Middle East and FX headwinds have not undermined growth quality; J.P. Morgan reiterates its Overweight rating on Neway

Overview

This report reviews Neway's 2Q26 results and assesses whether Middle East logistics disruptions and foreign-exchange pressure have altered its growth thesis. J.P. Morgan concludes that the company demonstrated strong resilience in revenue, gross margin, and product mix. The Middle East issues mainly delayed shipments rather than undermining demand, and the long-term thesis of transforming into a global high-end fluid-control platform remains intact.

Core views

First, the 2Q26 results demonstrate that the company retains strong execution capabilities despite external disruptions. Revenue increased 13% year over year and gross profit rose 16%, significantly outperforming investors' prior concerns that Middle East logistics delays would severely hamper growth. Cost of sales increased only 11% year over year during the period, driving a 1.1-percentage-point year-over-year increase in gross margin to 37.2%; the 1H26 gross margin increased 2.4 percentage points year over year to 38.1%. The report believes this performance demonstrates the continued resilience of the high-value product mix. Net profit attributable to shareholders increased 4% year over year to RMB388 million, substantially slower than gross-profit growth, with the gap mainly resulting from higher foreign-exchange losses rather than a material deterioration in core profitability. The company also maintained an interim payout ratio of approximately 45%. Second, the report characterizes the Middle East disruption primarily as a delay in shipments and revenue recognition rather than demand destruction. The Middle East accounted for approximately 30% of 1H26 orders, and logistics issues did affect shipments to the region. However, resilient demand in other markets partially offset the impact, allowing the company to continue delivering revenue growth and gross-margin expansion. J.P. Morgan also notes that the disruption is not entirely negative: urgent orders may place greater emphasis on delivery speed, and Neway's faster delivery capabilities could provide an advantage over European and US competitors. Energy-security concerns could also accelerate investment in global oil pipelines and infrastructure surrounding the Strait of Hormuz, generating incremental valve demand. Investors' attention is therefore shifting from risk exposure toward a potential recovery in 2H26. Third, the report maintains its view that the company is transforming from a cyclical oil-and-gas valve supplier into a global high-end fluid-control platform. Growth drivers include market-share gains, end-market diversification, engineering capabilities, acquisitions, and product-mix upgrades, with offshore engineering, FPSO, FLNG, LNG, nuclear power, AIDC cooling, water infrastructure, and actuator valves all identified as expansion areas. The global industrial-valve market is fragmented, while the company's global market share remains only approximately 1%, which the report believes leaves considerable room for expansion. Vertical integration, rapid delivery, and direct access to overseas customers help the company gain share in high-end products and maintain resilient growth and margins. Execution quality, professional management, and strong cash flow also support its multi-year growth thesis. Finally, valuation remains a key reason for the report's reiterated Overweight rating. The shares declined by approximately 40% from mid-May to mid-July 2026, while the CSI 300 Index fell 7% over the same period. J.P. Morgan believes Middle East risks have already been largely priced into the shares. On the report's estimates, the stock trades at approximately 19x FY27E P/E, while its FY25-28E earnings CAGR is approximately 20%, implying a PEG ratio of approximately 0.9x. The December 2027 target price of RMB70 is based on 20x FY28E EPS, below the average valuation of global industrial-valve peers at approximately 26x FY26E and approximately 23x FY27E. Although 20x is at the upper end of Neway's historical cyclical range, the report believes this multiple remains reasonable given its multi-year growth potential and FY25 net margin of 21% and ROE of 35%, both of which lead most domestic and international peers. The target price implies approximately 25% upside from the price of RMB54.17 on August 20, 2026.

Analysis framework

The report first compares 2Q26 revenue, costs, gross margin, and net profit separately to distinguish core operating performance from the effects of foreign-exchange losses. It then assesses whether the Middle East disruption represents demand destruction or shipment delays and analyzes potential offsetting factors based on demand in other markets and delivery capabilities. From a long-term perspective, the report evaluates the company's platform transformation through end-market diversification, product upgrades, global market share, vertical integration, and overseas customer channels. Finally, it determines the target valuation using earnings growth, PEG, historical valuation ranges, and the P/E multiples of global peers.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  P/E and PEG valuation

  The report calculates the RMB70 target price using 20x FY28E EPS and combines an approximately 19x FY27E P/E with an approximately 20% FY25-28E earnings CAGR to derive an approximately 0.9x PEG ratio and assess whether the valuation fully reflects growth.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Layered analysis of revenue, costs, gross margin, and net profit

  The report measures the resilience of core profitability through changes in revenue, cost of sales, and gross margin, then attributes net-profit growth lagging gross-profit growth mainly to foreign-exchange losses, distinguishing operating quality from non-core disruptions.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Distinguishing logistics delays from demand destruction

  The report concludes that the Middle East issues mainly delayed shipments and revenue recognition without eliminating end demand. It also examines the impact of demand in other regions, urgent orders, and energy-security investment on valve demand.

• Competition and Strategy FrameworkMoat/Competitive Advantages

  Vertical integration, delivery speed, and direct overseas customer access

  The report uses these capabilities to explain why Neway may gain share in urgent orders and high-end customized products while maintaining resilient growth and margins.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Neway Valve - A (603699.SS, 603699 CH)

  The report believes the company directly benefits from global demand for high-end industrial valves, end-market diversification, and market-share gains and may secure urgent orders through its rapid delivery capabilities.

  Strengths

  Vertical integration, rapid delivery, direct overseas customer channels, a high-value product mix, professional management, strong cash flow, and high profitability represented by an FY25 net margin of 21% and ROE of 35%.

  Weaknesses

  The Middle East accounted for approximately 30% of 1H26 orders, making shipments and revenue recognition sensitive to local logistics; the export business also faces pressure from RMB appreciation and foreign-exchange losses.

  Comparison

  The 20x FY28E target P/E is below the average valuation of global industrial-valve peers at approximately 26x FY26E and approximately 23x FY27E; the FY25 net margin and ROE lead most domestic and international peers.

  Risks

  Prolonged Middle East disruptions, a weaker-than-expected order recovery in 2H26, declining gross margins, slower high-end upgrades or acquisition progress, and further share reductions by the founder or major shareholders.

Key data

• 2Q26 Revenue GrowthUp 13% year over yearMaintained double-digit growth despite Middle East logistics delays
• 2Q26 Gross-Profit GrowthUp 16% year over yearFaster than revenue growth
• 2Q26 Cost-of-Sales GrowthUp 11% year over yearBelow revenue growth, supporting gross-margin expansion
• 2Q26 Gross Margin37.2%Up 1.1 percentage points year over year
• 1H26 Gross Margin38.1%Up 2.4 percentage points year over year
• 2Q26 Net Profit Attributable to ShareholdersRMB388 millionUp 4% year over year, with foreign-exchange losses the main reason growth lagged gross-profit growth
• Interim Payout RatioApproximately 45%The company maintained a relatively stable interim payout level
• Share of Middle East OrdersApproximately 30% of 1H26 ordersExplains the significance of Middle East logistics disruptions for shipments and order execution
• Share-Price Pullback During the PeriodApproximately 40%From mid-May to mid-July 2026; the CSI 300 Index fell 7% over the same period
• FY27E P/EApproximately 19xThe current valuation metric used in the report
• FY25-28E Earnings CAGRApproximately 20%Corresponding to an approximately 0.9x PEG ratio
• Global Market ShareApproximately 1%The industrial-valve market is fragmented, and the report sees considerable potential for market-share gains
• Target Valuation20x FY28E EPSUsed to calculate the December 2027 target price of RMB70
• Global Peer ValuationsApproximately 26x FY26E and approximately 23x FY27EBoth are above the 20x target multiple assigned to Neway in the report
• FY25 Net Margin21%Above most domestic and international peers
• FY25 Return on Equity35%Above most domestic and international peers
• Current Price and Target PriceRMB54.17 / RMB70.00The current price is as of August 20, 2026, and the target price is for December 2027, implying approximately 25% upside

Impact & implications

The report believes the 2Q26 results have reduced market concerns that Middle East disruptions would materially undermine growth and margins, with attention potentially shifting toward shipment and order recovery in 2H26. If end-market diversification, product upgrades, and global market-share gains continue, the company could gradually reduce its dependence on the traditional oil-and-gas cycle, while its current valuation still does not fully reflect these high-quality growth characteristics.

Risks

• If Middle East disruptions persist for an extended period, they could delay shipments, revenue recognition, and order execution; the region accounted for approximately 30% of 1H26 orders.
• The 2H26 order recovery could be weaker than expected, particularly if LNG, oil-and-gas, or offshore engineering projects are delayed.
• RMB appreciation, rising specialty-alloy costs, freight disruptions, or a declining share of high-end products could cause gross margins to fall below expectations.
• Slow progress in control-valve acquisitions or smart-valve upgrades could limit the company's ability to gain high-end market share.
• Further share reductions by the founder or major shareholders could create valuation pressure following a share-price rerating.

What to watch

• Monitor whether Middle East shipments, revenue recognition, and order execution recover in 2H26.
• Monitor the progress of LNG, oil-and-gas, and offshore engineering projects and the strength of the new-order recovery.
• Monitor the impact of the RMB exchange rate, specialty-alloy costs, freight rates, and the high-end product mix on gross margins.
• Monitor progress in control-valve acquisitions and smart-valve upgrades.
• Monitor whether the founder or major shareholders further reduce their holdings.