Citi: Shuanghuan Driveline: Third-quarter results miss expectations as overseas NEV gears and embodied AI open growth opportunities

Why did Citi raise its target price after an earnings miss?

Shuanghuan Driveline’s third-quarter 2026 results fell short of Citi’s expectations. Following a weak performance in the first nine months, Citi cut its 2026 and 2027 net profit forecasts by 9% and 4%, respectively, to 1.334 billion yuan and 1.659 billion yuan.
Citi maintained its Buy rating and raised its target price from 45 yuan to 49 yuan. It kept the valuation multiple at 26 times earnings but shifted the earnings base from 2026 to 2027. The bank expects overseas new energy vehicle gear projects and the embodied AI components business to drive 2027 net profit growth of 24.3% year on year.
Costs also constrain the earnings improvement: Citi expects a gross margin of 27.0% in 2026, below 2025’s 27.3%; rising depreciation expenses could further compress the gross margin.

In the third quarter of 2026, revenue from new energy vehicle gears rose 26% year on year and accounted for 51%–52% of total sales. Growth came mainly from strong orders from Stellantis and the European factory of a leading US new energy vehicle manufacturer.
The company already supplies differentials to the US automaker’s German factory and has provided samples for testing at its US factory. Management believes the company’s cost advantage can support sustained growth in its new energy vehicle business in Europe and the US.
Orders for coaxial gears used in high-end new energy vehicles are strong. The company plans to expand monthly capacity from the current 80 thousand units to 100 thousand units by the end of 2026. Meanwhile, third-quarter revenue from internal-combustion vehicle gears fell 14%–15% year on year, while commercial vehicle gear revenue fell 7%.

Management said embodied AI component revenue was approximately 70 million yuan in the first nine months of 2026 and is expected to reach 150 million yuan for the full year. Most customers are based in China.
Based on order visibility, Citi expects the business’s revenue to rise to 500 million yuan in 2027, with approximately 40% coming from overseas customers. Under the bank’s model, the business’s share of total company revenue will rise from 1.5% in 2026 to 4.1% in 2027.
The company plans to work with its subsidiary Huandong Technology to pursue opportunities in components such as reducers and gears. Citi believes the business’s growing share and a more proactive strategy will strengthen the company’s investment case as a core component supplier for embodied AI.

Citi expects net profit to grow 5.7% year on year in 2026, with growth rebounding to 24.3% in 2027. Under its new forecasts, net profit is 4% below market consensus for 2026 and approximately 1% above it for 2027.
Citi identifies new energy vehicle gear shipments, progress in domestic production of RV reducers and depreciation expenses as key downside variables. Earnings improvement would come under pressure if shipments or domestic production progress were slower than expected or rising depreciation compressed gross margins.