Sieyuan Electric: Revenue rose by thirty percent in the third quarter. Why did profit grow by only 4.5%?

Revenue grew by thirty percent. Why did profit not keep pace?

Sieyuan Electric recorded revenue of 7 billion yuan in the third quarter of 2026, up 30.7% year on year; net profit was 939 million yuan, up just 4.5%. The same gap was evident in the first three quarters: revenue was 17.8 billion yuan, up 28.5%, while net profit was 2.403 billion yuan, up 9.7%.
Morgan Stanley attributed the third-quarter results, which were slightly below market consensus, to foreign exchange effects and an unfavorable revenue mix. By its calculation, excluding one-off items such as foreign exchange losses and changes in fair value, quarterly net profit grew 13.7% year on year, above the reported growth rate but still below revenue growth.
The third-quarter gross margin was 30.9%, below 31.6% in the second quarter and 33.3% a year earlier. Over the same period, selling, administrative and R&D expenses fell to 11.9% of revenue, down 2.2 percentage points year on year, providing a partial cushion; profit growth still lagged revenue growth significantly.

The gross margin for the first three quarters fell 1.3 percentage points year on year to 30.6%, mainly because the combined revenue share of lower-margin energy storage and EPC engineering businesses rose by 6–7 percentage points. The faster-growing businesses generated less gross profit per yuan of revenue, so expansion in scale did not translate proportionately into profit.
Energy storage accounted for approximately 15%–16% of revenue in the first three quarters, with faster project deliveries driving growth in the third quarter. A higher share of overseas projects and an improved product mix lifted the energy storage gross margin noticeably quarter on quarter, but it remained below the group average and continued to dilute the overall gross margin.
Traditional equipment also faces constraints: high-voltage switchgear has a higher gross margin, but revenue recognition is slower; margins on domestic medium-voltage switchgear are under pressure. Higher copper prices also caused the gross margin on high-voltage transformers to decline slightly from the first half.

Order growth has exceeded the company’s initial target of 30% year on year. Overseas orders grew by more than 50% year on year in both the third quarter and the first three quarters, while domestic orders grew 15%–20%; overseas markets were the stronger source of growth.
Overseas revenue accounted for approximately 30% of revenue in the first three quarters, up from 26.4% for the full year of 2025; overseas orders accounted for more than 40% of total orders. The higher overseas share of orders than revenue supports subsequent expansion in overseas revenue.
The overseas gross margin is slightly higher than the domestic margin, but renminbi appreciation and rising transportation costs are narrowing that advantage. Overseas switchgear orders from North American data centers have gross margins comparable to those of the switchgear business overall; their value is reflected first in order growth rather than higher margins.

Morgan Stanley believes the results have left its original investment thesis unchanged and maintains its Overweight rating. Order growth exceeding the initial target and overseas orders growing faster than domestic orders are important support amid near-term profit pressure.
Capacity expansion provides room for future growth, but the timing is clear: the third phase of transformer expansion is expected to add annual capacity of more than 3 billion yuan and is scheduled to begin trial production in 7–August of 2027; it cannot be counted as current delivery capacity.
The key variables listed by the bank include new overseas orders, domestic orders and the share of State Grid tenders won. Better-than-expected overseas orders and high-end product tender wins would support an upward revision to its assessment, while weaker-than-expected growth in orders or share would create downside pressure.