2Q26 Missed Expectations Across the Board, with Industrial AI Yet to Offset Pressure on the Traditional Automation Business

Overview

This report reviews SUPCON Technology's 2Q26 results and assesses the effects of weak domestic chemical industry capital expenditure, the pace of industrial AI commercialization, the traditional automation business, margins, and cash conversion on earnings and valuation. Goldman Sachs lowers its earnings forecasts and target price, believes industrial AI remains insufficient to offset pressure on the traditional business in the near term, and maintains its Sell rating.

Core views

SUPCON Technology's 2Q26 results, announced after the market close on August 28, 2026, were below Goldman Sachs' expectations. Quarterly revenue, gross profit, operating profit, and net profit were Rmb2,129mn, Rmb684mn, Rmb2mn, and Rmb80mn, respectively, down 4%, 8%, 99%, and 66% year over year and 5%, 8%, 99%, and 62% below Goldman Sachs' forecasts, respectively. Gross margin, operating margin, and net margin were 32%, 0%, and 4%, respectively, down 1, 7, and 7 percentage points year over year and 1, 5, and 6 percentage points below Goldman Sachs' forecasts, indicating that revenue pressure has flowed through to profitability. Goldman Sachs primarily attributes the earnings miss to continued weakness in domestic chemical end-market capital expenditure and the near-term cannibalization effect from industrial AI's transition to a subscription model. Excluding industrial AI, the company's 1H26 sales declined 12% year over year, while fixed-asset investment growth in the domestic chemical industry was -6.5% over the same period. National Bureau of Statistics data also showed that chemical industry fixed-asset investment growth weakened further from -6.5% in the first six months of 2026 to -7.4% in the first seven months. This demand pressure has a significant impact because the petrochemical and chemical industries accounted for 55% of the company's total sales in 2025. Industrial AI is the fastest-growing new business, but the pace of commercialization has yet to reach a level sufficient to offset the decline in the traditional business. 1H26 industrial AI sales reached Rmb385mn, up 230% year over year; however, they grew only 9% quarter over quarter in 2Q26, and their share of total sales declined from 12% in 1Q26 to 9% in 2Q26. Obstacles cited by management include lengthy internal customer decision-making cycles, insufficient salesforce incentives after the subscription model cannibalized one-off product sales, and low implementation efficiency on the customer side. The company is restructuring its internal sales and marketing system and strengthening customer education. Management still expects full-year 2026 industrial AI sales of Rmb800mn to Rmb1,000mn, mainly driven by the expanded application of the TPT time-series pre-trained Transformer model in industries such as chlor-alkali and petrochemicals; Goldman Sachs forecasts Rmb805mn. The traditional automation business remains under pressure. Automation control system sales declined 11% year over year, compared with declines of 9% in 1H25 and 28% in 2H25. The company believes its DCS market share continues to increase; SUPCON Technology ranked first in China's DCS market in 2025 with a 45% share and competes with Emerson, Honeywell, Yokogawa, and domestic company Hollysys. Management stated that new order growth has turned positive year to date in 2026, and Goldman Sachs expects the segment's sales to increase 26% in 2H26 off a low base. However, Goldman Sachs believes that even if new businesses such as industrial AI deliver strong sales CAGRs during 2025-2030E, weak chemical industry capital expenditure will keep the company's overall growth moderate over the next several years. Costs, expenses, and cash conversion further intensified earnings pressure. The company's overall gross margin declined 1 percentage point year over year in 2Q26, mainly due to a 21-percentage-point decline in the industrial software segment's gross margin. Operating expenses increased 24% year over year, contrasting with a 4% year-over-year decline in revenue and driving the selling and administrative expense ratio up 7 percentage points year over year. Annualized receivables turnover days, including accounts receivable, notes receivable, and contract assets, extended to 288 days in 1H26, above 255 days in 1H25 and 244 days in 2H25; operating cash outflow widened from Rmb559mn in 1H25 to Rmb715mn. Goldman Sachs therefore emphasizes the need to monitor credit impairment and cash conversion risks going forward. Goldman Sachs lowered its 2026E-30E net profit forecasts by an average of 11% to reflect the earnings shortfall and a prolonged period of weak domestic chemical industry capital expenditure. Its 2026E, 2027E, and 2028E revenue forecasts were revised to Rmb8,271.7mn, Rmb9,414.6mn, and Rmb10,465.0mn, respectively, from Rmb8,734.4mn, Rmb9,756.9mn, and Rmb10,804.5mn previously. EPS forecasts for the same period were revised to Rmb0.57, Rmb1.23, and Rmb1.52 from Rmb0.87, Rmb1.30, and Rmb1.60, corresponding to forecast P/E ratios of 161.3x, 74.7x, and 60.7x, respectively. Goldman Sachs recognizes the company's leading position in control systems but believes its valuation remains elevated relative to long-term EPS growth. The 12-month target price was lowered from Rmb44.5 to Rmb42.3, still based on a 28x 2030E P/E multiple and discounted to 2027E using a 10.5% cost of equity. Compared with the current price of Rmb92.14, this implies 54.1% downside, and Goldman Sachs therefore maintains its Sell rating.

Analysis framework

The report first compares 2Q26 revenue, profit, and margins with year-over-year and quarter-over-quarter figures and Goldman Sachs' forecasts. It then separates the sources of growth between industrial AI and the traditional automation business and uses domestic chemical industry fixed-asset investment, DCS market share, and order trends to explain changes in demand. It subsequently analyzes gross margins, expense ratios, receivables turnover days, and operating cash flow, lowers its earnings forecasts accordingly, and finally updates the target price using a forward P/E multiple and cost-of-equity discounting approach.

Methodology notes

• Company Fundamentals and Financial Framework

  Actual-versus-expected variance and segment performance breakdown

  The report compares actual 2Q26 revenue, profit, and margins with the prior-year period, the previous quarter, and Goldman Sachs' forecasts, and further distinguishes between industrial AI and the traditional businesses to identify the main sources of the performance variance.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Transmission of chemical industry capital expenditure to automation demand

  The report treats domestic chemical industry fixed-asset investment as an important driver of demand for SUPCON Technology's traditional automation products and assesses the impact of weak demand on revenue growth in light of the company's 55% revenue exposure to the chemical industry.

• Company Fundamentals and Financial FrameworkWorking capital cycle

  Receivables turnover and cash conversion analysis

  The report uses changes in receivables turnover days and operating cash outflow to assess the pace of revenue collection, credit impairment risk, and the company's ability to convert profit into cash.

• Valuation MethodPE/PEG valuation

  Forward P/E-discounted target price

  The report calculates forward value using a 28x 2030E P/E multiple and then discounts it to 2027E using a 10.5% cost of equity, deriving a 12-month target price of Rmb42.3. It also assesses the valuation as elevated by comparing the P/E multiple with long-term EPS growth.

Asset mapping & comparison

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

• SUPCON Technology (688777.SH; original report code 688777.SS)

  The only principal company covered in the report; the traditional automation business is affected by weak domestic chemical industry capital expenditure, and industrial AI has not yet fully offset this pressure.

  Strengths

  Ranked first in China's DCS market in 2025 with a 45% share; new order growth has turned positive year to date in 2026; 1H26 industrial AI sales increased 230% year over year.

  Weaknesses

  2Q26 revenue and profit missed expectations, industrial AI's quarter-over-quarter growth and revenue contribution slowed, and margins, expense control, receivables, and operating cash flow were all under pressure.

  Comparison

  The company competes in the process automation market with international companies such as Emerson, Honeywell, and Yokogawa, as well as domestic companies such as Hollysys.

  Risks

  Credit impairment and cash conversion risks are increasing; stronger-than-expected contributions from new businesses, the chemical investment cycle, overseas expansion, or DCS market share would pose upside risks to the Sell view.

Key data

• 2Q26 revenue/gross profit/operating profit/net profitRmb2,129mn / Rmb684mn / Rmb2mn / Rmb80mnDown 4%/8%/99%/66% year over year, respectively, and 5%/8%/99%/62% below Goldman Sachs' forecasts, respectively.
• 2Q26 gross margin/operating margin/net margin32% / 0% / 4%Down 1/7/7 percentage points year over year, respectively, and 1/5/6 percentage points below Goldman Sachs' forecasts.
• 1H26 industrial AI salesRmb385mnUp 230% year over year.
• 2Q26 industrial AI quarter-over-quarter growth and revenue contribution+9% / 9%The revenue contribution was below 12% in 1Q26.
• 2026 industrial AI sales targetRmb800mn-Rmb1,000mnManagement target; Goldman Sachs forecasts Rmb805mn.
• 1H26 revenue growth excluding industrial AI-12% year over yearReflects continued weakness in the traditional businesses.
• Automation control system sales-11% year over yearManagement stated that new order growth has turned positive year to date in 2026; Goldman Sachs expects the segment's sales to grow 26% in 2H26.
• China DCS market share45%SUPCON Technology ranked first in 2025.
• Expense and sales growthOperating expenses +24% year over year; sales -4% year over yearThe selling and administrative expense ratio rose 7 percentage points year over year.
• 1H26 receivables turnover days288 daysAnnualized, compared with 255 days in 1H25 and 244 days in 2H25.
• 1H26 operating cash outflowRmb715mnThe outflow was higher than Rmb559mn in 1H25.
• Earnings forecast revisions2026E-30E net profit lowered by an average of 11%Reflects the earnings miss and continued weakness in chemical industry capital expenditure.
• Target price and current priceRmb42.3 / Rmb92.14The previous target price was Rmb44.5; the current target price implies 54.1% downside.

Impact & implications

The report believes weak domestic chemical industry capital expenditure will remain the primary constraint on SUPCON Technology's growth over the next several years. Although industrial AI is growing rapidly year over year, its slower quarter-over-quarter growth, declining revenue contribution, and the sales cannibalization effect from the subscription transition mean that the new business has yet to provide a sufficient offset. The traditional business may resume growth in 2H26 off a low base, but pressure on expenses, margins, receivables, and cash conversion prompted Goldman Sachs to lower its earnings forecasts. Combined with high forecast P/E multiples, the report continues to maintain its Sell view.

Risks

• Higher-than-expected contributions from new businesses such as industrial AI, software subscriptions, or robotics could pose upside risks to the report's Sell view.
• A stronger-than-expected chemical industry investment cycle could improve demand for the traditional automation business.
• Faster-than-expected overseas expansion could deliver growth above the report's forecasts.
• Faster-than-expected gains in domestic DCS market share could improve revenue and earnings performance.
• Longer receivables turnover days and widening operating cash outflows create credit impairment and cash conversion risks.

What to watch

• Monitor whether industrial AI can achieve management's 2026 sales target of Rmb800mn-Rmb1,000mn and whether quarter-over-quarter growth and revenue contribution can recover.
• Track when industrial AI can fully offset the decline in the traditional business and the adoption progress of the TPT model in industries such as chlor-alkali and petrochemicals.
• Observe whether the restructuring of the sales and marketing system, sales incentives, and customer education can shorten decision-making cycles and improve implementation efficiency.
• Track whether the return to positive new order growth can translate into the 26% growth in 2H26 automation control system sales forecast by Goldman Sachs.
• Monitor subsequent changes in receivables turnover days, credit impairment, and operating cash flow.
• Track progress in software subscriptions, robotics solutions, overseas expansion, and domestic DCS market share.