Citi: Songfa Shares’ third-quarter revenue misses expectations, while stronger-than-expected net margin supports Citi’s target price increase

Why did profit still slightly exceed expectations despite lower-than-expected revenue?

In the third quarter of 2026, Songfa Shares posted revenue of 14.27 billion yuan, 17% below Citi’s forecast; net profit was 3.064 billion yuan, 1% above the bank’s forecast, though Citi believed it might be at the low end of buy-side expectations.
The key difference was margin: the third-quarter net margin was 21.5%, 3.9 percentage points above Citi’s forecast of 17.6%, offsetting the revenue shortfall. Gross margin was 28.3%, also 0.8 percentage points above the bank’s forecast.

Management attributed the revenue miss to steel processing capacity being diverted from shipbuilding to support the ongoing capacity expansion. Based on discussions with management, Citi estimated that this reallocation reduced third-quarter revenue by more than 1 billion yuan.
The expansion has already come at a short-term revenue cost: third-quarter revenue was below the second quarter’s 14.616 billion yuan. Citi also cut its fourth-quarter 2026 net profit forecast by 2% because it lowered its revenue forecast.

Citi raised its net margin assumptions for 2027–2028 by 3.5 to 4.3 percentage points, driving increases of 15% to 17% in its net profit forecasts for the two years. The bank now expects net profit of 21 billion yuan and 36.6 billion yuan in 2027 and 2028, respectively.
Citi’s assessment also depends on the shipbuilding cycle and the deployment of capacity: the bank believes replacement demand for aging bulk carriers and tankers could support an industry upcycle through around 2035, while disruptions to shipping routes support freight rates and also help demand for new vessels.

Citi maintained its buy rating and raised its target price from 300 yuan to 320 yuan, primarily based on its higher 2028 earnings forecast. The valuation uses a price-to-earnings multiple of 9 times forecast 2028 earnings per share, down from 10 times previously; the bank expects the expanded capacity to be fully utilized for the first time in 2028.
Citi’s base case assumes freight rates remain firm, replacement demand supports new vessel orders, and the company executes steadily and gradually gains market share. A sharp fall in freight rates, a halt in new vessel orders, or execution errors at the shipyard could affect order momentum and investor confidence.