Where did the third-quarter earnings shortfall arise?

  • Gree Electric reported third-quarter 2026 revenue of 36.871 billion yuan, down 8% year on year and broadly in line with Goldman Sachs’ expectations; net profit was 3.996 billion yuan, down 43% year on year and 36% below the bank’s forecast.
  • The profit shortfall mainly reflected gross margin pressure that exceeded Goldman Sachs’ expectations. Third-quarter gross margin was 23.1%, down 5.5 percentage points year on year; operating margin was 10.3%, down 6.6 percentage points year on year.

What changed in demand and distribution channels?

  • Goldman Sachs believes weak domestic demand and intense competition weighed on revenue. Domestic retail demand for major home appliances unexpectedly declined in September despite a somewhat easier comparison base. Air conditioners performed worse than other major appliance categories, possibly due to consumer sentiment and unfavorable weather.
  • Gree is more reliant on the domestic air-conditioning market than its peers and was therefore more affected. IOL data show that its third-quarter air-conditioner factory shipments fell 19% year on year, with domestic shipments down 14% and exports down 34%.
  • Third-quarter contract liabilities stood at 7.8 billion yuan, down 43% year on year. These mainly comprise dealer prepayments, and Goldman Sachs believes the decline may reflect dealer caution.

Why were margins under pressure?

  • Goldman Sachs believes air-conditioning costs were affected by rising prices for raw materials such as copper, while industry competition intensified; together, the two factors may have depressed gross margin.
  • AVC data show that the industry’s average offline and online selling prices for air conditioners fell 2% and 19% year on year, respectively, in the third quarter. Goldman Sachs believes this may reflect increased promotions and changes in product mix.
  • Gree’s third-quarter selling expenses rose 15% year on year, and its selling expense ratio increased by 0.9 percentage points. Goldman Sachs suggests that increased promotions amid competition were one reason; administrative expenses were relatively stable over the same period.

How does Goldman Sachs balance growth pressure against valuation support?

  • Goldman Sachs recognizes Gree’s vertical integration and scale manufacturing capabilities, its extensive distribution network, particularly offline, and its brand strength in mid- to high-end air conditioners. It is also concerned that weaker trade-in incentives may restrain revenue growth, and that intensified competition and the company’s relatively less aggressive strategy in promoting value-for-money products may lead to market-share losses.
  • The company announced an interim dividend of 1 yuan per share, unchanged from the previous interim period. Goldman Sachs believes the dividend yield can support valuation and maintained its Neutral rating and 12-month target price of 41 yuan. The target is based on 10 times forecast 2028 earnings per share, discounted back to 2027 at a cost of equity of 9.5%.