CTI: Pharmaceutical recovery and overseas expansion support growth; third-quarter gross margin falls below BofA expectations

Revenue met expectations. Why did profit fall slightly short of BofA’s forecast?

In the third quarter of 2026, CTI reported revenue of 1.99 billion yuan, up 14.3% year on year and 2.9% quarter on quarter, broadly in line with BofA’s expectations. Net profit attributable to shareholders was 395 million yuan, up 14.5% year on year. It fell within the company’s previously disclosed guidance range of 392 million–404 million yuan, but below BofA’s forecast of 414 million yuan.
The main shortfall was in gross margin: it was 49.3% in the third quarter, down 0.9 percentage points year on year and 2.7 percentage points quarter on quarter, below BofA’s forecast of 51.8%. Operating expenses were 5.6% below the bank’s forecast, partly offsetting the gross profit shortfall. Operating profit ultimately came to 442 million yuan, still about 5% below forecast.
Cash collections improved markedly: operating cash flow for the first three quarters of 2026 exceeded 923 million yuan, up 55% year on year, driven by stronger collections. Operating cash flow improved while profit was slightly below BofA’s expectations.

In the first three quarters of 2026, pharmaceutical and clinical services revenue grew approximately 40% year on year. New orders for contract research services (CRO) doubled, while medical device services revenue grew more than 50%. Growth in both revenue and orders is an important basis for BofA’s assessment that the pharmaceutical business is recovering.
The recovery in demand also turned the segment’s net margin positive from May, meaning that business expansion has begun to be accompanied by improved profitability. Management has set a net margin target of 10% for 2030; between the current return to profitability and that medium-term target, further margin improvement remains to be delivered gradually.

Profitability in consumer goods testing also improved because the semiconductor business VESP helped optimize the revenue mix. However, this segment’s improvement occurred alongside a decline in the group’s third-quarter gross margin; strength in individual businesses has yet to offset pressure on the overall margin.
In the first three quarters, newly acquired businesses including Safety SA, Emicert and Openview contributed to revenue growth. Management continues to pursue acquisition opportunities in consumer goods, shipping and certification services in Southeast Asia, Europe and Latin America. Overseas expansion remains one of the paths to future growth.
The value of this path depends on whether acquisitions can enhance earnings. BofA identifies better-than-expected earnings accretion as an upside factor and value-destructive acquisitions as a downside risk; a larger acquisition scale alone is not the entirety of its bullish case.

BofA slightly lowered its 2026–2028 earnings forecasts because of a slightly weaker gross margin assumption, partly offset by expectations of lower operating expenses. After the adjustment, the bank forecasts net profit attributable to shareholders of 1.231 billion, 1.471 billion and 1.705 billion yuan for the three respective years, representing year-on-year growth of 21.1%, 19.5% and 15.9%.
The price target was cut from 19.5 yuan to 19.4 yuan, using the average of a discounted cash flow valuation of 19.0 yuan and a price-to-earnings valuation of 19.8 yuan. Valuation parameters remain unchanged: the former uses a weighted average cost of capital of 11.9% and a perpetual free cash flow growth rate of 3%; the latter applies a price-to-earnings multiple of 25 to expected earnings per share from the second half of 2026 to the first half of 2027.
The Buy rating rests on the potential for expansion into new industries and regions and for market share gains. The case for improved earnings also depends on higher utilization of personnel and facilities; a weak macroeconomic environment and price competition in the testing industry would constrain that process.