J.P. Morgan: Hongfa Technology’s third-quarter growth accelerates: AI data centers bring new demand, while margins remain below last year’s level

Why did growth accelerate in the third quarter?

In the third quarter of 2026, the company reported revenue of 6.318 billion yuan, up 38.3% year on year, faster than the 32% growth in the first half. Net profit attributable to shareholders was 654 million yuan, up 29.4% year on year.
J.P. Morgan estimates that demand measured by actual sales volume rose more than 20% year on year in the first three quarters. Management said the contribution of pricing to revenue growth over the same period rose to 10–12 percentage points, above the single-digit level in the first half, and expects it to increase further in the fourth quarter.
Revenue from high-voltage DC, new-energy and industrial relays each grew more than 50% year on year. Automotive, signal and power relays also grew 20%–30%, indicating that growth was not confined to a single application.

The third-quarter gross margin was 33.4%, up 0.2 percentage points quarter on quarter but down 2 percentage points year on year. The net margin attributable to shareholders was 10.4%, down 0.7 percentage points year on year, so profit grew more slowly than revenue.
Management expects product-mix upgrades and industry consolidation to drive further margin improvement. J.P. Morgan believes the company can pass through raw-material costs, but also lists an unexpected rise in copper prices as a risk to its margin assumptions.
Cash flow was weaker than profit: operating cash flow in the first three quarters was 807 million yuan, down 48.7% year on year, while net profit attributable to shareholders for the same period was 1.81 billion yuan, up 23.1% year on year.

In the first three quarters of 2026, sales of AI data-center-related relays were approximately 900 million yuan, up about 60% year on year and accounting for approximately 5% of total company revenue. Management expects full-year sales to exceed 1.5 billion yuan; this measure includes only traditional relay applications.
High-voltage DC relays used in data centers have higher value per unit and greater profitability, and have already received small-volume orders from major global technology customers. Management believes these applications could generate 2 billion–3 billion yuan in sales over the next 2–3 years.
The company is also developing products including solid-state switches, connectors and capacitors. Some products are being sent to overseas customers as samples or undergoing validation.

The bank believes that 800V architecture in AI data centers could drive upward revisions to earnings expectations and valuation. It maintains an Overweight rating and a target price of 46 yuan for December 2027, based on a discounted cash flow model.
This assessment also depends on end-market demand and cost trends. The bank’s main listed risks include weaker-than-expected demand for home appliances and electric vehicles, an unexpected rise in copper prices, and changes in trade policy.