Gree's 2Q26 results missed expectations; core air conditioning and gross margin remained resilient, but revenue pressure limits upside

Overview

This report evaluates Gree Electric Appliances' 2Q26 results, revenue mix, margin changes, and outlook for the second half. Goldman Sachs believes overall results were weaker than expected, with overseas and non-core businesses constituting the primary drags. The core air-conditioning business and gross margin were relatively resilient, but operating deleverage, weak demand, and competitive pressure limit the growth outlook; it therefore maintains its Neutral rating.

Core views

Gree's 2Q26 results missed expectations. Total 1H26 revenue was Rmb89.673bn and net profit was Rmb13.278bn, both down 8% yoy. Based on these figures, 2Q revenue and net profit declined 17% and 15% yoy, respectively, coming in 13% and 7% below Goldman Sachs' forecasts. Cash-flow indicators also weakened: 2Q operating cash flow fell 36% yoy from Rmb17.3bn in 2Q25 to Rmb11.0bn, while contract liabilities, primarily comprising advance payments from distributors, declined 32% yoy from Rmb12.4bn to Rmb8.5bn, indicating weaker channel cash inflows and order support. The revenue miss primarily came from overseas and non-core businesses, while the core consumer-appliance business was relatively resilient. Consumer appliances, which mainly comprise air conditioners and account for more than 80% of total sales, saw revenue decline only 3% yoy in 1H. IOL data showed that Gree's domestic air-conditioner shipments declined 10% and 11% yoy in 1H and 2Q, respectively. The smaller decline in sales value than in shipment volume implies a potential increase in average selling prices, with pricing and product-mix adjustments partly offsetting volume pressure. By contrast, other businesses, mainly comprising sales of raw materials and components and accounting for approximately 5% of total sales, recorded a sharp 58% yoy revenue decline in 1H. The company stated that it would focus on its core businesses and scale back such non-core operations, meaning this revenue drag was partly driven by a proactive strategic decision, although it will still reduce total revenue in the near term. Regional performance diverged significantly. Domestic sales grew 2% yoy in 1H, which Goldman Sachs believes may have been supported by the resilience of the air-conditioning business and emerging businesses such as industrial equipment. Overseas sales, however, declined 22% yoy. This performance was consistent with the factory export shipment data for air conditioners tracked by Goldman Sachs, which showed respective yoy declines of 24% and 32% in 1H and 2Q, indicating that overseas markets were a major source of the period's revenue shortfall. Margin performance was better than the revenue trend. Despite rising raw-material costs, 2Q gross margin increased 0.8pp yoy to 30.3% and exceeded Goldman Sachs' expectations. The report attributes the improvement to pricing and product-mix adjustments, a lower revenue contribution from low-margin non-core businesses, and reduced overseas revenue contribution, which diminished the negative impact of renminbi appreciation on gross margin. However, the gross-margin improvement did not fully translate into higher operating margin: lower sales caused operating deleverage, and 2Q operating margin declined 0.4pp yoy to 14.1%. Although selling, general and administrative expenses decreased 10% yoy and were slightly below Goldman Sachs' forecast, their ratio to revenue still increased 1.3pp yoy. Goldman Sachs cut its 2026E-2028E EPS forecasts by 2%-3% to reflect the latest results. Its updated revenue forecasts for 2026E, 2027E, and 2028E are Rmb161.642bn, Rmb162.104bn, and Rmb165.652bn, respectively, corresponding to yoy changes of -5.5%, +0.3%, and +2.2%; EPS forecasts are Rmb4.86, Rmb5.01, and Rmb5.20, respectively. Forecast net profit attributable to shareholders for the same periods is Rmb27.222bn, Rmb28.066bn, and Rmb29.104bn, corresponding to yoy changes of -6.1%, +3.1%, and +3.7%; gross margin is expected to rise from 30.3% in 2026E to 30.7% in 2027E and 30.8% in 2028E. This reflects the view that revenue recovery will be slow while margins remain resilient. Looking ahead to 2H26, Goldman Sachs expects Gree to continue facing revenue-growth pressure from weak domestic demand and the proactive contraction of non-core businesses, while pricing, product mix, and business-mix adjustments should continue to support margins. Regarding long-term fundamentals, the report recognizes Gree's manufacturing capabilities supported by vertical integration and economies of scale, its extensive distribution network with particular strength in offline channels, and its brand equity in the mid-to-high-end air-conditioning market. However, waning trade-in stimulus may continue to weigh on revenue, while intensifying competition and the company's insufficiently proactive strategy in value-for-money products could lead to market-share losses. On valuation, Goldman Sachs maintains its 12-month target price of Rmb41. The target price applies a 10x exit P/E multiple to 2028E EPS and discounts it to 2027E using a 9.5% cost of equity. The report sees limited positive catalysts in the near term but expects an approximately 7% dividend yield in 2026E to provide downside valuation support. Considering growth pressure, competitive risks, margin resilience, and dividend protection, Goldman Sachs views the risk-reward as relatively balanced and maintains its Neutral rating.

Analysis framework

Goldman Sachs first derives 2Q yoy performance from the disclosed 1H data and compares it with its own forecasts. It then analyzes the revenue shortfall across core consumer appliances, non-core businesses, and domestic and overseas regions, while using third-party air-conditioner shipment data to infer the cushioning effect of pricing and product mix. The report further breaks down gross margin, expense ratios, and operating margin to explain the difference between business-mix improvement and operating deleverage. Finally, it cuts its EPS forecasts accordingly and updates its valuation assessment using an exit P/E discounting method.

Methodology notes

• Industry/Sector Analysis FrameworkPrice-Volume Decomposition

  Inferring changes in average selling prices from the difference between declines in sales value and air-conditioner shipments

  The report compares the decline in consumer-appliance revenue with the decline in domestic air-conditioner shipments. Sales value fell 3% while shipment volume declined 10%-11%, suggesting that pricing or product-mix improvements may have offset some of the volume pressure.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating deleverage

  Lower sales revenue made it difficult to reduce fixed or semi-fixed expenses at the same pace. Therefore, even though gross margin improved and absolute selling and administrative expenses declined, the expense ratio still increased, causing operating margin to fall yoy.

• Valuation MethodPE/PEG valuation

  Discounted exit P/E valuation

  Goldman Sachs applies a 10x exit P/E multiple to 2028E EPS and discounts it to 2027E using a 9.5% cost of equity, deriving a 12-month target price of Rmb41.

• Valuation MethodDividend Yield Method

  Using expected dividend yield to assess downside valuation support

  The report does not use dividend yield to calculate the target price directly, but views the approximately 7% 2026E dividend yield as a downside valuation protection factor.

Asset mapping & comparison

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

• Gree Electric Appliances (000651.SZ)

  The Chinese residential air-conditioning and white-goods company directly covered by the report; overall 2Q26 results were weaker than expected, but the core business and gross margin were relatively resilient.

  Strengths

  Manufacturing capabilities supported by vertical integration and economies of scale; an extensive distribution network with advantages in offline channels; brand equity in the mid-to-high-end air-conditioning market; an approximately 7% 2026E dividend yield providing valuation support.

  Weaknesses

  Revenue growth is under pressure, with weak overseas and non-core businesses; declining sales caused operating deleverage; the strategy for value-for-money products is relatively insufficiently proactive.

  Comparison

  Consumer-appliance revenue declined 3% yoy in 1H, significantly better than the 58% decline in other businesses; domestic sales grew 2% yoy, also outperforming the 22% decline in overseas sales.

  Risks

  If white-goods demand, raw-material costs, channel inventory, or progress in diversified businesses is worse than expected, shipments, revenue, gross margin, and market share could be affected.

Key data

• 1H26 Total RevenueRmb89,673mnDown 8% yoy
• 1H26 Net ProfitRmb13,278mnDown 8% yoy
• 2Q26 Revenue Growth-17% yoy13% below Goldman Sachs' forecast
• 2Q26 Net Profit Growth-15% yoy7% below Goldman Sachs' forecast
• 2Q26 Operating Cash FlowRmb11.0bnRmb17.3bn in 2Q25, down 36% yoy
• Contract LiabilitiesRmb8.5bnRmb12.4bn in the prior-year period, down 32% yoy
• 1H26 Consumer-Appliance Sales-3% yoyThis business primarily comprises air conditioners and accounts for more than 80% of total sales
• Domestic Air-Conditioner Shipments1H -10% yoy; 2Q -11% yoyThe smaller decline in sales value indicates a potential improvement in average selling prices or product mix
• 1H26 Other-Business Revenue-58% yoyPrimarily sales of raw materials and components, accounting for approximately 5% of total sales
• 1H26 Domestic Sales+2% yoyMore resilient than overseas markets
• 1H26 Overseas Sales-22% yoyFactory export shipments of air conditioners declined 24% and 32% in 1H and 2Q, respectively
• 2Q26 Gross Margin30.3%Up 0.8pp yoy and above Goldman Sachs' expectations
• 2Q26 Operating Margin14.1%Down 0.4pp yoy
• 2Q26 Selling, General and Administrative Expenses-10% yoyThe expense ratio still increased 1.3pp yoy
• EPS Forecast Revisions2026E-2028E cut by 2%-3%Reflecting the latest results and revenue pressure
• 2026E-2028E EPSRmb4.86 / Rmb5.01 / Rmb5.20Updated Goldman Sachs forecasts
• 2026E-2028E RevenueRmb161,642mn / Rmb162,104mn / Rmb165,652mnYoy growth rates of -5.5%, +0.3%, and +2.2%, respectively
• 2026E-2028E Net Profit Attributable to ShareholdersRmb27,222mn / Rmb28,066mn / Rmb29,104mnYoy growth rates of -6.1%, +3.1%, and +3.7%, respectively
• 2026E-2028E Gross Margin30.3% / 30.7% / 30.8%Expected to remain relatively resilient and gradually improve
• 12-Month Target PriceRmb41Unchanged; based on a 10x exit P/E multiple on 2028E EPS and a 9.5% cost of equity
• 2026E Dividend Yield7%Goldman Sachs believes it can provide downside valuation support

Impact & implications

The report believes Gree's near-term revenue growth will remain affected by the combined effects of weak domestic demand, declining overseas shipments, and the contraction of non-core businesses. Operating deleverage may also prevent gross-margin improvement from fully translating into operating-profit growth. However, the core air-conditioning business, pricing and product-mix adjustments, a lower contribution from low-margin businesses, and the relatively high dividend yield could provide some cushioning. Goldman Sachs therefore cuts its earnings forecasts but leaves its target price and Neutral rating unchanged.

Risks

• If the macroeconomy, property market, or stimulus policies are weaker than expected, white-goods demand could deteriorate further; changes in the opposite direction could drive demand upside.
• Rising costs of raw materials such as steel and copper could erode gross margin, while lower costs could improve it.
• If channel inventory is higher than expected, it could suppress factory shipments and revenue growth; lower inventory could have a positive impact.
• If progress in diversified businesses such as other home appliances is weaker than expected, it could limit new sources of growth.
• Waning support from trade-in stimulus could increase pressure on revenue growth.
• Intensifying competition and an insufficiently proactive strategy for value-for-money products could lead to market-share losses.

What to watch

• Monitor domestic white-goods demand in 2H26 and changes in the macroeconomy, property market, and stimulus policies.
• Track the difference between domestic air-conditioner shipments and sales value to assess whether average selling prices and product mix can continue to cushion volume pressure.
• Monitor whether overseas factory shipments of air conditioners and overseas revenue can recover from their significant declines in 1H and 2Q.
• Track the pace at which the company scales back non-core businesses such as raw materials and components, as well as the impact on total revenue and gross margin.
• Monitor the pass-through of raw-material prices, including steel and copper, to gross margin.
• Observe channel inventory, contract liabilities, and operating cash flow to assess distributor orders and shipment trends.
• Monitor progress in diversified businesses such as industrial equipment and other home appliances, as well as changes in market share.