Revenue rose 12%—why did net profit fall 82%?

  • Oriental Yuhong’s revenue rose 12% year on year in the third quarter of 2026, exceeding Goldman Sachs’ expectations. Net profit, however, fell 82% year on year to 44 million yuan, mainly weighed down by impairment losses of 410 million yuan and higher-than-expected finance costs. Impairments rose 70% from a year earlier and were close to the second-quarter level.
  • Operational factors also contributed to the profit shortfall: excluding impairments, net profit still fell 14% year on year and was 13% below Goldman Sachs’ forecast. Impairments therefore explained most of the sharp profit decline, but deteriorating gross margin also reduced earnings.
  • Cash flow was relatively resilient: third-quarter operating cash flow was approximately 800 million yuan, equivalent to 1.8 times net profit before impairments, up from 1.5 times a year earlier.

With industry demand weak, where is revenue growth coming from?

  • Management estimates that industry demand fell by a double-digit percentage year on year, while the company’s growth was supported by channel and geographic expansion. Third-quarter sales through retail channels grew more than 20%; domestic retail growth was in the teens, mainly from lower-tier markets. Mortar revenue also grew in the teens.
  • Overseas revenue rose more than 180% year on year in the third quarter. Excluding acquisitions, overseas direct sales still grew more than 50%, indicating that growth included both acquisitions and expansion of the company’s own business. The company targets full-year overseas revenue of 4.5 billion yuan, compared with 1.6 billion yuan in 2025; growth in the first three quarters was in line with the full-year target.
  • Overseas expansion also requires upfront investment. Local supply chains and channels are still being built, and overseas selling and administrative expenses account for approximately 30% of revenue. Management expects the overall expense burden to persist for some time, even if domestic efficiency improves.

Why have two rounds of price increases yet to support gross margin?

  • Bitumen prices rose cumulatively by nearly 45% from the end of June to early October, reaching an all-time high, while product price increases did not occur at the same pace. Third-quarter gross margin fell to 22.8%, down approximately 2 percentage points year on year and approximately 5 percentage points quarter on quarter. It was approximately 1 percentage point below Goldman Sachs’ forecast and the second-lowest level on record.
  • The company announced two rounds of price increases in mid-September and on 17 October, but there was a gap between the announcements and actual price changes. The announced cumulative increase was in the teens, while the 20 sample products tracked by Goldman Sachs rose by only about 5% on average from the end of August to 23 October, far from enough to offset higher costs.
  • Management believes that even if major companies coordinate and execute price increases smoothly, they may only be able to pass part of the costs on to customers, particularly in the engineering channel. On that basis, Goldman Sachs expects raw material costs to weigh on results through at least the first half of 2027; any subsequent gross-margin recovery depends on the size and execution of price increases.

Why does Goldman Sachs maintain its Buy rating after cutting forecasts?

  • Goldman Sachs cut its 2026 net profit forecast by 62%, raised its full-year impairment assumption from 1.1 billion yuan to 1.5 billion yuan, and lowered its fourth-quarter gross-margin forecast by 2 percentage points to 22%. Management estimates that provisions currently cover approximately 30% of the 2.3 billion yuan in properties received as debt settlement, leaving risk exposure of 400 million to 500 million yuan.
  • The pressure extends into subsequent years: Goldman Sachs cut its 2027–2028 net profit forecasts by an average of 22%, mainly because of lower gross-margin forecasts. Its earnings-per-share forecasts for the two years are 24% and 9% below market consensus, respectively.
  • The Buy rating rests on structural growth from retail penetration in lower-tier markets, cross-selling of products and overseas expansion. Goldman Sachs forecasts net profit excluding impairments of approximately 2 billion yuan in 2026, up 21% year on year, followed by compound growth of approximately 25% through 2028. It nevertheless cut its 12-month price target from 15.4 yuan to 13.7 yuan.