AI Infrastructure And EV Expansion Will Drive Long-Term Earnings Upside

Catalysts

About FIT Hon Teng

FIT Hon Teng provides advanced connectivity, interconnect and system solutions for cloud, consumer electronics and automotive applications.

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

• Acceleration of AI infrastructure build out, including high speed connectivity, liquid cooling CDUs and next generation server platforms, supports sustained double digit growth in the Cloud segment and should lift group revenue and gross profit as AI content per rack rises.
• Ongoing PC and notebook upgrade cycles to AI capable architectures, with higher value interconnect and power components, underpin resilience in Consumer interconnects and can gradually improve blended ASPs and net margins as legacy products are phased out.
• Integration of Auto Kabel into the One Mobility strategy, combined with growing EV and hybrid penetration and geographic expansion into the Middle East, is set to drive high double to triple digit growth in Automobility revenue and a richer mix of recurring, higher margin automotive business.
• Consolidation of global manufacturing, new audio and other production facilities and tighter OpEx discipline, supported by Foxconn’s global footprint, enhance operating leverage and are expected to stabilize gross margin near the 20% target while keeping the sales expense ratio around 17% to 18%.
• Deepening R&D and customer collaboration in advanced connectivity, including GPU sockets, ASIC related interfaces, CPO and robotics cabling, positions FIT Hon Teng to capture emerging compute and automation demand, broadening its addressable market and supporting long term earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming FIT Hon Teng's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $400.6 million (and earnings per share of $0.04) by about December 2028, up from $152.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $545.3 million in earnings, and the most bearish expecting $330.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, down from 30.0x today. This future PE is greater than the current PE for the HK Electronic industry at 12.2x.
• 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 9.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Stronger than expected AI infrastructure investment, including robust demand for high speed connectivity, liquid cooling CDUs and GPU sockets, could accelerate Cloud segment growth beyond current guidance and drive higher group revenue and earnings than implied by a flat share price outlook.
• Successful integration and scaling of the Auto Kabel acquisition under the One Mobility strategy, combined with triple digit growth targets and expansion into EV and Middle East charging solutions, may deliver structurally higher, recurring automotive revenue and improved net margins that support a re rating of the shares.
• If next generation connectivity products, including CPO, optics and advanced AI server interconnects, move from certification to commercialization more quickly than anticipated, FIT Hon Teng could achieve its 20% gross margin target and expand profitability, lifting earnings and potentially the share price.
• Global diversification of manufacturing, easing tariffs and effective use of Foxconn's footprint could reduce supply chain and FX related pressures, stabilize or improve gross margins and sustain revenue growth, which would challenge the assumption that the share price stays flat.
• Long term secular growth in AI, robotics and data center workloads, together with FIT Hon Teng's early mover position in liquid cooling and high content per AI rack, may support a multi year earnings uptrend that is inconsistent with expectations for a largely unchanged valuation and share price.

Valuation

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

• The analysts have a consensus price target of HK$5.21 for FIT Hon Teng based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $400.6 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of HK$5.03, the analyst price target of HK$5.21 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.