Citi: Longsys’s third-quarter gross margin declines, while enterprise business growth could cushion the pressure

What changed in third-quarter growth and margins?

Longsys posted third-quarter revenue of 14.63 billion yuan, up 124% year over year and 3% quarter over quarter, broadly in line with its earnings guidance.
Gross margin was 44.7%, down 16.5 percentage points from the second quarter but above Citi’s previous forecast of approximately 38%. Slowing memory price increases were the main reason for the sequential contraction in gross margin.
The company recorded a fair-value change loss of 493 million yuan, and third-quarter net profit was 3.745 billion yuan, broadly in line with its earnings guidance.

Management expects tight memory supply to persist through 2027, driven by AI and enterprise demand; however, higher prices have already dampened demand from low-end consumer customers.
Citi believes the company’s gross margin will gradually return to normal as memory price increases slow. Its model forecasts gross margins of 49.5%, 35.1% and 28.0% for 2026 through 2028, respectively.
Operating cash flow turned positive in the third quarter at 877 million yuan, compared with an outflow of 3.2 billion yuan in the first half; an advance payment from a US smartwatch customer helped drive the improvement.

The company plans to protect profitability through differentiated and enterprise products and improved manufacturing efficiency. Enterprise revenue approached 5 billion yuan in the first nine months of 2026, accounting for 10%–15% of total revenue; despite its smaller scale, its gross margin was already close to the company average.
Third-quarter mSSD shipments exceeded 1.2 million units, compared with 200 thousand units in the second quarter. The report says it takes up about one-third of the space of a conventional SSD, costs 10% less to produce and has been adopted by major PC manufacturers.
Longsys is developing custom solutions for Chinese cloud service providers. Citi believes a higher contribution from the enterprise business and technological differentiation could help cushion gross-margin contraction and enable the company to outperform the market.

Citi slightly lowered its forecasts because of a weaker revenue outlook: it cut its 2027 revenue forecast from 61.519 billion yuan to 60.064 billion yuan; it also forecasts 2027 net profit of 14.885 billion yuan, down 13% from its 2026 forecast of 17.112 billion yuan.
Citi maintained its Buy and High Risk ratings and, using a lower valuation multiple, cut its A-share price target from 325 yuan to 290 yuan and its H-share price target from 195 Hong Kong dollars to 185 Hong Kong dollars.