A recent research report has maintained an 'Outperform' rating on JOHNSON ELEC H (00179) with a target price of HK$39.85. The FY26 profit forecast was adjusted downward by 21.4% to USD 213 million, considering factors such as rising raw material costs and pricing pressure from downstream customers. A FY27 profit forecast of USD 225 million was introduced. These correspond to FY26/FY27 P/E ratios of 14.4x and 13.6x, respectively. The target price implies FY26/FY27 P/Es of 22.5x and 21.2x, representing a potential upside of approximately 56.15% from the current share price. This valuation uplift is attributed to progress in the company's Solid Oxide Fuel Cell (SOFC) business.
Key observations from the report are as follows:
FY25 results aligned with market expectations. Revenue for FY25 was USD 3.65 billion, showing a marginal year-on-year increase of 0.1%. Net profit attributable to shareholders was USD 220 million, a decrease of 23% year-on-year. After adjusting for non-operating factors—including fair value changes on certain investments, non-cash unrealized foreign exchange movements, restructuring costs, and impairment of intangible assets—the adjusted net profit was USD 234 million, down 13% year-on-year. While the net profit was in line with prior guidance, a detailed breakdown revealed that gross margin performance exceeded market expectations.
Weakness in the domestic automotive market dragged down overall revenue, while increased selling and administrative expenses pressured profits. By segment, automotive business revenue was approximately USD 3.05 billion (down 3% year-on-year), primarily due to market share loss among Chinese joint venture automotive clients. Industrial and commercial product revenue was about USD 600 million (up 2% year-on-year), returning to growth after three consecutive years of decline, driven by market recovery and volume growth in downstream emerging businesses such as AIDC liquid cooling pumps and robotics.
In terms of profitability, the FY26 gross margin was 23.0%, essentially flat year-on-year. The adjusted net profit decline of 13% was mainly attributed to increased distribution and administrative personnel costs, along with a non-cash impairment of intangible assets related to a past acquisition.
The core business is expected to achieve steady development, with globalization efforts continuing to deepen. Looking ahead, the report suggests that as the company's automotive clients in China gradually expand towards independent brands, domestic operational pressures are expected to see marginal improvement. Concurrently, the company is increasing its investments in India, having acquired land to build a third factory there in early 2026, which will strengthen local expansion and support global clients.
Capital expenditures (CAPEX) are likely to remain elevated as the company invests in new business ventures. For FY25/26, CAPEX as a percentage of revenue was 7.8% (compared to 5.4% in the prior period), and the company anticipates this level may persist. This is primarily due to increased investment in multiple new businesses: 1) Robotics: Currently collaborating with several leading Tier-1 suppliers overseas, focusing on joints and dexterous hands. 2) AIDC Power Supply: Its subsidiary, Stackpole's powder metal business, has become a key partner for a leading North American SOFC supplier. 3) AIDC Liquid Cooling: Has secured significant new business orders in the Asia-Pacific region.
Risks highlighted include weaker-than-expected downstream demand for new technologies, slower-than-anticipated customer development, and persistent increases in raw material prices.
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