AI Infrastructure Demand And Auto Mobility Will Drive Powerful Long Term Upside

Catalysts

About FIT Hon Teng

FIT Hon Teng is a global provider of advanced interconnect, power and connectivity solutions for cloud data centers, AI infrastructure, mobility and consumer electronics.

What are the underlying business or industry changes driving this perspective?

• Accelerating global investment in AI infrastructure is driving sustained demand for FIT Hon Teng's high speed connectivity and power solutions, underpinning management's upgraded mid 20s top line growth outlook for fiscal years 2027 and 2028 and supporting structurally higher revenue.
• The rising complexity and power density of next generation AI servers and larger rack form factors is increasing content value per rack for FIT through advanced connectors, liquid cooling Busbars and high voltage power solutions. This provides a clear pathway for faster revenue growth and expanding gross margins.
• AI driven cloud data center demand is lifting the cloud segment mix from low teens to a projected high 20s share of total revenue by 2028. Given this segment's above average profitability, the shifting mix should translate into higher blended gross margin and stronger earnings.
• FIT's deep ecosystem collaboration with leading chip and platform partners, evidenced by the industry's first 102.4 Tbps CPO connector and design wins across compute trays, tray to tray and rack to rack connectivity, creates high barriers to entry and supports sustained pricing power, reinforcing net margin resilience.
• Rapid growth in Auto Mobility and emerging adoption in robotics, both benefiting from the long term move toward software defined, connected and electrified systems, should diversify revenue streams beyond cloud while leveraging existing engineering strengths and supporting more stable earnings growth through the cycle.

Assumptions

This narrative explores a more optimistic perspective on FIT Hon Teng compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming FIT Hon Teng's revenue will grow by 19.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.3% today to 6.9% in 3 years time.
• The bullish analysts expect earnings to reach $551.6 million (and earnings per share of $0.08) by about December 2028, up from $152.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $333.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, down from 33.7x today. This future PE is greater than the current PE for the HK Electronic industry at 12.2x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The persistent structural weakness in smartphones and broader consumer electronics, where management guides to a high teens decline in smartphone revenue for 2025 and only flat demand in Consumer Interconnects, suggests secular stagnation in legacy businesses that may offset AI driven gains and cap consolidated revenue growth and operating leverage, pressuring overall earnings.
• Intensifying competition and potential patent workarounds in high speed backplane and in rack connector technologies, alongside emerging cableless architectures for AI platforms, could erode FIT Hon Teng's technological edge in its core AI connectivity portfolio over time, undermining pricing power and structurally compressing segment gross margins and net margins.
• Heavy upfront spending on R&D, certifications, global expansion and capacity reallocation to support AI and Auto Mobility, combined with raw material pooling and safety stock buildup to secure supply, raises the risk that operating expenses remain structurally elevated relative to sales. This would limit operating margin expansion and dampen long term earnings growth even if revenue grows as guided.
• The long ramp times and multi month qualification cycles for AI connectivity and power products, together with management's reliance on a few hyperscale and cloud customers and nondisclosure of segment profitability, create medium term execution and concentration risks. Any delay in platform adoption or order pushouts could disrupt the mid 20s revenue growth outlook and reduce earnings visibility.
• Strategic bets on Auto Mobility, EV charging infrastructure and emerging robotics applications are aligned with long term trends, but the sectors are facing industry wide headwinds, uncertain adoption curves and potential project cancellations. This could slow diversification benefits, leave the company more exposed to cyclical swings in AI capex and constrain the stability of future revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for FIT Hon Teng is HK$7.4, which represents up to two standard deviations above the consensus price target of HK$5.21. This valuation is based on what can be assumed as the expectations of FIT Hon Teng's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$7.4, and the most bearish reporting a price target of just HK$2.63.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $8.0 billion, earnings will come to $551.6 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of HK$5.65, the analyst price target of HK$7.4 is 23.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.