Why has industrial automation growth slowed from its peak?

  • Inovance Technology’s industrial automation revenue grew 26% year on year in the third quarter of 2026, excluding the elevator business, below the 33% recorded for the first nine months and the 30%–40% growth at the start of the year. Management said industrial automation order growth had slowed markedly since August.
  • Weaker lithium battery orders and delays to process automation projects weighed on demand. Management believes the industry upcycle has cooled from its second-quarter peak, while domestic and overseas competitors are increasing investment in key areas.
  • Management expects the industrial automation business to maintain year-on-year growth of around 20% in the fourth quarter of 2026 and the following year, but changes in product mix and higher input costs will continue to pressure gross margin.

Why has revenue growth not translated into a higher gross margin?

  • The industrial automation business’s gross margin fell by around 1 percentage point year on year in the third quarter, after remaining broadly flat in the first half. Costs for chips, PCBs and rare earths rose faster than the company’s price increases, with products such as programmable logic controllers (PLCs) more noticeably affected.
  • Lower-margin products such as linear guides and high-efficiency motors grew faster than the overall industrial automation product portfolio, further lowering the business’s gross margin. Price increases provided some relief but were insufficient to offset higher costs.
  • Third-quarter revenue from the new energy vehicle business rose 15% year on year, while its gross margin fell by around 3–4 percentage points. Management remains cautious about domestic demand, overseas protectionism and automakers’ in-house production of powertrains, and has chosen to forgo some low-margin orders.

What happened to cash flow behind the profit growth?

  • Management noted that although revenue and profit growth accelerated in the third quarter, earnings quality was affected by gross margin contraction, operating cash outflows and greater reliance on non-cash investment gains.
  • Net operating cash outflow was 1 billion yuan in the third quarter, the first third-quarter net outflow since 2015. Management said the main reasons were increases in inventories and receivables, especially slower collections in the new energy vehicle business. Asset and credit impairments remained at a relatively high level during the quarter, affected by inventory write-downs.
  • JPMorgan is watching whether the company can strengthen working capital management and improve payment terms and customer quality in its new energy vehicle business.

When can robotics and industrial AI contribute to growth?

  • New businesses, including digital energy and intelligent robotics, continued to grow in the third quarter, but slowed markedly from the first half. Industrial robot demand retreated from its second-quarter peak, and the scale of the new businesses remains insufficient to offset gross margin and cash flow pressures in the core business.
  • The company has begun mass production of seven-axis biomimetic robotic arms and delivered small batches of humanoid robot components to leading customers. Management expects significant revenue and profit contributions from industrial AI and humanoid robots only in 2028–2029 and beyond.

How does JPMorgan view the current valuation?

  • JPMorgan recognises Inovance Technology’s execution, product innovation and market share gains, but sees near-term risk-reward as balanced given pressures on gross margin, cash flow and demand, and maintains a Neutral rating.
  • The bank assigns a December 2027 price target of 51 yuan, using a discounted cash flow method with a perpetual growth rate of 0% and a weighted average cost of capital of 8.8%. The share price listed in the report for 26 October 2026 was 55.25 yuan.