Citi: JOHNSON ELEC H (00179) Issues Profit Warning, Expects First-Half Net Profit to Fall 56% to 62%; Rating Cut to "Sell"

Citi issued a research report stating that JOHNSON ELEC H (00179) unexpectedly issued a profit warning for its first-half FY2027 results for the period ending late September, which are due to be announced in early November, expecting net profit for the period to fall 56% to 62%. Given a margin outlook worse than expected, the bank cut its FY2027 to FY2029 earnings forecasts by 21% to 37%, lowered its target price by 25.5% from HK$19.6 to HK$14.6, and downgraded the rating from "Neutral" to "Sell." The report cited the company's profit warning, expecting net profit for the period to fall 56% to 62% to between US$50 million and US$58 million, with the midpoint guidance implying a decline of about 60% to approximately US$54 million. The company attributed this to exchange losses recorded during the period, compared with exchange gains in the same period of the prior fiscal year, as well as pricing negotiations to pass on rising raw material costs to customers taking longer than expected. The bank noted that excluding exchange factors, underlying net profit still fell about 24% to 44% year-on-year, with a midpoint decline of about 33%, mainly dragged down by copper prices surging about 30% year-to-date. Management mentioned taking pricing action in response to the competitive environment, with customer credit provisions and claims still under negotiation to pass on elevated raw material and other input costs as well as labor inflation; price cuts and rising input costs remain ongoing challenges, especially as the automotive product group still accounted for about 84% of FY2026 sales. The bank expects first-half revenue to edge up 2% year-on-year to US$1.87 billion, with net profit plunging 58% to US$56 million; in the second half ending late March next year, the net profit decline should narrow significantly to 4% year-on-year to US$79.8 million, as average selling prices in the second half should be better than in the first half, partially offsetting higher commodity costs, though earnings downside risk remains high. The bank said market forecasts for its full-year FY2027 and FY2028 results appear too high, with its earnings forecasts 43% and 38% below consensus, respectively. The bank prefers TSUGAMI CHINA (01651) in the China industrial automation chain, and reiterates a pair trade of bullish on Tsugami and bearish on Johnson Electric.