1H26 results miss our expectations

The firm announced its 1H26 results: Revenue fell 1.91% YoY to Rmb21.26bn and net profit attributable to shareholders fell 34.3% YoY to Rmb934mn. In 2Q26, revenue rose 1.98% YoY to Rmb11.76bn, and net profit attributable to shareholders fell 36.82% YoY to Rmb479mn. The results missed our expectations, mainly due to FX losses of Rmb185mn in 1H26 (vs. FX gains a year earlier) and a Rmb129mn decrease in income from disposal of non-current assets. Excluding the impact, net profit attributable to shareholders fell 2.7% YoY to Rmb1.09bn in 1H26, demonstrating the resilience of the firm’s operations.

The tripartite business landscape of engineering, equipment, and operation & maintenance is becoming increasingly solid. In 1H26, revenue from engineering, equipment, and operation & maintenance businesses changed - 6.9%, +25.5%, and -2.9% YoY to Rmb11.71bn, Rmb2.89bn, and Rmb6.05bn, with gross margin changing +1.14ppt, -2.54ppt, and -0.63ppt YoY to 14.3%, 16.7%, and 19.4%. Specifically, the growth of the equipment manufacturing business was mainly driven by its overseas operations and its presence in other industries, while we attribute the pressure on gross margin to the geopolitical conflict in the Middle East and regional changes in business structure.

Steady progress in overseas business; ample orders on hand. In 1H26, new overseas orders and revenue rose 12% and 9% YoY to Rmb31.06bn and Rmb12.78bn. As of end-1H26, the firm's uncompleted contracts on hand rose 15% YoY to Rmb71.65bn, which may support its future earnings growth. The new growth driver is gaining momentum; mining and green energy and environmental protection businesses are recording strong growth. The firm stepped up its efforts tocultivate a second growth driver by focusing on mining and green energy and environmental protection businesses. It signed Rmb3.38bn of mining engineering contracts in 1H26 (+48% YoY). Overseas revenue from mine operation and maintenance business grew more than 1.3x YoY. In 1H26, new green energy and environmental engineering contracts rose 67% YoY to Rmb2.8bn, and sales volume of alternative fuels nearly doubled YoY to 690kt.

Trends to watch

We believe overseas cement demand is still in an upward cycle, and the firm can leverage its leading position in cement engineering to accelerate the increase in the penetration rate of its equipment and operation and maintenance businesses. In addition, we believe demand for capex related to utilization of phosphogypsum solid waste will increase, which may bring incremental opportunities for the firm's phosphogypsum treatment business.

Financials and valuation

Given lingering pressure on domestic business demand, we slightly lower our 2026 and 2027 attributable net profit forecasts by 3.3% and 5.6% to Rmb2.86bn and Rmb2.97bn. The stock is trading at 7.0x 2026e and 6.7x 2027e P/E. We maintain an OUTPERFORM rating, and considering changes in market liquidity and risk appetite, we cut our target price 12% to Rmb11, implying 10.1x 2026e and 9.7x 2027e P/E and offering 44.5% upside.

Risks

Execution of overseas contracts and/or expansion of equipment and operation & maintenance businesses disappoint.