Empyrean (301269): Goldman Sachs keeps Neutral on Empyrean despite improving 2Q26 results and expanding EDA coverage

Overview

This earnings review examines Empyrean's 2Q26 performance and its expansion from analog and panel EDA into digital design, foundry, memory, PCB and advanced-packaging tools. Goldman Sachs remains constructive on the longer-term product-expansion and localized AI-demand opportunity, but maintains Neutral after reducing revenue and earnings forecasts, particularly for digital-design EDA.

Core views

Empyrean's 2Q26 results showed improving momentum, according to Goldman Sachs. Revenue reached Rmb310 million, up 16% year-on-year and 20% quarter-on-quarter, supported by increased spending from foundry and memory EDA customers. Gross profit was Rmb293 million, up 26% year-on-year, and gross margin improved to 94.7% from 78.8% in 1Q26. Operating income improved to a Rmb5 million loss from a Rmb118 million loss in the prior quarter, while net income turned positive at Rmb28 million, compared with a Rmb73 million loss in 1Q26 and a Rmb7 million loss in 2Q25. The result was broadly in line with Goldman Sachs' estimates, although revenue was 17% below its forecast and net income was 7% below forecast. The report's longer-term thesis rests on product breadth and semiconductor localization demand. Empyrean already offers full-flow analog, panel and memory EDA tools and is extending its portfolio into digital-design, foundry, and PCB/advanced-packaging EDA. It has more than 1,500 R&D employees and is supplementing internal development through investments and acquisitions, adding tools such as place and route, optoelectronic-device simulation, design-for-test, formal verification and TCAD. Management also pointed to local suppliers' advantages in selected products, including 3D IC EDA tools. Goldman Sachs believes the broader portfolio can raise client spending over time. AI is another prospective demand driver, but the report distinguishes near-term execution from longer-term potential. Local GPU and CPU companies generated strong digital-design EDA orders in 2025, yet digital EDA customer growth is muted in 2026. Goldman Sachs notes that an order generally lasts about three years, supporting its positive longer-term view of rising localized AI demand and related customer spending. Management said AI features are improving the internal team's productivity and can be integrated across tools to improve users' efficiency, but their direct revenue contribution will take time. The weaker near-term digital-design EDA outlook drove forecast cuts. Goldman Sachs reduced 2026E, 2027E and 2028E revenue forecasts by 15%, 11% and 11%, respectively, to Rmb1.682 billion, Rmb2.452 billion and Rmb3.420 billion. It reduced net-income forecasts by 60%, 18% and 16% to Rmb138 million, Rmb577 million and Rmb1.073 billion, respectively. The 2026E operating-margin forecast was cut to negative 2.7% from 6.7%, with the higher operating-expense ratio mainly reflecting high R&D spending. Forecast revenue growth remains 27% for 2026E, 46% for 2027E and 39% for 2028E, while the model assumes profitability scales as the expense ratio declines. Goldman Sachs maintains Neutral and lowers its 12-month target price to Rmb109 from Rmb125. Its discounted P/E methodology applies a 46.5x multiple to 2029E EPS, versus 45x previously, and discounts the result back to 2026E using an 11.5% cost of equity. The cost of equity uses a beta of 1.3, a 3.0% risk-free rate and a 6.5% market-risk premium. The target multiple is based on the relationship between semiconductor/EDA peers' P/E valuations and forward earnings growth, as well as the average historical 12-month forward P/E of global EDA peers. Against the Rmb86.45 share price as of 28 September 2026, the target implied 26.1% upside.

Analysis framework

Goldman Sachs first assesses the quarter against its estimates and prior periods, then links demand trends across foundry, memory and digital-design EDA to Empyrean's expanding product portfolio. It revises revenue, profitability and expense assumptions before deriving a 12-month target price by applying a peer-informed P/E multiple to 2029E EPS and discounting it to 2026E using its cost-of-equity assumptions.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Discounted P/E valuation

  Goldman Sachs applies a 46.5x multiple to 2029E EPS and discounts that value back to 2026E to calculate its Rmb109 target price.

• Quantitative, Factor, and Portfolio TheoryCAPM (Capital Asset Pricing Model)

  Cost of equity based on beta, risk-free rate and market-risk premium

  The 11.5% discount rate uses a beta of 1.3, a 3.0% risk-free rate and a 6.5% market-risk premium.

Asset mapping & comparison

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

• Empyrean (301269.SZ)

  Primary covered company and EDA supplier.

  Strengths

  Improving foundry and memory EDA customer spending; broad existing analog, panel and memory EDA coverage; expansion into digital design, foundry and advanced-packaging tools.

  Weaknesses

  Muted digital-design EDA client growth in 2026 and high R&D spending pressure near-term profitability.

  Comparison

  The target P/E multiple is derived from semiconductor/EDA peers' P/E and forward-growth relationship and global EDA peers' historical forward P/E.

  Risks

  Customer acquisition and spending may change more slowly or quickly than expected; competition and talent availability or labor costs may differ from expectations.

Key data

• 2Q26 revenueRmb310 millionUp 16% year-on-year and 20% quarter-on-quarter; 17% below Goldman Sachs' estimate.
• 2Q26 net incomeRmb28 millionTurned positive from losses of Rmb73 million in 1Q26 and Rmb7 million in 2Q25; 7% below estimate.
• 2Q26 gross margin94.7%Up from 78.8% in 1Q26 and 87.1% in 2Q25.
• 2026E net-income revisionRmb138 millionReduced 60% from the prior Rmb347 million estimate.
• 2027E/2028E net-income revisionsRmb577 million / Rmb1.073 billionReduced 18% / 16% from prior estimates.
• Target priceRmb109Down from Rmb125; based on a 46.5x 2029E P/E discounted to 2026E at an 11.5% cost of equity.

Impact & implications

Goldman Sachs sees foundry and memory EDA spending, product expansion and localized AI demand as supporting a larger future customer-spending opportunity. However, muted 2026 digital-design EDA growth and continued R&D investment weaken near-term revenue and earnings expectations, underpinning the maintained Neutral rating despite the target price implying 26.1% upside.

Risks

• Customer acquisition and average spending per customer could increase more slowly or more quickly than expected.
• Competition could increase or decrease relative to expectations.
• Talent availability, labor costs or labor shortages could be better or worse than expected.