Hongfa(SH:600885) Goldman Sachs·2024-08-12 09:27Investment Rating - The investment rating for Hongfa Technology (600885.SS) is "Buy" with a 12-month price target of RMB 37.3, indicating an upside potential of 33.2% from the current price of RMB 28.01 [8][10][11]. Core Insights - Hongfa Technology reported Q2 2024 results that met expectations, with revenue, gross profit, EBIT, and net profit showing year-on-year increases of 11%, 7%, 1%, and 28% respectively. The company raised its revenue guidance for 2024 from a growth of 7-13% to 10-15% [1][4][9]. - The company is expected to benefit from strong order momentum, particularly in the high-voltage direct current (HVDC) relay segment, which is primarily used in new energy vehicles [1][10]. - The automotive relay segment outperformed expectations in the first half of 2024, with revenue growth of 36% year-on-year, driven by domestic brands and a significant increase in global market share [2][4][9]. Revenue Breakdown by Segment - HVDC Relay: Revenue for the first half of 2024 reached RMB 17.50 billion, growing 31% year-on-year, with a strong performance in the new energy vehicle sector [1][4]. - Automotive Relay: Revenue for the first half of 2024 was RMB 11.18 billion, up 36% year-on-year, with expectations of a 22% growth for the full year [2][4]. - Power Relay: Revenue for the first half of 2024 was RMB 11.13 billion, reflecting a 20% year-on-year increase, supported by strong demand from the State Grid and overseas markets [2][4]. - Home Appliance Power Relay: Revenue for the first half of 2024 was RMB 16.88 billion, with a growth of 7% year-on-year, although growth was below industry levels due to price competition [4][9]. - Industrial Control Relay: Revenue for the first half of 2024 was RMB 3.86 billion, showing a slight decline of 3% year-on-year, but a recovery is anticipated in the second half [4][9]. Financial Performance - The company achieved a gross profit margin of 34.6% in Q2 2024, a decrease of 1 percentage point year-on-year, attributed to rising silver and copper prices, but production efficiency improvements are expected to stabilize margins in the second half [5][10]. - Operating cash flow was RMB 12.23 billion, which is 2.5 times the net profit, indicating strong cash generation capabilities [5][10]. Market Position and Outlook - Hongfa Technology holds a leading position in the global relay market with a market share of 23% as of 2023, and is expected to continue expanding its market share driven by technological advantages in automotive, home appliance, and power sectors [9][10]. - The company is well-positioned to benefit from the electrification of vehicles and the increasing demand for smart meters as the global power grid undergoes upgrades [10][11].