Citi: Dongfang Electric's third-quarter profit growth slows; Citi focuses on recurring earnings and new orders

Why did net profit growth slow markedly?

Dongfang Electric's net profit for the third quarter of 2026 was 1.125 billion yuan, up 6.5% year on year, slower than the 42.1% growth in the first half and 31.1% for the full year of 2025.
Citi calculates that third-quarter recurring net profit was 1.129 billion yuan, up 22.7% year on year, excluding gains and losses on structured deposits and hedges and changes in the fair value of securities. The bank believes this growth rate may be in line with market expectations.
Structured deposits and hedging arrangements recorded a loss of 75 million yuan in the third quarter, compared with a profit of 39 million yuan a year earlier. Citi estimates a fair-value loss on securities of 80 million yuan, compared with a profit of 48 million yuan in the prior-year period.

Third-quarter gross margin was 17.4%, up 1.5 percentage points year on year and 2.2 percentage points quarter on quarter; Citi believes changes in the revenue mix may have helped. Gross margin for the first three quarters was 16.7%, up 0.7 percentage points year on year.
Third-quarter operating margin was 7.5%, up 1.1 percentage points year on year; net margin was 6.5%, up 0.3 percentage points. Citi believes the company has maintained its margins so far, unaffected by rising raw material and component costs.
Costs remain a key constraint: Citi notes that the company's orders on hand are fixed-price contracts, so margins could fall if steel prices rise; lower average selling prices would also affect revenue and margins.

New orders in the first nine months of 2026 totaled 93.47 billion yuan, up 5.5% year on year. Efficient and clean energy accounted for 69%, modern services for 21%, and emerging growth businesses for 10%. Citi regards new orders as a leading indicator of future growth for equipment manufacturers.
Operating cash flow remained negative, but the shortfall narrowed: outflows in the first three quarters were 2.279 billion yuan, down 38.5% year on year; third-quarter outflows were 557 million yuan, down 82.3%. The company was in a net cash position at the end of the third quarter.

Citi maintained its Buy rating and named Dongfang Electric its top pick in China's power equipment sector, citing rapid recurring earnings growth. Its H-share target price is 27 Hong Kong dollars, implying upside of 64.9% from the 16.37 Hong Kong dollar share price cited in the report.
The target price corresponds to 15.6 times Citi's forecast earnings for 2027; the bank expects compound annual earnings-per-share growth of 11.5% from 2026 to 2028. Besides costs and selling prices, it lists weak new orders as a downside risk.