Xusheng's 1Q26 results met expectations, with energy storage and overseas business driving gross margin recovery, but Deutsche Bank maintained its Sell rating

Overview

This report is Deutsche Bank's earnings review and forecast revision on Xusheng 603305.SS. The report argues that Xusheng's full-year 2025 results were slightly below market expectations, mainly because rising operating expenses dragged down operating margin; however, 1Q26 results were in line with market expectations, and the ramp-up of the energy storage business plus a higher overseas revenue mix materially restored gross margin. Despite the marginal operational improvement, Deutsche Bank still maintains a Sell rating.

Core views

The core view is: first, the pressure in 2025 came from expenses rather than revenue alone; management expenses and R&D expenses rose 18% and 17% year over year, respectively, causing operating margin to fall 2.4 percentage points year over year to 10.1%. Second, the energy storage business became the key source of growth and margin improvement, with 2025 revenue rising 96% year over year and gross margin reaching 40.3%. Third, better product mix, the ramp-up of high-margin energy storage business, and a higher contribution from overseas revenue lifted 1Q26 gross margin back to 22.9%. Fourth, although the North American new-energy vehicle customer award provides medium- to long-term order support, Deutsche Bank still cut its 2026 net profit forecast by 11% and maintained a Sell rating.

Analysis framework

The report combines earnings decomposition with DCF valuation: it first attributes full-year 2025 and 1Q26 revenue, net profit, expense ratios, and segment gross margins, then updates profitability, capex, WACC, tax rate, cost of debt, and capital structure assumptions based on the latest results, and finally revises the DCF target price.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The report believes Xusheng is still in a growth phase, so it uses a 6-year forecast DCF to capture the maturation process of electrification and intelligentization trends in China's auto industry. Key assumptions include a 9.3% WACC, 2.8% cost of debt, 2.5% risk-free rate, 6.0% market risk premium, 1.3 beta, 11.5% income tax rate, 88.0% equity capital ratio, and 0.5% terminal growth rate.

• Earnings attributionSegment gross margin analysis

  Decompose gross margin changes by business segment

  The report breaks down changes in overall gross margin into contributions from the auto, mold, energy storage, and overseas businesses, noting that the auto and mold businesses were under pressure due to customer price-cut requests and higher depreciation expenses, while higher energy storage gross margin and the relatively higher margin of the overseas business jointly supported the 1Q26 gross margin recovery.

Asset mapping & comparison

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

• 603305.SS

  Covered security in the report

  Strengths

  Rapid growth in the energy storage business, 1Q26 gross margin recovery, overseas business gross margin above domestic business, and a long-term award from a North American new-energy vehicle customer.

  Weaknesses

  2025 net profit declined year over year, operating expenses rose, gross margins in the auto and mold businesses came under pressure, and operating margin fell.

  Comparison

  In 2025, overseas gross margin of 29.3% was well above domestic gross margin of 13.3%; energy storage gross margin of 40.3% was above the company's overall 20.3%, while auto business gross margin was only 16.1%.

  Risks

  If downstream customer sales are weaker than expected, competition intensifies, price pressure persists, or new projects ramp up more slowly than expected, earnings and valuation could come under pressure.

• New energy vehicle supply chain

  Xusheng's main downstream application area

  Strengths

  The company supplies Tesla's global business and covers new energy vehicle customers such as BYD, NIO, GAC AION, XPeng, Li Auto, and Leapmotor.

  Weaknesses

  Customer bargaining power and price-cut requests may compress gross margin in the auto parts business.

  Comparison

  Compared with traditional auto parts business, energy storage and overseas orders currently show higher gross margins and stronger growth elasticity.

  Risks

  New energy vehicle sales, customer model cycles, industry price competition, and policy changes may all affect order realization.

Key data

• 2025 net profitRMB 365 million, down 12% year over yearSlightly below market expectations, mainly dragged by higher-than-expected operating expenses.
• 2025 revenueAbout RMB 4.5 billion, up 1% year over yearOverall revenue was basically flat, but the mix diverged.
• 2025 energy storage revenueRMB 569 million, up 96% year over yearReflects rapid ramp-up in the energy storage business.
• 2025 overall gross margin20.3%, flat year over yearImprovement in the energy storage business offset pressure in the auto and mold businesses.
• 2025 energy storage gross margin40.3%, up 11.7 percentage points year over yearSignificantly higher than the company's overall gross margin.
• 2025 auto business gross margin16.1%, down 1.4 percentage points year over yearAffected by downstream customer price-cut requests and higher depreciation expenses.
• 2025 mold business gross margin46.3%, down 8.2 percentage points year over yearAlthough the absolute level remained high, the year-over-year decline was notable.
• 1Q26 net profitRMB 125 million, up 31% year over year and 92% quarter over quarterIn line with market expectations.
• 1Q26 gross margin22.9%, up 2.1 percentage points year over year and 6.0 percentage points quarter over quarterMainly driven by improved product mix, a higher energy storage mix, and stronger overseas contribution.
• 2025 overseas gross margin comparisonOverseas 29.3%, domestic 13.3%Overseas business contributed positively to gross margin improvement.
• North American new-energy vehicle customer award8-year term, contract value of about RMB 7.8 billionProducts include powertrain, body components, subframes, and battery housings, with mass production expected to start by end-2026.
• 2026 net profit forecast revisionLowered by 11%Reflects the latest results and updated profitability assumptions.
• 2026 capex forecast revisionLowered by 49% to RMB 500 millionClose to the 2025 level of RMB 439 million, and a major reason for the higher target price.
• Target priceRMB 13.5, prior RMB 11.8Raised based on DCF valuation.
• WACC assumption9.3%, prior 7.5%The valuation also adjusted assumptions for cost of debt, tax rate, and capital structure.

Impact & implications

The investment implication is cautious: Xusheng's short-term earnings and gross margin improvement show that energy storage and overseas business are indeed making a marginal contribution, and the North American new-energy vehicle customer award also supports future revenue visibility; however, 2025 expense pressure, declining gross margins in the auto and mold businesses, and the downward revision to 2026 earnings forecasts all weaken earnings elasticity. The target price increase comes more from DCF improvement driven by lower capex assumptions than from a broad-based upgrade to earnings forecasts, so the rating remains Sell.

Risks

• Downstream customer sales may be weaker than expected.
• The degree of competitive easing may fall short of expectations, putting pressure on selling prices and gross margins.
• The auto and mold businesses may continue to face margin pressure from customer price-cut requests and rising depreciation expenses.
• High spending, especially employee compensation, R&D investment, and investment in new growth areas, may continue to weigh on operating margin.
• Although the North American new-energy vehicle customer award is sizable, mass-production timing, ramp-up pace, and profitability still carry execution risk.
• DCF valuation is sensitive to assumptions such as WACC, capex, tax rate, capital structure, and terminal growth rate.

What to watch

• Whether energy storage revenue growth can continue and whether the high gross margin near 40% is sustainable.
• Changes in overseas revenue mix and their contribution to overall gross margin.
• The mass-production progress and order realization of the North American new-energy vehicle award project by end-2026.
• Whether the auto and mold businesses continue to face pressure from customer price cuts and depreciation.
• Whether management expenses and R&D expenses slow, and whether operating margin can recover.
• Whether 2026 capex stays near RMB 500 million to avoid further downward revisions to DCF assumptions.
• Whether the company issues further rating, target price, or earnings forecast revisions.