Citi: Huali Industrial’s gross margin rebounds as Citi upgrades stock: Can the profit recovery last?

Shipments are still falling. Why did gross margin rebound?

In the third quarter of 2026, the company’s gross margin rose to 22.6%, up 5 percentage points from the previous quarter, while shipments still fell about 3% year over year. Citi therefore believes the improvement came mainly from costs and efficiency, rather than higher capacity utilization driven by shipment growth.
Management said more than a dozen mature factories accounted for most of the improvement, while the new factories remained small in scale. Efficiency and task-completion bonuses reduced idle time caused by intermittent orders in the first half, and the time needed to change styles on production lines fell from half a day to one or two hours.
The bonuses and accruals for annual bonuses also pushed up third-quarter administrative expenses; management said the related bonuses were temporary.

Inventory at the end of September was 3.664 billion yuan, up 579 million yuan from the end of June and representing the company’s largest third-quarter inventory increase since its listing. Inventory rose 16% year over year, while revenue fell 8% over the same period.
The company produces to brand orders, and Citi observed that inventory growth has historically led revenue growth in the following quarter. Management said most fourth-quarter orders had been secured, and Citi forecasts revenue of 6.4 billion yuan for the quarter, up 2% year over year.
The inventory increase also affects the quarter-on-quarter gross margin comparison: some fixed costs in the third quarter were included in inventory and will move into cost of sales when goods ship in the fourth quarter. Citi therefore forecasts a fourth-quarter gross margin of 21.5%, below the third quarter’s 22.6%.

Citi believes the factors that weighed on gross margin in the first half are easing: production scheduling is returning to normal, and fewer customers are sharing tariff costs. Management expects the Adidas and ASICS factories that began production in 2024–2025 to reach profitability by the end of 2026.
Only three factories in Indonesia are expected to start up in 2027, fewer than the eight that ramped up in 2024–2025, and management will prioritize allocating orders to mature factories. Higher-end Nike footwear, more supercritical foam midsoles and the pass-through of some costs are also expected to raise average selling prices.
On orders, management said Adidas business grew more than 50% in the first nine months, Nike orders stopped declining in the second half, and all five of the largest brands placed additional orders in the second half. However, Nike’s own guidance calls for a decline in fiscal 2027, and changes in customer orders will continue to affect the pace of recovery.
Cost pressures remain: petrochemical raw material prices have been hedged through the fourth quarter of 2026, but Vietnam’s minimum wage rises by several percentage points each year, and the company can pass on only part of the increase.

Citi upgraded Huali Industrial from neutral to buy and raised its target price from 35.06 yuan to 51.96 yuan. The bank raised its 2027 forecast for net profit attributable to the parent by 15%, relying mainly on an improvement in gross margin rather than a higher revenue growth assumption.
Citi forecasts a gross margin of 22.5% for 2027, 0.5 percentage points above its forecast level for the second half of 2026 and above the pre-results VA market consensus of 20.7%. This gap accounts for the vast majority of the 11% by which its 2027 net profit forecast exceeds consensus.
By Citi’s estimate, each 1 percentage-point change in the 2027 gross margin changes net profit by about 6%. The bank used a rolling forward price-to-earnings multiple of 19.5 to set its target price, still below the 22.7 average since listing, because it expects the 2027 EBIT margin to remain below its 2021–2024 levels and three new factories to start up that year.