Citi: Desay SV: Intelligent driving projects fuel growth, while higher material prices squeeze gross margin

What drove third-quarter growth, and why did gross margin decline?

Management said third-quarter growth came mainly from intelligent driving domain controllers: some projects deferred from the second quarter were delivered in the third quarter, while several large projects entered mass production. In the first three quarters of 2026, smart cockpits accounted for approximately 66% of revenue, and intelligent driving for 26%–28%.
Gross margin fell quarter on quarter over the same period because of broad price increases in raw materials such as PCBs, MLCCs and metal parts. Although the company has signed memory cost-recovery contracts with most automakers, it must still absorb some of the price increases.

There is a lag in passing through memory costs: second-quarter negotiations with automakers were based on prices at the end of June, and additional third-quarter price increases must wait until the next round of negotiations, which could take place at year-end or in 2027.
Management believes that, entering the fourth quarter, the ability to secure complete sets of components amid tight supplies of key materials remains the main variable for revenue; if material costs continue to rise, pressure on earnings will also persist. Citi expects supplies of key materials to remain tight in 2027.

Management said the company has secured design wins for robotics domain controllers from customers including AgiBot and UBTECH, covering most of the top 15 robotics companies. It aims to start production at scale in the fourth quarter, with AgiBot potentially the first to enter mass production. Management expects robotics revenue to exceed 100 million yuan in 2026 and reach several hundred million yuan in 2027.
Overseas revenue accounted for approximately 11% of the total in the first three quarters of 2026, including approximately 12% in the third quarter; the company expects the share to fall slightly in the fourth quarter. Its Spanish plant is expected to begin production within 1–2 months, with first-phase capacity of approximately 1 billion–1.5 billion yuan. It will initially focus on lower-margin display products, with margins expected to be below those of exports from China but above those of domestic sales.
The company has deliberately slowed the rollout of another new business, Robovan, in cities in Guangdong: management said several hundred vehicles are currently operating, regulatory rules have yet to be clarified, and AI computing and talent costs are higher than expected.

Citi believes the signed memory cost-recovery contracts and expansion of overseas operations could offset some of the pressure from price increases in other materials. The bank maintained its revenue forecasts for 2026–2028 at 35.9 billion, 40.1 billion and 44.8 billion yuan respectively, and its net profit forecasts at 2.45 billion, 2.978 billion and 3.51 billion yuan respectively.
Citi maintained its 89 yuan target price and Neutral rating. The bank is positive on improvements in smart cockpit market share and the customer mix, as well as additional growth from intelligent driving and connected-vehicle businesses, but believes most positive factors are already reflected in the share price and the valuation is becoming relatively high.