What happened to margins behind the third-quarter beat?

  • Hon Precision’s revenue for the third quarter of 2026 was 16.194 billion New Taiwan dollars, up 17.4% quarter over quarter and 97.5% year over year, exceeding Goldman Sachs’ previous estimate and the Bloomberg market consensus by 5.0% and 7.4%, respectively. Earnings per share were 37.33 New Taiwan dollars, 4.7% above Goldman Sachs’ estimate.
  • Gross margin was 56.9%, up 0.8 percentage points from the previous quarter but below 57.7% a year earlier. Higher R&D expenses raised the operating expense ratio to 7.3%, above Goldman Sachs’ estimate of 5.6%; the operating margin was 49.7%, below its estimate of 50.9%.

Why do large packages support higher equipment prices?

  • The Mega Tray solution is designed for large packages exceeding 120 mm × 150 mm and is also compatible with existing chip sizes. The company expects to begin small-volume shipments in the second half of 2026 and penetration to increase in 2027; 20%–30% of new orders from some customers already use the solution.
  • In system-level testing, the new equipment can test 36 boards in parallel, compared with 6–12 for existing equipment; parallel testing capacity becomes more important as testing times lengthen. The equipment’s average selling price is more than twice that of existing products, providing price support for a product mix upgrade.
  • Supporting thermal control is another area of competition: the company offers different thermal control platforms that can be installed on final-test or system-level test equipment to meet customers’ temperature and power requirements. Management plans to increase handling capacity for 200 mm × 200 mm large packages from 12 kW at the end of 2026 to 25 kW at the end of 2027.

When will CPO equipment enter mass production?

  • The company said its CPO Insertion 4 equipment was ready for mass production at the end of October 2026, and current shipments consist mainly of small volumes of engineering equipment. Customer qualification is scheduled to begin in November and finish in December, with the customer targeting mass production in the first quarter of 2027.
  • The equipment tests optical and electrical performance simultaneously, with separate thermal control systems for ASICs and optoelectronic components; the company’s internally developed optical alignment platform remains under qualification.

When will capacity expansion and new products affect earnings forecasts?

  • Management reiterated its target of expanding capacity by 50% in 2027 and said order visibility covers the next two to three quarters; on that basis, Goldman Sachs expects revenue to continue growing through the first half of 2027.
  • Shipments of high-end thermal control and Mega Tray equipment began in the fourth quarter of 2026, while CPO equipment is scheduled for delivery in the first quarter of 2027. As equipment revenue recognition typically lags by 3–6 months, management expects new products to lift gross margin in the second half of 2027.
  • Goldman Sachs raised its earnings per share forecasts for 2026 through 2028 by approximately 2%, 2% and 1%, respectively; its 2027 forecast is 256.18 New Taiwan dollars, 17.2% above the Bloomberg consensus. Goldman Sachs also raised its 12-month price target from 12,500 to 12,600 New Taiwan dollars and maintained its buy rating.
  • Downside risks listed by Goldman Sachs include weaker AI and high-performance computing demand, slower adoption of system-level testing for AI ASICs, and intensifying competition.