Why did growth rates differ in the third quarter?
- Revenue in the third quarter of 2026 was 27.77 billion yuan, up 24.6% quarter on quarter, but 11.0% and 3.1% below BofA’s forecast and market consensus, respectively; net profit was 8.59 billion yuan, up 8.5% quarter on quarter and 17.6% and 12.2% below the two estimates, respectively.
- An improved product mix lifted gross margin to 46.6% from the previous quarter, and operating profit rose 25.9% quarter on quarter; however, net margin fell from 35.5% in the second quarter to 30.9%, with net profit growing substantially less than revenue.
- BofA said adjusted profit was approximately 9 billion yuan, broadly in line with buy-side expectations; adding back approximately 300 million yuan in foreign exchange losses related to the Hong Kong IPO that were not included in non-recurring adjustments would bring it to approximately 9.3 billion yuan.
How long will the flooding and component shortages affect shipments?
- Management said flooding in Thailand affected shipments in the final week of September and was also partly responsible for the increase in third-quarter inventory; the impact on logistics was fully resolved in the first week of October.
- Component supply remains a constraint. Because of shortages, BofA cut its forecast for global 1.6T optical module shipments in 2026 from 20 million units to 17 million units. The company expects supply tightness to ease gradually from the second half of 2026 as upstream capacity expands; customers will also help procure digital signal processing chips (DSPs).
How will orders and new products support subsequent growth?
- Management said most major customers have extended orders through the whole of 2027, and some have also placed orders for 2028. The company expects shipments of both 800G and 1.6T products to achieve solid growth in 2027.
- Products based on new technologies, including 2.4T, NPO and XPO, are expected to begin shipping in the second half of 2027 and make a more visible contribution in 2028. Meanwhile, BofA expects competition in 800G to intensify in 2027; changes in high-end product prices and competition will also affect margins.
- BofA forecasts fourth-quarter 2026 revenue of 42.02 billion yuan, up approximately 51% from the third quarter; its net profit forecast for 2027 is 86.76 billion yuan, approximately 34.5% above Bloomberg consensus.
Why did BofA cut its target price while maintaining its buy rating?
- BofA lowered its net profit forecasts for 2026 and 2027 by 8.4% and 3.0%, respectively; accounting for the increased share count following the Hong Kong IPO, it cut its earnings-per-share forecasts for 2026–2028 by approximately 5%–13% from its previous estimates.
- The bank lowered its target price from 1650 yuan to 1325 yuan and the corresponding 2027 forecast price-to-earnings multiple from 20 times to 18 times, reflecting market concerns about the AI supply chain and potential restrictions by the US Federal Communications Commission. BofA maintained its buy rating and remains positive on long-term earnings growth.