Revenue grew 31%: why did net profit increase only 5%?

  • Sieyuan Electric’s revenue in the third quarter of 2026 rose 31% year over year, 3% below Goldman Sachs’ forecast. Operating profit grew 30% year over year, in line with the bank’s expectations, while net profit rose only 5%, 18% below its forecast. Operating and net profit performance diverged markedly.
  • As gross margin declined, combined selling, administrative and R&D expenses rose only 10% year over year, slower than revenue, helping sustain operating profit growth. Net profit was weighed down by credit and asset impairment, foreign exchange losses, lower subsidies, fair-value changes and profit or loss attributable to non-controlling shareholders.
  • Credit impairment losses amounted to 80 million yuan and can be reversed if payments are subsequently recovered. Inventory-related asset impairment losses were 19 million yuan, which management considers harder to reverse. Foreign exchange losses rose from 26 million yuan a year earlier to 68 million yuan, while the expiry of long-term subsidy programs also reduced earnings. A profit recovery cannot depend on revenue growth alone.

Orders are strong, so why have they not fully translated into revenue?

  • Overseas orders grew more than 50% year over year in both the third quarter and the first nine months, and now account for more than two-fifths of the company’s orders; customer advances at the end of the third quarter rose 52% year over year. Revenue recognition, however, is lagging orders: under delivered duty paid (DDP) terms, revenue has not yet been recognized on 500 million–600 million yuan of goods still in transit by sea, about two-thirds of which are transformers.
  • Acceptance cycles for complete substation projects are long, and some large domestic projects require one to three rounds of remedial work, leaving switchgear revenue growth at only about 25% in the first nine months, slower than the company overall. Inventory at the end of the third quarter rose about 28% year over year. Management said it consisted mainly of finished goods awaiting revenue recognition and expects the situation to ease from the fourth quarter and clear further in 2027.

Does the decline in gross margin mean core products are becoming less competitive?

  • Third-quarter gross margin was 30.6%, down 2.4 percentage points year over year. One of the main pressures was a combined increase of 6–7 percentage points in the revenue share of low-margin EPC and energy storage businesses. Switchgear gross margin was stable year over year, while transformers faced higher copper costs under fixed-price contracts. Recent quotation increases will be reflected only when new orders become revenue.
  • Management estimates that renminbi appreciation reduced gross margin by 0.7–0.8 percentage points, while Red Sea disruptions also increased freight costs. Economies of scale and a higher share of high-voltage switchgear and exports offset some of the pressure.
  • The energy storage business’s own gross margin improved in the third quarter. Its future performance depends on the share of overseas and high-end products and the supply of battery cells of at least 587 Ah. The company may also shift cell procurement to customers in 2027, removing cells from revenue and costs. This would change the reported gross-margin basis and should be distinguished from profit improvement driven by the product mix.

What has changed in orders amid North American policy uncertainty?

  • Following the executive order, North American customer engagement and contract signings were broadly unchanged. North American medium-voltage and switchgear orders were 300 million–400 million yuan in September and exceeded 400 million yuan in October. Management expects contracts signed across 10–November to exceed 1 billion yuan and has expanded its medium-voltage business presence.
  • Management remains cautiously optimistic because core transformers and switchgear have limited programmable hardware and software, and customers are mainly cloud service providers whose power-supply systems may face less scrutiny. Final policy details are scheduled for release on 24 December; current order performance and the policy’s eventual scope of application remain two key factors.

What supports full-year growth and Goldman Sachs’ long-term view?

  • Revenue grew 28.5% in the first nine months. Management maintained its full-year growth target of 25% and believes growth could reach 26%–27%. Faster acceptance at year-end would help revenue recognition, but the high base in the fourth quarter of 2025 means year-over-year growth in this year’s fourth quarter may not accelerate.
  • Goldman Sachs forecasts export revenue to grow at a compound annual rate of 43% over 2025–2030, based on global grid upgrades, a shortage of transformer supply and the company’s rising market share. Delivery on that forecast also depends on overseas execution and the production ramp-up: the third transformer phase targets more than 3 billion yuan in additional annual production capacity, with trial production planned for 7–August of 2027.