Gree’s third-quarter revenue decline narrowed, but both gross margin and expenses came in worse than JPMorgan expected. The bank expects earnings forecasts to be cut, while dividends and buybacks may cushion pressure on the share price.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
Gree’s third-quarter revenue beat expectations, but a decline in gross margin and obstacles to cutting expenses led to a significant earnings disappointment. JPMorgan believes shareholder returns can provide support and maintains its neutral rating.
The revenue decline narrowed, so why did profit disappoint so sharply?
In the third quarter of 2026, Gree’s revenue fell 8% year on year, a narrower decline than the 17% recorded in the second quarter and better than JPMorgan’s forecast of a 11% decline and the market consensus forecast of a 10% decline. Net profit, however, fell 43% year on year to 4 billion yuan, its lowest in nearly 22 quarters and approximately 30%–35% below the bank’s and market consensus estimates.
The main shortfall was in profitability: third-quarter gross margin fell 5.6 percentage points year on year to 22.7%, below JPMorgan’s forecast of 27.3%. While revenue declined, operating expenses were flat year on year, compared with the bank’s original forecast of a 11% decline, putting pressure on profit from both sides.
What does the relatively better revenue performance indicate?
According to Industry Online data, shipments in China’s air-conditioning industry fell 15% year on year in the third quarter, a deeper decline than the 9% in the second quarter; Gree’s revenue fell 8% over the same period. The company attributed its relatively better performance to its differentiated and mid-to-high-end product mix.
JPMorgan believes changes in competitors’ sales practices may also have indirectly supported Gree’s share of shipments to dealers. The comparison uses company revenue and industry shipments respectively, so the measures differ.
Why did expenses and cash flow fail to offset pressure on earnings?
After falling 13% year on year in the first half of 2026, Gree’s operating expenses were flat in the third quarter. JPMorgan believes the company still needs to maintain necessary sales and marketing spending in a highly competitive market, leaving less room to cut expenses.
Third-quarter non-GAAP operating margin fell 7 percentage points year on year to 9.9%, below the bank’s forecast of 15.2%; the corresponding operating profit fell 47% year on year.
Operating cash flow in the first nine months of 2026 fell 47% year on year to 24.1 billion yuan, partly affected by changes in restricted funds. Excluding that effect, adjusted operating cash flow still fell 25%, a larger decline than the 20% fall in net profit over the same period, and did not offset weak earnings.
How much support can dividends and buybacks provide for the valuation?
Gree announced an interim dividend of 1 yuan per share, unchanged from the same period last year, despite a 20% decline in net profit in the first nine months. The company also announced a 5 billion–10 billion yuan buyback plan, with 70% allocated for cancellation and 30% for incentives.
Combined with the final dividend of 1.87 yuan per share expected before the results announcement, JPMorgan estimates a dividend yield of approximately 7% and a buyback yield of approximately 2%–3%, for a total shareholder yield of approximately 10%. The bank believes the approximately 7 times 2026 forward price-to-earnings ratio before the results announcement and shareholder returns may ease share-price pressure from the earnings disappointment.
JPMorgan expects the market to cut earnings forecasts significantly and maintains its neutral rating and 39 yuan price target. The bank believes weaker domestic demand and channel destocking will weigh on 2026 sales and profit, with a limited recovery in 2027; the price target is based on 8 times 2027 forward earnings.
