Second-quarter revenue and profit beat expectations, but margins, order momentum, and steel capex remain under pressure; Goldman Sachs maintains Sell on Baosight Software

Overview

This report updates Baosight Software's 2Q26 results, segment operations, orders, and industry demand. Although quarterly revenue and profit were significantly above Goldman Sachs' expectations and data center projects are expected to drive growth in 2H26E, declining gross margin, weakening contract liabilities, and contracting steel industry capex remain key pressures. Goldman Sachs slightly raised its earnings forecasts and target price but continues to view the company's earnings outlook and relative valuation as unattractive, maintaining its Sell rating.

Core views

Baosight Software announced its 2Q26 results after market close on August 19, 2026: revenue, gross profit, EBIT, and net profit were Rmb2,988mn, Rmb864mn, Rmb362mn, and Rmb326mn, respectively, increasing 37%, 13%, 11%, and 22% YoY and exceeding Goldman Sachs' expectations by 25%, 8%, 8%, and 9%, respectively. However, the growth did not translate into stronger margins. Gross margin, operating margin, and net margin were 29%, 12%, and 11%, respectively, down 6, 3, and 1 percentage points YoY and 5, 2, and 2 percentage points below Goldman Sachs' expectations, respectively. Goldman Sachs therefore concludes that although quarterly revenue and aggregate profit exceeded expectations, earnings quality remained constrained by the decline in gross margin. Software development and engineering services were the main source of growth. Segment sales reached Rmb3,817mn in 1H26, up 26% YoY, compared with a 41% YoY decline in 1H25, meaning the current high growth rate partly reflects a low base. Meanwhile, the segment's gross margin declined 6 percentage points YoY to 23.7%. This indicates that the recovery in the core business generated strong incremental revenue, but the project mix or cost pressures weakened the contribution of that incremental revenue to margins. The order side showed signs of weakening. 2Q26 contract liabilities were Rmb2,865mn, down 9% YoY and 2% QoQ, ending four consecutive quarters of positive growth. Goldman Sachs views this as a sign of weakening order intake momentum. The external demand environment also remains difficult: capex in China's steel industry declined 6.3% YoY in 1-7M26, compared with growth of 1.8% in 2024 and a decline of 2.6% in 2025, indicating a further deepening of the contraction in steel industry investment. As more than 50% of the company's 2025 revenue was exposed to the domestic steel end market, steel production controls and capex contraction directly affect demand for its industrial software, informatization, and automation projects. Outsourcing services, which include data center services, were relatively resilient. Segment sales were Rmb1,776mn in 1H26, up 7% YoY, with gross margin of 43.0%, down 2 percentage points YoY. Goldman Sachs expects the segment's revenue growth to accelerate in 2H26E as new data center projects commence operations. Combining the low base and project commissioning factors, Goldman Sachs now forecasts 2H26E sales and net profit to grow 19% and 25% YoY, respectively, a marked improvement from respective declines of 9% and 37% in 2H25. However, lower margins will still offset part of the earnings uplift from revenue growth. Regarding the long-term investment thesis, Goldman Sachs recognizes Baosight Software's leading position in China's production software market, particularly in manufacturing execution systems (MES). Backed by its parent company, China Baowu Steel Group—the largest steel producer in China by crude steel output—Baosight Software is also the largest digitalization and automation service provider in the steel industry. The report lists three growth drivers: manufacturers increasing investment in production software to improve process efficiency; Baowu Group continuing to advance steel industry consolidation; and Baosight Software leveraging its established track record to expand into new customers and markets. However, these industry and shareholder resource advantages also create concentration risks. In addition to more than 50% of 2025 revenue being exposed to the domestic steel end market, 56% of the company's 2025 revenue came from related-party transactions with its parent company, making operating performance vulnerable to changes in Baowu's spending pace. Goldman Sachs' 2026E-28E net profit forecasts are, on average, 15% below Wind consensus, indicating a more cautious assessment of demand and earnings delivery. Goldman Sachs also considers the company's P/E valuation unattractive relative to the Chinese industrial technology companies it covers. Following the results, Goldman Sachs raised its 2026E-30E net profit forecasts by 1% on average, mainly reflecting the latest results and faster revenue growth assumptions, although the revenue upgrades were largely offset by lower gross margins. The 12-month target price was slightly raised from Rmb15.0 to Rmb15.2, still based on 25x 2027E P/E, while the Sell rating was maintained. The report notes that faster-than-expected expansion in non-steel markets, accelerated industry consolidation by Baowu Group, and faster commercialization of new products could all represent upside risks to its cautious view.

Analysis framework

Goldman Sachs first compares 2Q26 revenue, profit, and margins with the prior-year period and its own forecasts to distinguish between the beat in aggregate results and the margin shortfall. It then breaks down software development and engineering services and outsourcing services, analyzing the effects of the low base, segment gross margins, and the commissioning of data center projects. Next, it assesses orders and downstream demand using contract liabilities and steel industry capex. Finally, it adjusts its 2026E-30E earnings forecasts accordingly and derives the 12-month target price using 25x 2027E P/E.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  2027E target P/E valuation

  The report calculates Baosight Software's 12-month target price of Rmb15.2 using 25x 2027E P/E and compares its relative valuation with the Chinese industrial technology companies covered by Goldman Sachs.

• Company fundamentals and financial frameworkEarnings quality analysis

  Analysis of the relationship between revenue growth and margins

  The report examines revenue, gross profit, EBIT, net profit, and margins at each level, noting that although quarterly aggregate results beat expectations, gross margin declined significantly, preventing faster revenue growth from fully translating into earnings forecast upgrades.

• Industry analysis frameworkUpstream, midstream, and downstream value-chain transmission

  Transmission of steel capex into industrial software orders

  The report uses contracting capex in China's steel industry to explain pressure on demand from Baosight Software's core downstream market and combines this with changes in contract liabilities to conclude that the pressure is already reflected in order intake momentum.

Asset mapping & comparison

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

• Shanghai Baosight Software (600845.SS)

  A Chinese provider of production software and steel industry informatization and automation services, whose performance is jointly affected by industrial software investment, Baowu's consolidation efforts, steel capex, and the commissioning of data center projects.

  Strengths

  It holds a leading position in China's production software and MES markets, benefits from Baowu Group's steel industry customers and project resources, and has a track record of expanding into new customers and markets.

  Weaknesses

  More than 50% of 2025 revenue was exposed to the domestic steel end market, 56% of revenue came from related-party transactions with the parent company, and the gross margin of software development and engineering services declined 6 percentage points YoY in 1H26.

  Comparison

  Goldman Sachs' 2026E-28E net profit forecasts are, on average, 15% below Wind consensus, and it views the company's P/E valuation as unattractive relative to the Chinese industrial technology companies it covers.

  Risks

  Steel industry production controls and capex contraction could weigh on orders; fluctuations in parent-company spending could affect revenue; faster-than-expected expansion in non-steel markets, Baowu consolidation, or new-product commercialization would represent upside risks to the Sell thesis.

Key data

• 2Q26 revenueRmb2,988mnUp 37% YoY and 25% above Goldman Sachs' expectation
• 2Q26 gross profitRmb864mnUp 13% YoY and 8% above Goldman Sachs' expectation
• 2Q26 EBITRmb362mnUp 11% YoY and 8% above Goldman Sachs' expectation
• 2Q26 net profitRmb326mnUp 22% YoY and 9% above Goldman Sachs' expectation
• 2Q26 gross margin, operating margin, and net margin29% / 12% / 11%Down 6, 3, and 1 percentage points YoY, respectively, and 5, 2, and 2 percentage points below Goldman Sachs' expectations, respectively
• 1H26 software development and engineering services salesRmb3,817mnUp 26% YoY, compared with a 41% YoY decline in 1H25; segment gross margin was 23.7%, down 6 percentage points YoY
• 2Q26 contract liabilitiesRmb2,865mnDown 9% YoY and 2% QoQ, following four consecutive quarters of positive growth
• Capex in China's steel industry1-7M26同比-6.3%Up 1.8% YoY in 2024 and down 2.6% YoY in 2025
• 1H26 outsourcing services salesRmb1,776mnUp 7% YoY; gross margin was 43.0%, down 2 percentage points YoY
• 2H26E sales and net profit growth19% / 25%Compared with respective YoY declines of 9% and 37% in 2H25
• 2026E-30E net profit forecast revisions平均上调1%Faster revenue growth assumptions were largely offset by lower gross margins
• Difference between Goldman Sachs and market earnings forecasts2026E-28E平均低15%The gap between Goldman Sachs' net profit forecasts and Wind consensus
• 12-month target priceRmb15.2Previously Rmb15.0, based on 25x 2027E P/E
• Revenue exposure to the steel end market>50%Goldman Sachs' estimate of the share of 2025 revenue
• Share of revenue from related-party transactions with the parent company56%2025 data, reflecting high dependence on parent-company spending

Impact & implications

Goldman Sachs believes the 2Q26 results beat and the commissioning of data center projects support a recovery in growth in 2H26E, but declining margins in the software engineering business, lower contract liabilities, and contracting steel industry capex limit earnings upside. The company's leading position in MES and steel industry informatization remains intact, but customer concentration in the steel end market and its parent company makes its performance more vulnerable to spending fluctuations in a single industry and by a major customer. As a result, earnings forecasts were raised only slightly, while the valuation assessment and Sell rating remain unchanged.

Risks

• Production controls and capex contraction in the domestic steel industry may continue to weigh on demand for the company's core businesses.
• In 2025, 56% of revenue came from related-party transactions with the parent company, leaving the company vulnerable to fluctuations in this major customer's spending.
• Faster-than-expected expansion in non-steel markets could result in operating performance exceeding Goldman Sachs' current expectations.
• Faster-than-expected progress by Baowu Group in consolidating the steel industry could generate additional project demand.
• Faster-than-expected commercialization of new products could deliver additional growth.

What to watch

• Monitor whether contract liabilities can reverse their YoY and QoQ declines to confirm a recovery in order intake momentum.
• Monitor capex trends in China's steel industry and their transmission into demand for software, informatization, and automation projects.
• Monitor whether outsourcing services revenue accelerates as expected in 2H26E following the commissioning of new data center projects.
• Monitor whether the gross margin of software development and engineering services can stabilize from 23.7% in 1H26.
• Monitor expansion among non-steel customers, Baowu Group's industry consolidation, and progress in commercializing new products.