Shanghai M&G's first-quarter operating profit missed expectations, but product mix upgrades support the Buy rating

Overview

This report is Goldman Sachs' review of Shanghai M&G's 1Q26 results. The company's first-quarter revenue and operating profit were below Goldman Sachs expectations, mainly due to weaker revenue and a higher selling expense ratio; net profit was only slightly below expectations, supported by Rmb98mn in government subsidies. Despite rising short-term expense pressure, Goldman Sachs believes product upgrades have begun to show through in writing instrument growth and gross margin expansion, and therefore maintains the Buy rating.

Core views

The core view is that short-term earnings pressure coexists with medium-term product mix improvement. Negative factors include first-quarter revenue missing expectations, selling expenses exceeding expectations, a shift in online channels toward Douyin bringing a higher expense ratio, and gross margin pressure at Colipu. Positive factors include product mix improvement in writing instruments driving better-than-expected gross margin, narrower declines in student stationery and office stationery, and Jiumu's per-store output shifting from decline over the past two years to slight improvement. On this basis, Goldman Sachs only modestly lowers earnings forecasts and maintains the Buy rating.

Analysis framework

The report uses earnings variance analysis, business-segment revenue breakdown, gross margin and expense ratio analysis, earnings forecast revisions, and relative valuation. Goldman Sachs compares actual 1Q26 revenue, gross profit, selling expenses, EBIT, and net profit with its forecasts, and adjusts 2026-2028E net profit forecasts and the target price in conjunction with the operating performance of the traditional core business, Colipu, and the large-format retail store business.

Methodology notes

• Valuation methodologyP/E valuation

  17x 2026E P/E

  The target price of Rmb28 is based on an unchanged 17x 2026 expected P/E; after lowering earnings forecasts, the target price was cut from Rmb29 to Rmb28.

• Factor frameworkGoldman Sachs Factor Profile

  Growth, financial returns, valuation multiples, and composite percentile

  Goldman Sachs' factor profile compares the company with the covered market and industry peers across growth, financial returns, valuation multiples, and composite percentile, to supplement the investment context.

• M&A frameworkM&A Rank

  M&A Rank 3

  M&A Rank 3 represents a relatively low probability of being acquired, approximately 0%-15%; the report states that this is usually not included in the target price.

Asset mapping & comparison

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

• Shanghai M&G (603899.SS)

  Research coverage target

  Strengths

  Product upgrades continue to materialize, with writing instrument sales and gross margin outperforming expectations; Jiumu's per-store output improved slightly; revenue and EPS are still expected to grow in 2026-2028.

  Weaknesses

  1Q26 revenue missed expectations, and operating profit was dragged down by a higher selling expense ratio; Colipu's gross margin remains under pressure, while traditional student stationery and office stationery are still in the recovery phase.

  Comparison

  Versus Goldman Sachs expectations, 1Q26 revenue was 3% lower, EBIT was 13% lower, and net profit was 2% lower; versus the CSI 300, share price performance lagged by 10.1%, 9.8%, and 36.7% over the past 3, 6, and 12 months, respectively.

  Risks

  Slower-than-expected product mix upgrades; intensified competition in the stationery and office supplies business; continued increases in the expense ratio due to marketing investment and migration to online channels.

• Colipu

  Core business segment

  Strengths

  1Q26 revenue rose 10% year-on-year to Rmb3.1bn.

  Weaknesses

  Revenue was 4% below Goldman Sachs expectations, and gross margin remains under pressure.

  Comparison

  Performance was weaker than Goldman Sachs expectations, but it still maintained double-digit revenue growth.

  Risks

  Changes in corporate office supply demand or the competitive environment may continue to pressure gross margin.

• Jiumu

  Main driver of the large-format retail store business

  Strengths

  1Q26 revenue rose 16% year-on-year, store count was stable quarter-on-quarter, and average store efficiency improved slightly.

  Weaknesses

  The business is still in the stage of recovery and expansion validation.

  Comparison

  Store efficiency has improved versus the declining trend seen over the past two years.

  Risks

  There is uncertainty around execution of the target for net new store openings in the coming periods, store efficiency, and consumer demand.

Key data

• 1Q26 revenueRmb5,530mnUp 5% year-on-year and 3% below Goldman Sachs expectations.
• 1Q26 net profitRmb337mnUp 6% year-on-year and 2% below Goldman Sachs expectations; supported by Rmb98mn in government subsidies.
• 1Q26 EBITRmb351mn13% below Goldman Sachs expectations, with EBIT margin at 6.4%, below the expected 7.1%.
• 1Q26 selling expense ratio8.7%1.1 percentage points above Goldman Sachs expectations, the main reason operating profit missed expectations.
• 1Q26 gross margin20.3%About 0.2 percentage points above Goldman Sachs expectations, mainly driven by improved product mix in writing instruments.
• Colipu revenueRmb3.1bnUp 10% year-on-year, but 4% below Goldman Sachs expectations, with gross margin still under pressure.
• Large-format retail store business revenueRmb459mnUp 14% year-on-year; among this, Jiumu revenue was Rmb451mn, up 16% year-on-year.
• 2026E EPSRmb1.61Cut from the previous Rmb1.65; 2027E and 2028E EPS are Rmb1.78 and Rmb1.96, respectively.
• Target priceRmb28Previous Rmb29, based on 17x 2026E P/E.
• Market capitalizationRmb23.0bn / $3.4bnDisclosed in the report's key data.

Impact & implications

In terms of investment implications, the report conveys the view that 'short-term expense pressure is manageable, while product upgrades remain the main theme.' If the company can subsequently use new products, IP activities, and channel investment to achieve higher-quality growth while controlling the selling expense ratio, there is still room for earnings recovery; however, if marketing and online channel investment continue to push up the expense ratio, valuation recovery may be delayed.

Risks

• Product mix upgrades may be slower than expected.
• Competition in the stationery and office supplies business may intensify.
• Marketing investment, IP activities, and new product promotion may lead to a higher-than-expected selling expense ratio.
• Migration of online channels to platforms such as Douyin may bring a higher channel expense ratio.
• If gross margin pressure at Colipu persists, it may drag on overall profitability.

What to watch

• Whether the selling expense ratio declines or continues to rise in subsequent quarters.
• Whether improved product mix in writing instruments can continue to drive gross margin expansion.
• Whether the revenue declines in student stationery and office stationery narrow further and turn positive.
• Changes in Colipu's revenue growth and gross margin pressure.
• Execution of Jiumu's target of about 100 net new store openings over the remaining three quarters and the trend in per-store output.
• After the 2026-2028 net profit forecast cuts, whether actual earnings can still meet Goldman Sachs' new expectations.