Goldman Sachs: FII’s cabinet business drives growth as Goldman Sachs raises revenue forecast but cuts price target

How strong was third-quarter growth, and how did profits perform?

Third-quarter revenue in 2026 was 383.554 billion yuan, up 25% quarter on quarter and above Goldman Sachs’ previous forecast of 23%; revenue was 2% above Goldman Sachs’ estimate and 6% above the Bloomberg consensus.
Gross margin was 7%, unchanged from the second quarter. Operating profit rose 23% quarter on quarter to 20.862 billion yuan, 1% below Goldman Sachs’ estimate and 3% above the Bloomberg consensus, broadly in line with expectations. Net profit was 16.634 billion yuan, up 60% year on year and 3% below Goldman Sachs’ estimate.

Goldman Sachs expects fourth-quarter gross profit to rise 25% quarter on quarter, the same growth rate as in the third quarter. Drivers include rising volumes of higher-priced new AI server cabinets and co-packaged optics (CPO) switches, as well as the peak season for precision metal components for new smartphones.
The bank expects capital spending by major US cloud service providers to grow year on year by 84%, 52% and 13%, respectively, from 2026 through 2028. Goldman Sachs believes FII can use upgrades to server and switch specifications to maintain its leading position and gain market share.

Goldman Sachs raised its 2026 revenue forecast by 1% to approximately 1.49 trillion yuan, but cut its net profit forecast by 3% to 60.778 billion yuan, citing a lower gross margin forecast and a higher expense ratio resulting from increased research and development spending.
The bank believes a higher share of revenue from AI server cabinets will continue to depress overall gross margin, which it expects to fall from 6.7% in 2026 to 4.0% in 2028. However, greater scale is also expected to improve production and operating efficiency.
Goldman Sachs’ net profit forecasts for 2027 and 2028 are 15% and 29% above the Bloomberg consensus, respectively, reflecting its positive assessment of the AI infrastructure cycle and the company’s market position.

US production requirements, tight raw material supplies and rising costs have raised the barriers to entry in the AI cabinet business. In the first three quarters of 2026, the company generated operating cash flow of 3.2 billion yuan, up 178% year on year, while revenue grew 56% over the same period. Goldman Sachs believes this supports reinvestment in working capital, capital expenditure and research and development.
Goldman Sachs maintained its buy rating but cut its 12-month price target from 121 yuan to 106 yuan, lowering its target price-to-earnings multiple from 24.6 times to 21.5 times. The bank attributed the decline in industry valuations to model transitions, market concerns about the sustainability of AI spending, and the Section 337 investigation targeting the AI supply chain.
Downside risks listed by the bank include AI server demand and profits falling short of expectations, and a slower-than-expected capacity ramp-up at new factories.