Goldman Sachs: Songfa shares: third-quarter gross margin hits a record as expansion constrains revenue recognition

Why did profit broadly meet expectations despite the revenue shortfall?

In the third quarter of 2026, Songfa reported net profit of 3.1 billion yuan, up 22% quarter on quarter and broadly in line with Goldman Sachs’ forecast: revenue below the bank’s expectations was offset by margins that exceeded them.
Goldman Sachs estimates that the company prioritized processing steel for three new docks in the fourth phase of construction rather than for ship hulls, resulting in approximately 2 billion yuan in lost revenue; slower revenue recognition for container ships also affected revenue during the quarter. Dock construction spending is recorded as fixed assets, while hull construction is recognized as revenue.
Goldman Sachs believes revenue recognition could accelerate in subsequent quarters once the expanded capacity is operational, so it is focusing more on margins at this stage.

Third-quarter gross margin reached a record 28.4%, up 3.4 percentage points quarter on quarter and above Goldman Sachs’ previous forecast of 26.5%. The bank attributed the improvement to a greater share of higher-value vessel types, efficiency gains from accumulated production experience, and economies of scale.
The quarter’s net margin was 21.5%, up 4.3 percentage points quarter on quarter and above the bank’s forecast of 17.9%. Financing costs fell by 71 million yuan quarter on quarter, and government grants of approximately 400 million yuan also helped; meanwhile, yuan appreciation resulted in a foreign exchange loss of 192 million yuan.
Goldman Sachs expects greater contributions from container ships, very large crude carriers and gas carriers, together with factors including an increased supply of in-house marine engines, to lift gross and net margins to 30% and 23%, respectively, in 2028.

According to Clarksons data, Hengli Heavy Industry received orders for 82 vessels in the third quarter, totaling approximately 3.7 million compensated gross tons, including 57 container ships. Goldman Sachs believes the new orders show that the capacity expansion is translating into order growth and will also help increase the share of higher-value vessel types.
As of 28 October, the company’s orderbook stood at 16.4 million compensated gross tons. Goldman Sachs expects expansion of the phase-three slipways and phase-four docks to increase the orderbook to 26.5 million compensated gross tons by the end of 2027, up 62% from that date; this outlook depends on new capacity coming online and continued order intake.
Net cash inflow from operating activities in the third quarter was 9 billion yuan, above approximately 4 billion yuan and 4.5 billion yuan in the first and second quarters, respectively. It came mainly from payments received as construction progressed and advance payments on new orders. However, capital expenditure reached 14 billion yuan during the quarter, exceeding operating cash inflow and reflecting the substantial funding required for expansion.

Based on a better margin outlook, Goldman Sachs raised its 2028 net profit forecast by 3% to 32 billion yuan; it cut its 2026 forecast by 1% to 10 billion yuan, while its 2027 forecast remained broadly unchanged at approximately 23 billion yuan.
Goldman Sachs maintained its buy rating and raised its 12-month price target from 300 yuan to 310 yuan, equivalent to 10 times forecast 2028 earnings. The bank noted that, based on the share price used in its report, the company traded at 5.4 times forecast 2028 earnings, below the A-share peer average of 9 times.
The valuation assessment depends on the capacity expansion and earnings improvements materializing. Key constraints listed by Goldman Sachs include delays in vessel deliveries or new capacity coming online, higher-than-expected steel prices and stronger-than-expected yuan appreciation.