3Q26 results in line with our expectations

The firm’s attributable net profit fell 1.77% YoY to Rmb133mn in 1–3Q26, and recurring net profit rose 17.55% YoY to Rmb89mn. In 3Q26, operating income rose 28.14% YoY and 5.51% QoQ to Rmb305mn, net profit attributable to shareholders grew 46.15% YoY but fell 24.22% QoQ to Rmb41mn, and recurring net profit grew 173.99% YoY and 61.84% QoQ to Rmb39mn.

Trends to watch

Increasing sales volume of semiconductor products boosted earnings growth; recurring net profit grew markedly. Revenue growth in 1–3Q26 was mainly driven rising sales volume of semiconductor products, and recurring net profit growth was mainly due to higher operating net profit compared with the same period last year. The structural improvement in earnings was more notable, suggesting that the rising proportion of high value-added semiconductor business effectively offset the price pressure of traditional business. In 3Q26, the firm’s gross margin was 37.07%, up 8.1ppt YoY and -0.1ppt QoQ. Net margin was 13.6%, up 1.7ppt YoY and -5.3ppt QoQ.

The firm's expense ratio fell 0.61ppt YoY to 19.5% in 1–3Q26. In 3Q26, expense ratio fell 1.69ppt YoY and 5.07ppt QoQ to 16.99%. We expect the profitability of the firm's main business to keep growing as the number of certified semiconductor models increase and new production capacity gradually comes online.

A substantial expansion in capex underpins capacity building; asset impairments and exchange rate fluctuations constitute short-term disruptions. As of end-3Q26, the balance of construction in progress stood at Rmb482mn, marking a 190.47% increase from the end of the previous year. Cash paid for the acquisition and construction of fixed assets and other related items in the first three quarters reached Rmb386mn, indicating that the firm is in a critical investment phase for expanding its semiconductor quartz material production capacity. During the period, the firm recorded an asset impairment loss of Rmb36mn and a credit impairment loss of Rmb10mn. Coupled with a negative impact of -Rmb6.8mn from exchange rate movements on cash and cash equivalents, these factors have exerted a certain erosion on short-term profit. We believe that the current high-intensity capex is a necessary upfront investment to match the surging downstream semiconductor demand. Once the construction in progress is transferred to fixed assets, it will likely become a new performance growth driver.

Financials and valuation

Due to uncertainties related to the growth in downstream demand, we cut our 2026 revenue forecast 24.8% to Rmb1.41bn and lower our 2026 attributable net profit forecast 60.9% to Rmb206mn. We introduce our 2027 revenue and attributable net profit forecasts of Rmb1.75bn and Rmb325mn. The stock is trading at 56.3x 2027e P/E. Given that the firm will likely introduce semiconductor clients, we maintain a NEUTRAL rating and lower our TP 2.7% to Rmb36, implying 60x 2027e P/E and offering 6.51% upside.

Risks

Disappointing downstream demand; unstable supply of raw materials ores.