Why raise the full-year earnings forecast after a third-quarter slowdown?

  • Han's CNC's revenue in the third quarter of 2026 was 2.856 billion yuan, down approximately 6% from 3.03 billion yuan in the second quarter; net profit was 587 million yuan, down approximately 7% from 634 million yuan in the second quarter.
  • Citi believes that despite a relatively weak third quarter, overall performance in the first three quarters was better than the bank expected, and major customers will expand capacity in the fourth quarter. It has therefore raised its 2026 net profit forecast by 11% to 2.107 billion yuan.
  • Citi expects fourth-quarter revenue to rise 13% quarter on quarter to 3.234 billion yuan, but net profit to fall 4% to 563 million yuan. It forecasts the operating expense ratio will rise from 14.5% in the third quarter to 19.7% in the fourth quarter.

Why were profit forecasts for the following two years cut despite higher revenue forecasts?

  • Citi raised its revenue forecasts for 2027 and 2028 by 5% each, but after factoring in expenses related to the equity incentive plan, it cut its net profit forecasts for those years by 1% and 3%, respectively, to 3.019 billion yuan and 4.03 billion yuan.
  • In Citi's model, the net profit margin falls from a forecast 19.0% in 2026 to 18.2% in 2027 and 2028. Revenue growth can still lift profit, but the additional expenses will offset some of the benefit from the upward revenue revisions.

How large is the opportunity in high-end drilling equipment and customer expansion?

  • In 2026, the company has secured orders for 50 to 60 ultrafast laser drilling machines, mainly used to manufacture mSAP-type substrates needed for optical modules. Management expects more demand to emerge in 2027, with demand from 5 to 6 leading customers potentially reaching 1,000 machines; on that basis, Citi estimates the equipment opportunity at up to approximately 5 billion yuan.
  • Management also believes persistent supply constraints at Mitsubishi Electric will cause some demand for CO₂ laser drilling machines to spill over. In the first three quarters of 2026, ultrafast laser drilling machines and CO₂ laser drilling machines accounted for 4% and 5% of Han's CNC's revenue, respectively.
  • Among customers, Shengyi Electronics' counterpart Victory Giant Technology accounted for approximately 15% of revenue in the first three quarters of 2026, while the second-largest Chinese customer accounted for 5%. The company is seeking to enter leading AI PCB manufacturers including WUS Printed Circuit and Shennan Circuits; Citi believes a breakthrough would be an important share-price catalyst.

Why cut target prices sharply as AI demand grows?

  • Citi believes Han's CNC's revenue is growing more slowly than that of major peer Daliang Technology, suggesting it may be losing some market share in AI applications. The bank also expects the company's earnings growth to peak in 2026 and slow in 2027–2028.
  • Citi cut its target valuation for the A shares from approximately 51 times to approximately 29 times forecast 2027 earnings, while maintaining a 50% valuation discount for the H shares relative to the A shares. It cut both A- and H-share target prices by 44%, to 180 yuan and 105 Hong Kong dollars, respectively.
  • Citi maintained its Buy rating on the H shares and Neutral rating on the A shares, believing the H shares offer a more attractive risk-reward profile for participating in the company's expected earnings growth. Pressures cited by the bank include weaker-than-expected demand for AI PCB equipment, rising component costs and price competition from increased equipment supply.