Why did operating profit fall despite revenue growth?

  • In the third quarter of 2026, Inovance Technology reported revenue of 13.281 billion yuan, up 19% year over year and 1% above Goldman Sachs’ estimate; EBIT was 987 million yuan, down 7% year over year and 34% below Goldman Sachs’ estimate.
  • The group’s gross margin and operating margin were 25% and 7%, respectively. Both fell 2 percentage points year over year and were 4 percentage points below Goldman Sachs’ estimates.
  • Net profit was 1.589 billion yuan, up 24% year over year and 3% above Goldman Sachs’ estimate. This included a one-off fair-value gain of 419 million yuan on equity investments, which offset most of the operating profit shortfall at the net profit level.

Where is the margin pressure coming from, and what can price increases deliver?

  • Management said margin pressure was more concentrated in the automotive and elevator businesses. The automotive business’s third-quarter gross margin was 11%, down 4 percentage points year over year; the industrial automation business’s gross margin fell by about 1 percentage point.
  • Higher raw material costs, including those for power semiconductors, PCBs and electronic components, were gradually passed through from June to August. The company is implementing price increases and expects the group margin to improve sequentially in the fourth quarter; the automotive business is also expected to improve sequentially in the fourth quarter and return to profitability in 2027.
  • The automotive business’s overseas operations supported growth: overseas revenue rose 35% year over year in the first nine months of 2026 and 102% year over year in the third quarter. Management expects full-year overseas revenue to approach 2 billion yuan.

What supports growth, and what is the full-year profit threshold?

  • Management expects both orders and revenue in the industrial automation business to maintain year-over-year growth of about 20% in the fourth quarter of 2026 and in 2027. Demand is supported by smartphones and general 3C, semiconductors and machine tools, as well as domestic substitution of high-end control systems and exports by Chinese equipment manufacturers.
  • The company maintains its guidance for both revenue and net profit to grow 10%–30% year over year in 2026. Management believes the lower end of the full-year profit growth range, 10%, can be achieved if fourth-quarter profit exceeds approximately 1 billion yuan; Goldman Sachs forecasts fourth-quarter profit of 1.2 billion yuan.

How do embodied intelligence and Goldman Sachs’ valuation connect?

  • The company is developing humanoid robot components, automation hardware with sensing and data collection capabilities, and agents combining industry process models, vision and motion control. AI welding robots have been trialled at 5 to 6 customers, but near-term revenue remains limited.
  • Two major customers for humanoid robot components have begun receiving volume deliveries. Management expects orders and revenue in 2026 to be in the tens of millions of yuan, with a target in the hundreds of millions of yuan for 2027.
  • Goldman Sachs expects the company’s revenue and net profit to grow 15% and 21% year over year, respectively, in 2027. It maintains its Buy rating and 12-month price target of 75.9 yuan, based on a 2027 forward price-to-earnings multiple of 30 times.