Industrial Automation Strongly Beats Expectations; New Energy Loss Drag Expected to Ease in 3Q

Overview

The report reviews Inovance Technology's preliminary results for the second quarter of 2026. Its core conclusion is that the industrial automation business's growth, margins, and recurring profit were clearly better than expected, indicating that it is benefiting from the upstream automation cycle. The new energy business incurred losses due to weakness in China's EV industry, but management expects the related drag to ease from the third quarter. Based on improvements in the core business and medium- to long-term investments in new businesses, J.P. Morgan maintains its Overweight rating.

Core views

Inovance Technology's headline preliminary results for 2Q26 were broadly in line with its previous preview, but the profit mix was significantly better than expected. Quarterly revenue was Rmb14.532 billion, up 26% year over year, while net profit was Rmb1.796 billion, up 9% year over year. Recurring profit, which better reflects the performance of the core operations, reached Rmb1.710 billion, up 19% year over year, and represented the main positive surprise in the results. The report believes that, following fluctuations in overall results during the previous two consecutive quarters, the stronger-than-expected growth in recurring profit improves earnings repeatability and also indicates that the core business retains margin resilience. Industrial automation was the strongest business line. Revenue and recurring profit from the industrial automation and elevator businesses both grew approximately 50% year over year in 2Q26, significantly exceeding the earnings preview and market consensus expectations. Assuming elevator sales were broadly flat, the report estimates that factory automation sales may have grown by more than 60% year over year, indicating that demand was not concentrated in a single product but was broad-based across the automation and robotics sectors. Order momentum since the beginning of the year, the removal of supply bottlenecks, and improved execution jointly drove a renewed acceleration in the business. The company also implemented product price increases, particularly for industrial automation products, and supported profits through volume leverage and an improved product mix. Although the report shows that the net margin of the factory automation and elevator businesses was 20.5%, down from 23.1% in 2Q25, it still views recurring profit growth as important evidence of pricing discipline and improved earnings quality. The cyclical performance of upstream peer AirTAC provides validation for Inovance Technology. AirTAC's financial inflection point began in 1Q26, and its share price rose 54% from the beginning of the year through the report date. Inovance Technology's industrial automation business accelerated in 2Q26, confirming that upstream demand was being transmitted downstream. Inovance Technology's industrial automation orders still grew by more than 30% year over year in July, while AirTAC's monthly sales also accelerated further in July. The report therefore concludes that the automation upcycle remains sustainable and that Inovance Technology is positioned to continue benefiting, particularly as artificial intelligence-related projects and robotics investments are gradually implemented. The new energy business stood in sharp contrast to industrial automation. Separately listed Suzhou Inovance Automotive unexpectedly recorded a loss in 2Q26, with revenue declining 1% year over year and recurring profit declining 179% year over year; its net margin fell from 4.2% in 2Q25 to -2.6%. The report attributes this change to an unfavorable product mix and pricing pressure and believes it is consistent with the overall weakness in China's EV industry. Management expects the new energy business's drag on the group's financial performance to ease from 3Q26 as the comparison base normalizes. If this business stabilizes and returns to profitability, the segment volatility that has long concerned the market may also moderate. Cost controls and pricing measures helped the core business offset raw material inflation. The company adjusted product prices and controlled selling, administrative, and R&D expenses, causing these expenses to grow more slowly than revenue and lowering the overall expense ratio year over year. The report believes that efficiency improvements, volume leverage, and product mix optimization jointly supported the margin resilience of the industrial automation and elevator businesses. However, the preliminary results did not disclose operating cash flow, so the report does not conduct a cash flow analysis for now and will await the full interim report. Its long-term investment thesis continues to cite the company's more consistent return track record and stronger operating cash flow generation relative to peers. The share price performance has not yet reflected the improvement in the industrial automation business. Inovance Technology's share price fell 23% from the beginning of the year through the report date, while AirTAC rose 54%, the CSI 300 Index fell 5%, and the Taiwan Weighted Index rose 55% over the same period. The report believes this divergence reflects the market's preference for the reliability of overall results and the quality of margins: AirTAC achieved a financial inflection point first and provided positive 2026 guidance, while Inovance Technology's previous volatility in overall results and the drag from the new energy business weighed on its performance. As the industrial automation business began its financial catch-up in 2Q26, the performance gap between the two may narrow if the company continues to deliver clear industrial automation results and the new energy drag weakens. The medium- to long-term growth thesis is driven by the convergence of automation and artificial intelligence, global expansion, and investment in new businesses. Management is increasing investment in humanoid robots, energy storage systems, digital energy, and digitalization and artificial intelligence platforms. The report believes that multi-product solutions, brand strength, supply chain management, and product development capabilities position the company to capture opportunities arising from factory automation and industrial upgrading in China. General automation, robotics, and digital energy businesses all achieved rapid year-over-year growth and may support the next phase of expansion and margin resilience. J.P. Morgan maintains its Overweight rating and provides a DCF-based June 2027 target price of Rmb84. The valuation applies a 3% terminal growth rate and an 8% weighted average cost of capital. The cost of equity is 9.0%, based on a 2.2% risk-free rate, a 6.8% equity risk premium, and a beta of 1.0x; the cost of debt is approximately 4%, and the target debt-to-capital ratio is 20%. The target price corresponds to a target PEG of approximately 1.5x, while the report forecasts 23% earnings growth for FY25-28E.

Analysis framework

The report first compares overall revenue and net profit with the previous preview, then uses recurring profit to identify the underlying improvement in the core business. It subsequently breaks down growth and profit changes across the industrial automation, elevator, and new energy segments and explains earnings performance through price increases, volume leverage, product mix, expense controls, and the removal of supply constraints. The report further uses the orders, sales, and share price performance of upstream supplier AirTAC to validate the cycle, before incorporating its operating assessment into DCF and PEG valuation frameworks to derive the rating and target price.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  DCF Valuation

  The report discounts future cash flows to present value and applies a 3% terminal growth rate and an 8% weighted average cost of capital to derive a June 2027 target price of Rmb84.

• Valuation MethodPE/PEG valuation

  Target PEG Validation

  The report converts the DCF target price into a target PEG of approximately 1.5x and links it to the projected 23% earnings growth for FY25-28E to assess whether the target valuation is consistent with growth expectations.

• Industry/Value Chain Analysis FrameworkUpstream-Midstream-Downstream Value Chain Transmission

  AirTAC Upstream Cycle Leading Indicator

  The report uses the financial inflection point of upstream automation supplier AirTAC beginning in 1Q26 and its sales acceleration in July to validate the improvement in demand for Inovance Technology's industrial automation business in 2Q26 and beyond.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Volume Leverage, Price Increases, and Expense Ratio Analysis

  The report combines product price increases, volume growth, improved product mix, and expense growth below revenue growth to explain recurring profit and margin resilience in the core business.

Asset mapping & comparison

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

• Inovance Technology (300124.SZ)

  The report believes the company is a major beneficiary of China's factory automation upcycle and that its industrial automation business is financially catching up with upstream peers.

  Strengths

  Strong supply chain management and product development capabilities; robust growth in the industrial automation business; multi-product solution and brand advantages; continued investment in humanoid robots, energy storage, digital energy, and artificial intelligence platforms.

  Weaknesses

  The new energy business turned to a loss in 2Q26, causing volatility in overall results; preliminary results did not disclose operating cash flow; the improvement in industrial automation has not yet been fully reflected in overall share price performance.

  Comparison

  Inovance Technology fell 23% from the beginning of the year through the report date, while upstream peer AirTAC rose 54%. The report believes AirTAC achieved a financial inflection point first, but Inovance Technology's industrial automation business has begun to catch up.

  Risks

  Industrial automation growth or market share gains may fall short of expectations, price competition may depress gross margins, tariff impacts may exceed expectations, and competition in new energy passenger vehicle controllers may intensify.

Key data

• 2Q26 RevenueRmb14,532MMUp 26% year over year, broadly in line with the previous preview
• 2Q26 Net ProfitRmb1,796MMUp 9% year over year, broadly in line with the previous preview
• 2Q26 Recurring ProfitRmb1,710MMUp 19% year over year, significantly above expectations
• Industrial Automation and Elevator Business Revenue GrowthApproximately 50% Y/Y2Q26, significantly above the preview and consensus expectations
• Industrial Automation and Elevator Business Recurring Profit GrowthApproximately 50% Y/Y2Q26
• Estimated Factory Automation Sales Growth>60% Y/YAssuming elevator sales were broadly flat
• July Industrial Automation Order Growth>30% Y/YOrder momentum remained strong
• New Energy Business Revenue Growth-1% Y/Y2Q26
• New Energy Business Recurring Profit Growth-179% Y/YTurned to a loss in 2Q26
• New Energy Business Net Margin-2.6%4.2% in 2Q25
• Factory Automation and Elevator Business Net Margin20.5%23.1% in 2Q25
• Inovance Technology Year-to-Date Share Price Performance-23%As of the point in time specified in the report
• AirTAC Year-to-Date Share Price Performance+54%The CSI 300 was -5% and the Taiwan Weighted Index was +55% over the same period
• Key DCF AssumptionsTerminal growth rate 3%, WACC 8%Cost of equity 9.0%, cost of debt approximately 4%, target debt-to-capital ratio 20%
• Target PEGApproximately 1.5xCorresponding to projected earnings growth of 23% for FY25-28E

Impact & implications

The report believes that the stronger-than-expected recurring profit and industrial automation business performance in 2Q26 indicate that the company is entering a phase of financial catch-up, with the upstream automation cycle, July orders, and the removal of supply constraints supporting subsequent growth. The new energy business remains the primary drag on overall profit and market sentiment, but management expects its impact to ease from 3Q26. If industrial automation continues to deliver stable results and new energy profitability stabilizes, market concerns about the reliability of the company's overall results and the quality of its earnings may decline.

Risks

• Growth in the industrial automation business may be lower than expected.
• Market share gains from Japanese, European, and U.S. brands may be smaller than expected.
• Price competition in the industrial automation, elevator, and new energy vehicle businesses may intensify, resulting in lower-than-expected gross margins.
• The impact of tariffs may be greater than expected.
• Market competition in the new energy passenger vehicle controller business may intensify further.

What to watch

• Monitor operating cash flow data in the full interim report, as this metric was not disclosed in the preliminary results.
• Monitor whether industrial automation orders can sustain July's growth rate of more than 30% year over year and continue to produce stable and transparent segment results.
• Monitor whether the drag from the new energy business eases from 3Q26 as the comparison base normalizes, in line with management's expectations.