2Q26 gross margin improved and expense ratio declined; overseas and high-end products to drive 2H growth

Overview

Sieyuan Electric generated 1H26 revenue of Rmb10.8bn, up 27.0% YoY, and net profit attributable to shareholders of Rmb1,464mn, up 13.2% YoY, broadly in line with its previous earnings guidance. FX losses weighed on reported profit; excluding FX effects, analysts estimate earnings grew about 22.0% YoY. The report maintains a positive view, believing that orders, product mix and overseas business will support 2H growth.

Core views

Improved earnings quality: 2Q26 gross margin rose sequentially to 31.6%, while the expense ratio declined notably, reflecting effective cost control.Revenue-recognition timing affected quarterly growth: 2Q26 revenue grew 18.1% YoY, below expectations mainly due to project revenue-recognition progress; 750kV GIS and certain North American transformer products are expected to be recognized in 3Q26.Orders provide growth visibility: new orders in 1H26 grew by more than 30% YoY, while overseas orders grew by more than 50%.Mix upgrades support earnings: high-end switchgear, overseas orders and a lower contribution from subsequent EPC revenue are expected to improve the product and regional mix.

Analysis framework

The report assesses near-term earnings changes based on earnings breakdowns, segment gross margins and order trends, and uses a discounted cash flow method to value long-term cash flows from 2027 to 2037.

Methodology notes

• Valuation methodologyDiscounted cash flow method (DCF)

  Discounted valuation of long-term cash flows from 2027 to 2037.

  The report uses a 7.5% weighted average cost of capital and a 1% terminal growth rate; cost-of-capital assumptions include a 9.5% cost of equity, a 6.0% after-tax cost of debt, and a 40% target debt-to-capital ratio.

• Earnings analysisSegment and mix analysis

  Breaks down changes in revenue and profit by product, region and expense ratio.

  The analysis focuses on revenue and gross margins for switchgear, transformers, energy storage and EPC businesses, as well as overseas revenue mix and order growth.

Asset mapping & comparison

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

• Sieyuan Electric Co.Ltd.（002028.SZ）

  Covered company

  Strengths

  Strong order growth; high gross margins in switchgear and transformer businesses; high-end GIS, overseas markets and an improving product mix are growth catalysts.

  Weaknesses

  Overseas revenue mix and gross margin were under YoY pressure in 1H; energy storage and EPC businesses have lower gross margins; FX losses weighed on reported profit.

  Comparison

  Analysts expect risk-adjusted total return over the next 12 to 18 months to outperform the average of their industry coverage universe.

  Risks

  Weaker-than-expected overseas and domestic new orders, less-than-expected market-share gains in State Grid tenders, and slower progress in high-end product penetration.

Key data

• 1H26 revenueRmb10.8bn, up 27.0% YoYBroadly in line with earnings guidance.
• 1H26 net profit attributable to shareholdersRmb1,464mn, up 13.2% YoYExcluding the impact of FX losses, estimated to have grown about 22.0% YoY.
• 2Q26 gross margin31.6%Up 2.6 percentage points from 1Q26 and 3.6 percentage points from 4Q25.
• 2Q26 expense ratio11.2%Down 1.9 percentage points YoY and 3.7 percentage points QoQ.
• 1H26 new ordersUp more than 30% YoYDomestic growth was about 25% to 30%, while overseas growth exceeded 50%.
• Switchgear businessRevenue of Rmb4.3bn, up 22.5% YoY; gross margin of 39.1%Gross margin increased 3.7 percentage points YoY; 750kV GIS revenue is expected to be recognized in 3Q26.
• Transformer businessRevenue of Rmb2.3bn, up 12.5% YoY; gross margin of 36.4%Certain North American projects are expected to recognize revenue in 3Q26.
• Overseas businessRevenue of Rmb3.2bn, up 11.2% YoY; gross margin of 33.4%Representing 29% of revenue, gross margin declined 2.3 percentage points YoY due to product mix and slightly higher transportation costs.

Impact & implications

The key near-term variable for earnings is project revenue recognition, especially deliveries of 750kV GIS and North American transformers. If high-end products and overseas orders convert as planned, an improved revenue mix, controlled expense ratio and a lower contribution from low-margin EPC business could jointly accelerate profit growth in 2H.

Risks

• Overseas new orders are weaker than expected.
• Domestic order wins are weaker than expected.
• Market-share gains in State Grid public tenders are weaker than expected.
• Delayed project revenue recognition could affect quarterly revenue and profit performance.
• Changes in FX gains/losses and transportation costs could affect earnings.

What to watch

• Progress of revenue recognition for 750kV GIS in China in 3Q26.
• Revenue recognition for delivered transformer products in North America.
• Growth in overseas new orders, regional mix and trends in overseas gross margin.
• Market share in State Grid tenders and penetration of high-end products.
• Whether EPC revenue mix declines starting in 2H26.
• Whether gross margin and selling, administrative and R&D expense ratios can continue improving.