Silver cost shock pressures 4Q25 profitability, but Goldman Sachs maintains a Buy rating on Hongfa Technology

Overview

This report is Goldman Sachs' commentary on Hongfa Technology's 4Q25 results and margin pressure. Revenue continued to grow in 4Q25, but rising raw material prices such as silver and copper put clear pressure on gross margin, operating margin, and net margin, leaving results below Goldman Sachs estimates. The report believes 1Q26 gross margin will still be affected by raw material costs, but the company has started price increases and is pushing ahead with a second round of price negotiations, while also easing the cost shock through materials substitution and scale advantages.

Core views

Goldman Sachs' core view is that short-term margins are being dragged by silver cost inflation, but Hongfa Technology's global leadership in relays, customer penetration, product-mix upgrade, and pricing power continue to support medium- to long-term growth. The raw material shock may also accelerate industry consolidation, weakening the low-price competition of low-margin peers and helping Hongfa increase share in markets such as general relays for home appliances.

Analysis framework

The report evaluates Hongfa Technology's near-term profitability pressure and medium- to long-term growth drivers by combining 4Q25 financial data, gross margin decomposition, raw material cost changes, management's price-increase plan, revenue growth across business lines, and 2026E forecasts, and updates the target price using a 2028E P/E discounting approach.

Methodology notes

• Valuation methodTarget price P/E discounted method

  The 12-month target price is based on a 2028E P/E of 21x and discounted to 2027E, with an equity cost of 10.5%.

  This method uses forward earnings and a target valuation multiple, then discounts it by the cost of capital to reflect expectations for future growth and margin recovery.

• Goldman Sachs factor frameworkGS Factor Profile

  Compares stock characteristics across four dimensions: growth, financial return, valuation multiples, and composite percentile.

  The growth dimension uses forward sales, EBITDA, and EPS growth; financial return uses ROE, ROCE, and CROCI; valuation multiples use indicators such as P/E, P/B, dividend yield, EV/EBITDA, and EV/FCF.

• M&A probability frameworkM&A Rank

  Goldman Sachs assesses the likelihood of a company becoming an acquisition target on a scale of 1 to 3.

  1 indicates high probability, 2 medium probability, and 3 low probability; if the score is 1 or 2, M&A factors are typically incorporated into the target price.

Asset mapping & comparison

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

• Hongfa Technology (600885.SS)

  The company and investment target covered in the report

  Strengths

  Global relay leader, with about 27% global share in 2025; has scale, pricing power, customer penetration, and materials-substitution R&D capabilities.

  Weaknesses

  Near-term gross margin is highly sensitive to raw material prices such as silver and copper, and 4Q25 profit came in below expectations.

  Comparison

  The report believes the company is more resilient than peers, and raw material shocks may cause low-margin competitors to exit some projects.

  Risks

  If raw material prices keep rising or price increases are not successfully passed through, gross margins could remain under pressure.

• Silver

  Key raw material cost variable

  Strengths

  No direct operating advantage, but its price shock is prompting the company to renegotiate prices with customers.

  Weaknesses

  Silver costs now account for more than 20% of material costs, far above the historical level of around 12%-13%.

  Comparison

  Compared with copper price increases, silver has risen more sharply and is harder to fully absorb through efficiency gains.

  Risks

  Further silver price increases would directly pressure gross margins.

• Copper

  Key raw material cost variable

  Strengths

  The company can ease copper price pressure through scale, process improvements, internal efficiency, and partial materials substitution.

  Weaknesses

  Average copper cost in 1Q26 rose 37%, still pressuring gross margin.

  Comparison

  A 20%-30% increase in copper prices was previously considered relatively manageable, but pressure intensifies when it rises alongside silver.

  Risks

  Further copper price increases may dilute the effect of price hikes.

• High-voltage DC relays/ESS/AIDC applications

  Medium- to long-term growth driver

  Strengths

  High-voltage DC relay revenue in 2025 was Rmb5.8bn, up 40% y/y; ESS revenue was about Rmb300mn, up 60% y/y.

  Weaknesses

  AIDC applications have not yet started to contribute meaningfully to future growth.

  Comparison

  High-voltage DC relays are expected to outperform industry trends, while high-voltage control boxes and energy storage demand support 2026E growth.

  Risks

  If AIDC, ESS, or high-voltage control box orders release more slowly than expected, growth may come in below forecasts.

Key data

• 4Q25 revenueRmb4,288mnUp 33% y/y, 3% below Goldman Sachs estimates.
• 4Q25 gross profitRmb1,432mnUp 12% y/y, 9% below Goldman Sachs estimates.
• 4Q25 operating profitRmb388mnDown 8% y/y, 23% below Goldman Sachs estimates.
• 4Q25 net profitRmb288mnDown 20% y/y, 24% below Goldman Sachs estimates.
• 4Q25 gross margin/operating margin/net margin33%/9%/7%All declined y/y, by -6pp/-4pp/-4pp, respectively.
• 1Q26 copper/silver cost inflation37%/175%The roughly 10% price increase in January did not fully offset the cost rise.
• Expected 1Q26 gross margin29.5%Down 4.3pp y/y, still affected by raw material costs.
• Expected 2Q26 gross margin31.9%Expected to improve sequentially, driven by the second round of price negotiations.
• 2026E revenue growth forecast13% yoyForecast by Goldman Sachs; management's shipment target is about 10%.
• Global relay market share27%Ranked No. 1 globally as of 2025.
• Target priceRmb35.3Based on a 2028E P/E of 21x discounted to 2027E.

Impact & implications

For investors, Hongfa Technology's near-term earnings sensitivity depends on the pace of price pass-through and the trend in silver and copper prices; however, if low-margin peers in the industry withdraw from projects or stop bidding because of cost pressure, the company may gain stronger pricing power and further share gains. Over the medium to long term, demand related to industrial control, signal relays, new energy, automotive low-voltage, high-voltage DC, energy storage, and AIDC remains the main growth source.

Risks

• Revenue recognition from smart meters is weaker than expected.
• Previously pulled-forward revenue related to photovoltaic inverters is weaker than expected later on.
• Copper and silver prices rise further, continuing to pressure gross margins.
• Price increase negotiations progress more slowly than expected or customer acceptance is weaker than expected.
• Demand related to home appliances may soften after being boosted by subsidies in 2025.
• If power relay demand in North America continues to decline, overseas growth could be dragged down.

What to watch

• The magnitude and timing of execution for the second round of price increases.
• Whether 1Q26 and 2Q26 gross margins improve from 29.5% toward 31.9% as expected.
• The trend in silver and copper prices and the company's progress in materials substitution.
• 2026 order growth in industrial control, signal, new energy, high-voltage DC, ESS, and automotive low-voltage businesses.
• Whether competitors continue to exit projects or stop bidding, thereby supporting Hongfa's share gains.
• Progress on high-voltage control boxes, AIDC-related demand, and overseas capacity ramp-up.