Why did profit growth mask operating pressure?

  • In the third quarter of 2026, Inovance Technology’s revenue rose 19% year on year and reported profit rose 24%; however, JPMorgan calculates that recurring profit fell approximately 12% year on year.
  • Part of the difference came from a non-cash, one-off fair-value remeasurement gain on an equity investment. At the same time, group gross margin fell to 25.5%, down 2.1 percentage points year on year, weakening the profitability of its core business.
  • JPMorgan expects the market to lower its core earnings forecasts, excluding the one-off investment gain, after core profit fell short of expectations.

Why did revenue growth dilute gross margin?

  • The third-quarter revenue beat was driven mainly by the new energy vehicle business: its revenue rose 15% year on year, up from 4% in the first half of 2026; the core industrial automation business was not the main source of this growth.
  • The business mix shifted accordingly: industrial automation’s share of sales fell from 55% in the first half to 48% in the third quarter, while the new energy vehicle share rose from 38% to 46%. JPMorgan believes the latter has a lower margin and its increased share weighed on group gross margin; price increases in industrial automation were also insufficient to offset the impact.
  • The new energy vehicle business’s gross margin had already fallen by approximately 4 percentage points year on year in the first half. JPMorgan believes it may have deteriorated further in the third quarter, as rising costs and intensifying competition limited the company’s ability to pass price increases on to customers.

What signals did cash flow and orders send?

  • Operating cash flow recorded a net outflow of 1.08 billion yuan in the third quarter, compared with a net inflow of 911 million yuan in the same period of 2025. This was the company’s first third-quarter net operating cash outflow since 2015, with pressure on profitability and cash generation becoming apparent at the same time.
  • Third-quarter orders rose approximately 20% year on year, a marked slowdown from the 30%–40% growth rate in the first half. The company stopped disclosing monthly orders starting in August, and JPMorgan is concerned that slowing industrial automation orders could affect fourth-quarter revenue momentum.

Can new businesses take up the growth baton?

  • New businesses, including digital energy and intelligent robotics, recorded third-quarter revenue growth of 26% year on year and growth of 56% in the first nine months of 2026. The company’s mass-production seven-axis biomimetic robotic arm has completed validation tests with key customers.
  • However, the new businesses remain small relative to the group, and their profit contribution is not yet sufficient to offset the gross margin and cash flow pressures facing industrial automation and new energy vehicles. The new energy vehicle business also faces risks from weak domestic demand, rising overseas protectionism and automakers producing powertrain systems in-house.

How does JPMorgan view the share price?

  • JPMorgan maintains its neutral rating and its December 2027 price target of 51 yuan. The bank recognizes the company’s execution capabilities and long-term positioning, but believes near-term pressure on the industrial automation and new energy vehicle businesses leaves current risks and rewards broadly balanced.
  • The bank is watching whether stronger industrial automation growth, overseas expansion and scaling of new businesses such as humanoid robots can improve the outlook. Conversely, more intense price competition and weaker-than-expected industrial automation growth pose downside risks.