The revenue decline narrowed. Why is BofA still lowering its forecasts?

  • Glodon’s revenue in the third quarter of 2026 was approximately 1.46 billion yuan, down 2% year on year and 4% below BofA’s forecast; net profit was approximately 74 million yuan, broadly flat year on year. Profit held up, but revenue recovered more slowly than the bank had expected.
  • The cost-estimation business, which accounts for the bulk of revenue, generated approximately 1.14 billion yuan in the third quarter, down 1% year on year, an improvement from the 6% decline in the first half. Performance within the segment diverged: growth in engineering data services was offset by falling revenue from traditional quantity takeoff and cost-pricing products, and the business as a whole has yet to return to growth.
  • Construction management revenue was approximately 205 million yuan in the third quarter, down 6% year on year, a slightly wider decline than the 5% fall in the first half. BofA sees persistent weakness in downstream property sales and new construction starts as a constraint on demand and expects recovery to begin no earlier than 2027.

Which improvement kept profit broadly flat?

  • The main support came from expense controls. Third-quarter administrative expenses fell 20% year on year, declining to 15.3% of revenue, down 3.4 percentage points; selling expenses fell 3% year on year, with the expense ratio dropping to 31.0%. As revenue declined, savings in these two areas helped stabilize profit.
  • Cost pressures did not ease across the board: gross margin fell 0.3 percentage points year on year to 86.3%; R&D expenses rose 8% year on year, driven by higher amortization, and increased by 3 percentage points as a share of revenue to 32.4%.
  • Taken together, these changes left operating margin up 0.4 percentage points year on year at 6.8%, while net margin rose 0.1 percentage points to 5.0%. Cost controls were the main driver of this quarter’s earnings improvement, while revenue remained in contraction.

What progress has been made in AI and overseas business?

  • AI monetization has made early progress, and the company has begun commercializing some AI-native products, including AI-based industrial installation quantity takeoff and AI-based cost pricing. However, revenue from traditional cost-estimation products is still declining, so progress in new products currently coexists with pressure on the core business overall.
  • Overseas revenue was approximately 61 million yuan in the third quarter, broadly flat year on year. Management disclosed that, including deferred SaaS subscription revenue, overseas business grew by a double-digit percentage year on year in the first three quarters of 2026, while the value of new orders from Asian customers rose more than 30% year on year; the periods and measurement bases for these indicators differ from those for revenue recognized in a single quarter.
  • Digital design revenue rose 50% year on year in the third quarter, but amounted to only 26 million yuan. The high-growth business added revenue, though its current scale remains significantly smaller than the cost-estimation and construction management businesses.

How do these developments affect earnings forecasts and valuation?

  • Slower revenue recovery and relatively high R&D expenses prompted BofA to cut its earnings forecasts for each year from 2026 to 2028 by approximately 4%. After the revision, the bank expects net profit of 485 million, 598 million and 700 million yuan, respectively, over the three years. It still expects earnings growth, but from a lower starting point.
  • BofA maintained its Underperform rating and lowered its price target from 7.2 yuan to 7.0 yuan. Its valuation still uses a price-to-earnings multiple of 20 times for the next 12 months, a 25% discount to the average for Chinese software peers, reflecting expectations of slower revenue growth. The price-target adjustment accompanied the earnings forecast cuts; the valuation multiple was unchanged.
  • This assessment depends on the pace of recovery in demand for property and construction software. Stronger growth in cloud contracts, a faster property-market recovery or improved gross margin in construction management could provide upside; lower renewal rates for cloud cost-estimation software and weaker construction projects and related IT spending would add to revenue pressure.