Three-Circle Group’s third-quarter revenue beats expectations, while margins and cash flow come under pressure

Why did net profit fall short of expectations despite the revenue beat?

Third-quarter revenue in 2026 was 1.57 billion yuan, up 39% year over year and 19% above Goldman Sachs’ forecast; net profit was 183 million yuan, up 16% year over year but 5% below the bank’s forecast. SDI, consolidated from July, contributed approximately 100 million yuan in revenue; excluding SDI, revenue still rose approximately 30% year over year.
Gross margin and expenses weighed on profit conversion: third-quarter gross margin was 36.8%, down 0.1 percentage points year over year; operating expenses were 355 million yuan, up 49% year over year and 30% above Goldman Sachs’ forecast. Operating margin fell 1.6 percentage points year over year to 14.2%, while operating profit of 222 million yuan was broadly in line with the bank’s forecast.
Management said foreign exchange losses exceeded 50 million yuan in the first three quarters, equity incentive expenses were approximately 50 million yuan, and SDI acquisition expenses were approximately 20 million yuan. Excluding these items under management’s methodology, recurring net profit growth was close to 40% year over year, compared with reported net profit growth of approximately 12%.

Driven by downstream demand, shipments of traditional MLCC powders reached nearly 6000 tonnes in the first three quarters, up 24% year over year; this implies third-quarter shipment growth of approximately 33% year over year. Traditional-product capacity of 10 thousand tonnes was close to full utilization in the third quarter.
Dental zirconia powder shipments rose more than 60% year over year in the first three quarters. Management believes rare-earth export controls created uncertainty over supply from Japanese peers, prompting customers to accelerate stocking; the company’s related capacity was also close to full utilization in the third quarter.
At the end of July, the company announced zirconia powder price increases of 10%–40%, but it first had to fulfill existing orders, so the increases were not yet reflected in third-quarter results. Management expects the increases to take effect gradually from the fourth quarter, with the pass-through of most increases becoming clearer by the first quarter of 2027.
Meanwhile, higher cobalt oxide and praseodymium oxide costs reduced the gross margin of architectural ceramics by more than ten percentage points year over year to approximately 20% in the first three quarters; although the company adjusted prices from March, cost pass-through to property-related customers remains slow.

Several domestic and overseas customers have qualified the AI and automotive-grade MLCC powders and provided relatively clear order guidance. Of the planned 5000 tonnes of high-end capacity, 2000 tonnes have been completed; management expects volume shipments to begin in the fourth quarter, shipments of several hundred tonnes in 2026, and a large-scale ramp-up in 2027.
High-end copper-clad laminates require higher spherical silica powder loading: management said the loading ratio rises from the teens in M6 to above 30% in M9, and can reach 60% in PTFE solutions. The company is currently the sole volume supplier of PTFE-grade products. The first 2000 tonnes of planned capacity of 5000 tonnes are expected to be completed in early 2027; management gave no specific sales-volume or price guidance for 2027.
TEC ceramic substrates for HBM and CPU cooling have been qualified by a US customer and entered volume sales. The company is preparing capacity for large-volume orders expected by year-end.

Third-quarter operating cash inflow fell 29% year over year to 204 million yuan, capital expenditure doubled to 208 million yuan, and free cash flow was negative 4 million yuan, compared with positive 184 million yuan a year earlier. Together with the 776 million yuan cash outflow for the SDI acquisition, the company moved from net cash of 148 million yuan at the end of the second quarter to net debt of 726 million yuan at the end of the third quarter.
Management expects annual capital expenditure over the next two to three years to rise from a historical level below 500 million yuan to 500 million–1 billion yuan as multiple capacity expansions proceed simultaneously, and possibly exceed 1 billion yuan.
Goldman Sachs cut its 2026 earnings-per-share forecast by 6% because of one-off items, while leaving its 2027–2028 forecasts broadly unchanged. The bank raised its 12-month target price from 33 yuan to 34 yuan, but believes the current valuation largely reflects long-term growth potential and maintained its neutral rating; the share price listed in the report was 43.19 yuan.