Why did profit grow more slowly than revenue in the third quarter?

  • In the third quarter of 2026, revenue was 2.559 billion yuan and net profit was 333 million yuan, up 14% and 4% year on year, respectively. The results were in line with and 3% below Goldman Sachs’ earlier estimates, respectively.
  • Gross margin was 27%, unchanged year on year; net margin was 13%, down 1 percentage point year on year. Quarterly R&D expenses rose 17% year on year, faster than revenue, and an exchange loss of approximately 8 million yuan also affected net profit.
  • Operating cash flow was equivalent to 94% of net profit. Goldman Sachs considers cash flow to be healthy.

Why might NEV gears outperform the industry?

  • Third-quarter NEV business revenue was approximately 1.3 billion yuan, up 25% year on year, supported by overseas projects and coaxial products. Goldman Sachs forecasts 16% revenue growth for the business in 2027, above the 9% growth in NEV production forecast by its China autos team.
  • Goldman Sachs divides the 7 percentage-point outperformance over industry growth into two components: overseas sales growth and production ramp-up contribute 4 percentage points, while higher product value per vehicle and greater penetration of coaxial transmissions contribute 3 percentage points.
  • The company is developing gears and differentials for a North American NEV customer. It plans to deliver samples in the first quarter of 2027, begin supplying from China in the second to third quarters, and gradually shift to overseas production thereafter. Differential subassemblies supplied to a European customer are worth approximately 400 yuan per vehicle.
  • Monthly shipments of coaxial products have exceeded 80 thousand sets. The company expects them to reach 100 thousand sets by year-end and grow quarter by quarter in 2027. Meanwhile, third-quarter revenue from the conventional fuel vehicle business was approximately 390 million yuan, down 14% year on year; the company expects a further decline of more than 10% in the fourth quarter.

How much incremental growth can robot gears contribute?

  • In the first three quarters of 2026, revenue from industrial robot reducers rose more than 20% year on year. AI robotics revenue was approximately 70 million yuan, and the company expects it to reach approximately 150 million yuan for the full year.
  • The company expects AI robotics revenue to reach 400 million to 500 million yuan in 2027, including 100 million to 200 million yuan from overseas customers. Goldman Sachs expects the business to account for approximately 4% of the company’s total revenue.
  • The company plans to cover integrated control modules, reducers and other gear components. Its reducer portfolio includes harmonic, planetary and single-stage cycloidal products, as well as miniature joints.

How did Goldman Sachs adjust its earnings forecasts and valuation?

  • Taking into account third-quarter results and the higher revenue potential of the AI robotics business, Goldman Sachs adjusted its earnings-per-share forecasts for 2026–2030 by between -5% and +3%.
  • Goldman Sachs maintained its Buy rating and raised its 12-month target price from 45.5 yuan to 45.7 yuan, retaining a valuation of 25 times forecast 2027 earnings.
  • The bank forecasts compound annual growth rates of 15% and 16% for the company’s revenue and net profit, respectively, over 2026–2030. The forecast incorporates its view that improvements in internal operating efficiency will be sufficient to offset lower margins at the Hungarian plant and a potential Vietnamese plant.