Why did third-quarter results exceed expectations?

  • Three-Circle Group reported third-quarter 2026 revenue of 5.079 billion yuan, up 115.3% year on year and 35.7% quarter on quarter; net profit was 1.933 billion yuan, up 168.0% year on year and 69.4% quarter on quarter. Both revenue and net profit exceeded Nomura Orient International’s previous forecasts.
  • The firm attributed the outperformance mainly to favorable industry conditions and stronger demand: shipments and average selling prices for some core products, including MLCCs, rose more than expected. The third-quarter gross margin climbed to 53.7%, up 10.3 percentage points year on year and 8.8 percentage points quarter on quarter.
  • Higher revenue also diluted expenses. Third-quarter selling and administrative expense ratios fell by 0.5 and 1.6 percentage points year on year, respectively; the improved gross margin and lower expense ratios combined to make net profit grow substantially faster than revenue.

What drove the earnings forecast upgrades?

  • Nomura Orient International raised its 2026–2028 revenue forecasts by 17%, 24% and 24%, respectively, to 16.05 billion, 22.491 billion and 27.715 billion yuan; it raised net profit forecasts for each of the three years by 27%, to 5.45 billion, 8.236 billion and 9.5 billion yuan.
  • Electronic components were the main source of the revenue forecast upgrades: the firm raised its forecasts for the segment’s 2026 and 2027 revenue by 26% and 36%, respectively, to 10.535 billion and 15.411 billion yuan. Meanwhile, it raised its 2026 gross margin assumption for electronic components from 48% to 51%.
  • The firm also expects revenue growth to dilute expenses more substantially, and lowered its overall operating expense ratio assumptions for 2026–2028 by 2.5, 2.4 and 2.1 percentage points, respectively. However, the model’s overall gross margin falls from 52.3% in 2027 to 49.0% in 2028.

Why does profit growth come with cash flow pressure?

  • Nomura Orient International expects the company’s operating cash flow to be negative 1.756 billion yuan and free cash flow to be negative 2.386 billion yuan in 2026, compared with positive 2.878 billion yuan and positive 2.301 billion yuan, respectively, in 2025.
  • The model forecasts that changes in working capital will absorb 8.143 billion yuan in 2026; year-end accounts receivable and inventories are expected to rise from 2.914 billion yuan and 2.392 billion yuan in 2025 to 7.934 billion yuan and 6.234 billion yuan, respectively. The firm expects operating cash flow to recover to positive 6.076 billion yuan in 2027.

Why was the target price cut despite higher earnings forecasts?

  • Nomura Orient International maintained its “Buy” rating but cut its target price from 140 yuan to 124 yuan. After shifting its valuation base from 2026 to 2027, the firm lowered its target price-to-earnings multiple from 65 times to 30 times; applied to its 2027 earnings per share forecast of 4.12 yuan, this gives a target price of 124 yuan.
  • The 30 times multiple remains above the comparable companies’ average 2027 forecast price-to-earnings multiple of about 23 times, because the firm expects Three-Circle Group’s compound earnings growth over 2026–2028 to exceed its peers’. The target price implies upside of approximately 79.9% from the 3 November 2026 closing price of 68.92 yuan cited in the report.
  • The main variables facing this assessment include downstream demand, capacity expansion, the extent of product price increases and raw material price fluctuations.