Where did third-quarter growth come from?

  • Sangfor Technologies reported third-quarter 2026 revenue of 2.78 billion yuan, up 31% year on year and 17% quarter on quarter; profit was 345 million yuan, up 134% year on year and 17% quarter on quarter.
  • Operating cash flow for the same period was 1.19 billion yuan, up 377.7% year on year, with cash flow performance improving markedly as revenue grew.

What is driving growth in the cloud and security businesses?

  • Nomura believes enterprise use of large language models and AI agents is driving demand for AI cloud services, supporting the company’s cloud computing and IT infrastructure business.
  • The cybersecurity business is gradually recovering. Nomura believes enterprises are placing greater emphasis on cybersecurity in the AI era, and that solutions such as Security GPT and AI computing power gateways are helping drive demand.

Why did revenue growth not improve gross margin?

  • Third-quarter gross margin was 58.9%, down 0.4 percentage points year on year and 2.4 percentage points quarter on quarter. Nomura believes rising costs for components such as memory may be one reason.
  • The bank expects rising component prices and continued competition in China’s cybersecurity market to potentially keep gross margin under pressure in the near term.

How does Nomura view the valuation?

  • Nomura maintains its neutral rating and 120 yuan price target. The target is based on a discounted cash flow model and corresponds to 72 times its forecast earnings per share of 1.67 yuan for fiscal 2027; the closing price on 28 October 2026 was 143 yuan.
  • The bank estimates that the share price at the time corresponded to 86 times forecast earnings for fiscal 2027; the valuation implied by its target price was also equivalent to a PEG ratio of 2, based on an expected compound annual profit growth rate of 36% for fiscal 2026–2028.