What drove the third-quarter beat?

  • Nexchip’s third-quarter revenue was RMB 3.354 billion, up 14% year on year and 10% quarter on quarter, and 1% above Goldman Sachs’ previous estimate; operating profit was RMB 408 million, 75% above the bank’s estimate.
  • The earnings beat came mainly from gross profit and expenses: gross margin was 26.4%, 2.5 percentage points above Goldman Sachs’ estimate; the operating expense ratio was 14.2%, below the bank’s estimate of 16.8%.
  • Goldman Sachs attributed the gross margin performance to disciplined capacity expansion, higher capacity utilization and an upgraded product mix.

Why did operating profit growth not translate into an equivalent increase in net profit?

  • In the third quarter, the company recorded a fair value loss of RMB 64 million and a foreign exchange loss of RMB 79 million. Pretax profit was 3% below Goldman Sachs’ estimate, offsetting part of the operating beat.
  • Net profit was RMB 229 million, up 5% year on year and 18% quarter on quarter, and 10% above Goldman Sachs’ estimate; by comparison, operating profit rose 66% year on year.

What changes does fourth-quarter guidance reveal?

  • The company guided for fourth-quarter revenue of RMB 3.2 billion to 3.4 billion, with a midpoint of RMB 3.3 billion, down 2% quarter on quarter and up 20% year on year. Goldman Sachs considers this quarter-on-quarter change broadly consistent with seasonality; revenue fell 6% quarter on quarter in the fourth quarter of 2025.
  • Fourth-quarter gross margin guidance is 20% to 24%, below the third quarter’s 26.4%. The company continues to expand capacity steadily and shift its product mix toward more advanced processes and AI-related applications such as power semiconductors.
  • On the other hand, the company’s exposure to consumer electronics, including display driver chips and image sensors, could weigh on growth when memory costs are high.

Why did Goldman Sachs cut its earnings forecasts and target price?

  • After incorporating third-quarter results and fourth-quarter guidance, Goldman Sachs cut its revenue forecasts for 2026 through 2028 by 6%, 8% and 6%, respectively, mainly because of a lower fourth-quarter revenue assumption and a more gradual ramp-up of shipments from new capacity.
  • The bank also lowered its gross margin forecasts for the three years, reflecting fourth-quarter guidance and higher depreciation during the new capacity ramp-up; lower operating expense ratio forecasts provided a partial offset. Taken together, its net profit forecasts for 2026 through 2028 were cut by 15%, 1% and 8%, respectively.
  • Goldman Sachs lowered its 12-month target price from RMB 51.4 to RMB 44 and maintained its Neutral rating, citing greater upside potential at other companies within its coverage. The target price continues to use a discounted 2030 forecast price-to-earnings methodology, with the target multiple reduced from 24.9 times to 24.5 times.