2Q26 results were below Goldman Sachs expectations across the board, industrial AI has yet to offset pressure on the traditional business; reiterate Sell

Overview

The report reviews Zhejiang Supcon Technology's 2Q26 results and its August 30 earnings call, focusing on traditional automation demand, industrial AI commercialization, costs and expenses, and cash conversion. Goldman Sachs believes industrial AI has yet to reach sufficient scale to offset weak chemical-sector capex and therefore lowers its earnings forecasts and target price while reiterating its Sell rating.

Core views

Zhejiang Supcon Technology reported its 2Q26 results after the market close on August 28, 2026. Revenue, gross profit, operating profit, and net profit were Rmb2,129mn, Rmb684mn, Rmb2mn, and Rmb80mn, respectively, down 4%, 8%, 99%, and 66% year-on-year and 5%, 8%, 99%, and 62% below Goldman Sachs expectations, respectively. Gross margin, operating margin, and net margin were 32%, 0%, and 4%, respectively, down 1, 7, and 7 percentage points year-on-year and 1, 5, and 6 percentage points below Goldman Sachs expectations. Goldman Sachs therefore concludes that the quarter was not only weak on the revenue side, but that expense and margin pressure also significantly amplified the decline in profit. The traditional business remains constrained by weak capex in China's chemical industry. Excluding industrial AI, the company's other businesses recorded a 12% year-on-year revenue decline in 1H26, while fixed-asset investment in China's chemical industry fell 6.5% year-on-year over the same period. The decline in chemical-sector fixed-asset investment widened further to 7.4% year-on-year in the first seven months of 2026, versus a 6.5% decline in the first six months. Automation control systems revenue declined 11% year-on-year, versus declines of 9% and 28% in 1H25 and 2H25, respectively. Although the company believes its DCS market share continues to rise and new order growth has turned positive year-to-date in 2026, Goldman Sachs forecasts that the segment's 2H26E revenue could grow 26% off a low base. Nevertheless, the demand environment remains the principal near-term constraint on overall growth. This exposure is substantial because the chemical and petrochemical industries contributed 55% of the company's total revenue in 2025. Industrial AI is the primary growth driver, but its growth quality and ability to offset the traditional business remain to be validated. Industrial AI revenue reached Rmb385mn in 1H26, up 230% year-on-year; however, it grew only 9% sequentially in 2Q26, and its revenue contribution fell from 12% in 1Q26 to 9%. Following the company's transition to a subscription model, one-time product sales have been partially displaced, while the company also faces lengthy internal decision-making cycles, difficulties in incentivizing sales personnel, and relatively low implementation efficiency on the customer side. Management is restructuring the sales and marketing organization and strengthening customer education. Management remains confident in achieving its full-year 2026 industrial AI revenue target of Rmb800mn-Rmb1,000mn, mainly by expanding the application of its TPT time-series pre-trained Transformer model in end markets such as chlor-alkali and petrochemicals; Goldman Sachs's 2026E forecast is Rmb805mn. The report's core point to monitor is when industrial AI can reach sufficient scale to offset the decline in the traditional business, rather than merely maintaining high year-on-year growth. Costs and expenses further compressed profitability. The company's overall gross margin declined 1 percentage point year-on-year in 2Q26, mainly due to a 21-percentage-point decline in the industrial software segment's gross margin. During the same period, operating expenses increased 24% year-on-year while revenue fell 4% year-on-year, causing the selling and administrative expense ratio to rise 7 percentage points year-on-year. This combination explains why operating profit was almost entirely eliminated and why net profit declined much more sharply than revenue. Working capital and cash conversion are also risks emphasized in the report. Annualized receivables-related turnover days, including accounts receivable, notes receivable, and contract assets, lengthened to 288 days in 1H26 from 255 days in 1H25 and 244 days in 2H25. Operating cash outflow widened to Rmb715mn in 1H26, versus an outflow of Rmb559mn in 1H25. Goldman Sachs believes credit impairment and cash conversion risks warrant close monitoring, as a further slowdown in collections could continue to weaken earnings quality and cash-flow performance. Based on the weaker-than-expected results and prolonged weakness in capex among domestic chemical end customers, Goldman Sachs lowered its 2026E-30E net profit forecasts by an average of 11%. For revenue, its 2026E, 2027E, and 2028E forecasts were reduced from Rmb8,734.4mn, Rmb9,756.9mn, and Rmb10,804.5mn to Rmb8,271.7mn, Rmb9,414.6mn, and Rmb10,465.0mn, respectively; its EPS forecasts were revised from Rmb0.87, Rmb1.30, and Rmb1.60 to Rmb0.57, Rmb1.23, and Rmb1.52, respectively. The forecasts indicate a relatively back-end-loaded recovery: revenue and EPS are projected to grow only 2.5% and 2.4% in 2026E, followed by expected growth of 13.8% and 115.9% in 2027E; the EBITDA margin is projected to rise from 1.9% in 2026E to 7.6% in 2027E and 8.9% in 2028E. Over the long term, Goldman Sachs recognizes the company's leading position in China's process automation market: it ranked first with a 45% share of the DCS market in 2025 and competes with Emerson, Honeywell, Yokogawa, and domestic rival Hollysys. The report forecasts strong revenue CAGR for new businesses such as industrial AI over 2025-2030E, but believes the company's overall growth may remain relatively moderate over the next several years because of chemical-sector capex pressure and its high revenue exposure to the industry. Goldman Sachs is also monitoring whether software subscriptions, robotics solutions, and overseas expansion can become new sources of growth. On valuation, the 12-month target price was lowered from Rmb44.5 to Rmb42.3, still based on a 28x 2030E P/E multiple discounted back to 2027E using a 10.5% cost of equity. Relative to the current price of Rmb92.14, the target price implies 54.1% downside. The company's 2026E, 2027E, and 2028E P/E multiples are 161.3x, 74.7x, and 60.7x, respectively; Goldman Sachs believes the current valuation remains high relative to long-term EPS growth and therefore reiterates its Sell rating.

Analysis framework

Goldman Sachs first compares 2Q26 revenue, profit, and margins item by item with the prior-year period and its own forecasts, and then separates industrial AI from the remaining traditional businesses to assess whether the new business can offset the downturn in chemical-sector capex. The report subsequently analyzes operating quality using DCS market share, chemical-sector fixed-asset investment, orders, expense ratios, receivables turnover, and operating cash flow. It then revises its 2026E-30E earnings forecasts accordingly and finally calculates its 12-month target price using a forward P/E discounting methodology.

Methodology notes

• Event Games and Behavioral FinanceEvent-driven analysis

  Quarterly results and earnings call review

  The report focuses on the 2Q26 results announcement and August 30 earnings call, comparing actual results and management's explanations with prior forecasts and updating its earnings and valuation assessments accordingly.

• Event Games and Behavioral FinanceExpectation Gap/Expectations Management

  Comparison of actual results with GSe and management targets

  The report quantifies deviations in revenue, profit, and margins from Goldman Sachs forecasts, while also comparing management's industrial AI revenue target of Rmb800mn-Rmb1,000mn with Goldman Sachs's forecast of Rmb805mn.

• Industry/Sector Analysis FrameworkUpstream, Midstream, and Downstream Industry Chain Transmission

  Transmission of chemical-sector capex to automation demand

  The report links the decline in chemical-sector fixed-asset investment to weak revenue from the company's automation control systems, using end-customer capex to explain changes in traditional business demand.

• Corporate Fundamentals and Financial FrameworkWorking capital cycle

  Receivables turnover and cash conversion analysis

  The report uses changes in receivables-related turnover days and operating cash flow to assess collection efficiency, credit impairment, and the risk associated with converting earnings into cash.

• Industry/Sector Analysis FrameworkIndustry Concentration Analysis

  DCS market share and competitive position

  The report illustrates the company's leading position through its first-ranked 45% share of China's DCS market in 2025 and assesses its competitive advantages in the context of domestic and international competitors.

• Valuation MethodPE/PEG valuation

  Forward P/E discounting valuation

  The target price is based on a 28x 2030E P/E multiple, discounted back to 2027E using a 10.5% cost of equity, to derive the 12-month target price.

Asset mapping & comparison

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

• Zhejiang Supcon Technology (688777.SH)

  The primary company covered by the report, a Chinese process automation and DCS supplier that is also advancing industrial AI, software subscriptions, robotics, and overseas businesses.

  Strengths

  Held a first-ranked 45% share of China's DCS market in 2025; industrial AI achieved 230% year-on-year revenue growth in 1H26.

  Weaknesses

  The chemical and petrochemical industries contributed 55% of revenue in 2025, leaving the traditional business exposed to weak capex; margins, expense ratios, receivables turnover, and operating cash flow are all under pressure.

  Comparison

  The report states that the company competes with global vendors including Emerson, Honeywell, and Yokogawa, as well as domestic rival Hollysys, and believes its valuation is high relative to long-term EPS growth.

  Risks

  Industrial AI commercialization and implementation progress falling short of targets, persistent weakness in traditional demand, credit impairment, and deteriorating cash conversion.

Key data

• 2Q26 revenueRmb2,129mnDown 4% year-on-year, up 41% sequentially, and 5% below Goldman Sachs expectations.
• 2Q26 gross profitRmb684mnDown 8% year-on-year, up 47% sequentially, and 8% below Goldman Sachs expectations.
• 2Q26 operating profitRmb2mnDown 99% year-on-year and 99% below Goldman Sachs expectations.
• 2Q26 net profitRmb80mnDown 66% year-on-year, up 8% sequentially, and 62% below Goldman Sachs expectations.
• 2Q26 marginsGross margin 32% / operating margin 0% / net margin 4%Down 1, 7, and 7 percentage points year-on-year, respectively, and 1, 5, and 6 percentage points below Goldman Sachs expectations, respectively.
• 1H26 industrial AI revenueRmb385mnUp 230% year-on-year; grew only 9% sequentially in 2Q26, with its revenue contribution falling from 12% in 1Q26 to 9%.
• 2026 industrial AI revenue targetRmb800mn-Rmb1,000mnManagement target; Goldman Sachs's 2026E forecast is Rmb805mn.
• Traditional business and chemical-sector investment1H26 revenue excluding industrial AI declined 12% year-on-yearAutomation control systems revenue declined 11% year-on-year; fixed-asset investment in China's chemical industry fell 7.4% year-on-year in the first seven months of 2026.
• Changes in costs and expenses2Q26 operating expenses increased 24% year-on-yearRevenue declined 4% year-on-year over the same period; the selling and administrative expense ratio rose 7 percentage points year-on-year, while the industrial software segment's gross margin declined 21 percentage points.
• Receivables and operating cash flowReceivables-related turnover of 288 days; operating cash outflow of Rmb715mnReceivables turnover was 255 days in 1H25 and 244 days in 2H25; operating cash outflow was Rmb559mn in 1H25.
• Earnings forecast revisions2026E-30E net profit lowered by an average of 11%Reflects weaker-than-expected 2Q26 results and persistently weak capex among domestic chemical end customers.
• Revenue forecasts2026E / 2027E / 2028E: Rmb8,271.7mn / Rmb9,414.6mn / Rmb10,465.0mnPreviously Rmb8,734.4mn, Rmb9,756.9mn, and Rmb10,804.5mn, respectively.
• EPS forecasts2026E / 2027E / 2028E: Rmb0.57 / Rmb1.23 / Rmb1.52Previously Rmb0.87, Rmb1.30, and Rmb1.60, respectively.
• DCS market position45% share of the Chinese market in 2025The report describes Zhejiang Supcon Technology as a leading Chinese process automation supplier, ranking first by DCS market share.
• Valuation and target priceRmb42.312-month target price, previously Rmb44.5; based on a 28x 2030E P/E multiple discounted back to 2027E using a 10.5% cost of equity.
• Market capitalization and enterprise valueMarket capitalization Rmb72.9bn / $10.8bn; enterprise value Rmb70.3bn / $10.5bnThree-month average daily trading value was Rmb2.2bn / $328.1mn.

Impact & implications

The report believes that the high year-on-year growth of industrial AI has yet to translate into sufficient revenue scale to offset the decline in the traditional automation business, while the transition to a subscription model has also created sales incentive issues and displaced one-time revenue. Weak chemical-sector capex, declining margins, expense growth, and slowing collections collectively weigh on near-term earnings quality, delaying the earnings recovery and resulting in a lower target price. The leading DCS market share, commercialization of new businesses, and overseas expansion remain potential sources of future improvement and constitute the primary upside risks to the Sell thesis.

Risks

• If new businesses such as industrial AI, software subscriptions, or robotics contribute more than expected, this could constitute an upside risk to the Sell thesis.
• If the chemical industry's investment cycle is stronger than expected, the traditional automation business could outperform the report's forecasts.
• If overseas expansion progresses faster than expected, it could generate additional growth.
• If the company's share of the domestic DCS market increases faster than expected, results could exceed the report's forecasts.
• Longer receivables turnover days and widening operating cash outflows create credit impairment and cash conversion risks.

What to watch

• Whether industrial AI revenue can reach the 2026 target of Rmb800mn-Rmb1,000mn and when it will become sufficient to offset weakness in the traditional business.
• Growth momentum in new businesses such as industrial AI, software subscriptions, and robotics solutions.
• Progress in overseas expansion and contributions from new markets.
• Subsequent changes in credit impairment, receivables turnover, and operating cash flow.