Bank of America: Hongfa Technology’s third-quarter shipments are strong; profit beats expectations but gross margin falls year over year

Where did third-quarter results excel, and what pressures emerged?

Revenue in the third quarter of 2026 was RMB 6.318 billion, up 38.3% year over year; net profit attributable to shareholders was RMB 654 million, up 29.4% and 12.2% above BofA’s previous forecast. Revenue growth came mainly from price increases, strong global demand and market-share gains, particularly in high-voltage DC relays.
Growth did not bring year-over-year gross-margin expansion: third-quarter gross margin was 33.4%, down 2.0 percentage points year over year and up 0.2 percentage points quarter over quarter. The operating expense ratio rose to 18.1% from 15.7% in the second quarter, causing operating profit to fall 6.7% quarter over quarter; net profit attributable to shareholders fell 2.6% quarter over quarter.

Management said third-quarter shipments of power relays for new energy and AI data centers, high-voltage DC relays and industrial relays grew strongly year over year; shipments of products including automotive, power and signal relays rose 20%–30% year over year.
The company said strong demand from AI data-center customers drove relay sales in the first nine months of 2026 and expects the share of revenue from related products to continue rising in 2027. It is developing new products for these customers, targeting deliveries from 2027.
Management expects price increases and a substantial order backlog to support continued growth momentum into the fourth quarter of 2026.

Taking into account the third-quarter earnings beat and product price increases, BofA raised its earnings-per-share forecasts for 2026–2028 by approximately 4%, 6% and 6%, respectively, to RMB 1.45, RMB 1.79 and RMB 2.02.
The bank forecasts full-year 2026 revenue of RMB 22.978 billion, up 33.6% year over year, with revenue growth slowing to 15.5% in 2027. Its model puts fourth-quarter 2026 revenue at RMB 5.639 billion, down 10.7% from the third quarter, and net profit attributable to shareholders at RMB 427 million, down 34.8% quarter over quarter.

BofA raised its price target from RMB 26 to RMB 29 and changed its valuation basis to 16 times forecast 2027 earnings per share; it previously used 17 times average forecast earnings per share for 2026–2027.
The bank forecasts a compound annual earnings growth rate of 18% for 2026–2028 and considers the valuation high, so it maintained its Underperform rating. Variables affecting its assessment include downstream demand, the pace of market-share expansion, domestic competition and the cost of key materials such as copper and silver.