-loaded photovoltaic inverter-related revenue, and further increases in copper and silver prices that pressure gross margin.

• HVDC relay business

  Core growth driver

  Strengths

  Benefits from 800V EV platform penetration, customer expansion in Europe and Southeast Asia, and demand from AIDC and ESS high-voltage DC architectures.

  Weaknesses

  Dependent on the pace of new energy vehicle, energy storage, and data center construction.

  Comparison

  Hongfa's leading position in HVDC relays allows it to benefit more directly from the increase in value content of EVs relative to ICE vehicles.

  Risks

  EV or AIDC orders may materialize more slowly than expected, or competition may lead to pricing pressure.

• General relay business

  Source of revenue growth and market share gains

  Strengths

  Execution of price increases, ESS demand, and pressure on smaller manufacturers' operations jointly support strong growth in 2026E.

  Weaknesses

  Still sensitive to raw material costs and demand in traditional end markets.

  Comparison

  Compared with smaller competitors, Hongfa has stronger cash flow and cost pass-through capabilities.

  Risks

  Continued increases in raw material prices or a demand slowdown could affect gross margin and orders.

Key data

• 2Q26 revenueRmb5,914mn, +36% YoY, +4% vs GSeResults were in line with Goldman Sachs expectations.
• 2Q26 gross profitRmb1,963mn, +30% YoY, +3% vs GSeCorresponding gross margin was 33%, down 1 percentage point YoY.
• 2Q26 operating profitRmb1,007mn, +26% YoY, +6% vs GSeOperating margin was 17%, down 1 percentage point YoY.
• 2Q26 net profitRmb672mn, +21% YoY, +1% vs GSeNet margin was 11%, down 1 percentage point YoY.
• 2026E revenue growth+27% YoYGoldman Sachs expects revenue growth to be significantly above the roughly 15% historical CAGR over the past decade.
• 2026E HVDC relay revenue growth+30% YoYDriven by expanded global customer coverage in Europe and Southeast Asia and higher penetration of 800V EV platforms.
• 2026E General relay revenue growth+36% YoYSupported by price increases, market share gains from smaller manufacturers, and ESS demand.
• 2026E Auto relay revenue growth+16% YoYPrice increases were successfully implemented in 2Q26.
• 2026E Power relay revenue growth+24% YoYDriven by improving demand in Europe and higher installation volumes of State Grid-related smart meters.
• 2026E Industrial control relay revenue growth+29% YoYSupported by new energy, semiconductors, domestic substitution, overseas recovery, and improving OEM demand such as from Schneider.
• 2026E Signal relay revenue growth+20% YoYOrder visibility is relatively strong.
• Global relay market shareabout 27% in 2025, No.1 globallyGoldman Sachs believes the company will continue to gain market share.
• Gross margin forecast2Q26 33.2%, 3Q26E 34.5%, 4Q26E 35.1%Recovery driven by stable raw material prices, completed price increases, and operating leverage.
• Target priceRmb45.5Based on 2028E 24x P/E discounted back to 2027E.

Impact & implications

If Goldman Sachs' view plays out, Hongfa Technology's investment thesis will expand from a pure end-demand recovery story to a combination of price pass-through, market share gains, high utilization, and incremental growth from new applications. Automotive 800V platforms, AIDC data center DC architectures, ESS, smart meter replacement cycles, and global grid upgrades could all lift relay demand and value per vehicle/system. At the industry level, smaller manufacturers may be squeezed out by rising raw material prices and cash flow pressure, benefiting further share concentration toward market leaders.

Risks

• Weaker-than-expected smart meter revenue recognition.
• Weaker-than-expected front-loaded photovoltaic inverter-related revenue.
• Further increases in raw material prices such as copper and silver could negatively affect gross margin.
• AIDC-related commercialization plans still need further clarification in 4Q26-2027E, and the pace of order ramp-up remains uncertain.
• If industry supply-demand shifts from shortage to surplus, the ability to maintain prices may be tested.

What to watch

• Whether gross margin in 3Q26E and 4Q26E recovers to 34.5% and 35.1% as Goldman Sachs expects.
• Order progress for HVDC relay among customers in Europe, Southeast Asia, and 800V EV platforms.
• Whether General relay, ESS, and smart meter demand continue to drive above-industry market share gains.
• Commercialization plans after AIDC sample delivery, especially orders, product scope, and regional rollout in 4Q26-2027E.
• The trend of raw material prices such as copper and silver and the stability of margins after the company's price pass-through.