CGS: Upgrades Precision Target Price to HK$6.4, Next Quarter Performance in Line with Expectations; Bullish on High-Margin AI Business

CGS Research Report maintains its 2025 earnings forecast for Precision (06088) unchanged, with a positive outlook on the company's AI data products expanding into new categories in 2026, which is expected to contribute significantly to next year's performance increase. As a result, the company's 2026 earnings forecast was upgraded by 11% to USD 301 million. Corresponding to the 31.6x and 18.7x price-to-earnings ratio for 2025 and 2026, respectively, the report maintains its "Outperform" rating; considering the adjusted earnings forecast and industry valuation midpoint, the target price was upgraded by 76.8% to HK$6.4, corresponding to the 33.9x and 20x price-to-earnings ratio for this year and next year, respectively, with a potential upside of 7.2%.

Precision's revenue growth in the first half of the year was 11.5% to USD 23.05 billion, with net profit decreasing by 7.5% to USD 30 million, meeting CGS's expectations. Correspondingly, the company's next-quarter revenue grew 9.1% to USD 12.02 billion, with net profit increasing by 4% to USD 238 million. CGS noted that the company's net profit elasticity was smaller than its revenue growth in the first half of the year, mainly due to the combined impact of two factors: product structure changes and exchange rate fluctuations, which caused a decrease of 2.7 percentage points in the company's gross margin to 17.8% this year; the company continued to streamline production costs, with expense ratio decreasing by 1 percentage point to 15.3%. Looking ahead, CGS is optimistic about the growth potential of high-margin AI business, as it optimizes product structures and enhances operational efficiency, which can improve profitability.

CGS noted that the company's GB200 shipments accelerated, with new platforms such as GB300 expected to start mass production in the second half of this year. Additionally, CGS is optimistic about the continuous expansion of AI data product categories, which can bring significant revenue growth. Furthermore, the company will continue to invest in capital expenditures for AI infrastructure and platform upgrades, which are expected to further drive its 3+3 strategy.