Goldman Sachs: Huali Industrial Poised for Sequential Improvement in Q2, Maintains Neutral Rating

Overview

Goldman Sachs released minutes from an investor meeting regarding Huali Industrial (300979.SZ). The report notes that despite pressure from macro volatility, the company holds a cautiously optimistic view on its Q2 2026 performance, expecting sequential revenue growth and margin recovery. Key drivers include seasonal factors and continued capacity ramp-ups at several new factories. However, order visibility for the second half remains low due to cautious and volatile procurement plans from brand clients. Goldman Sachs maintains a 'Neutral' rating on Huali Industrial with a target price of RMB 38.

Core views

Operational Trends and Outlook: Management expressed confidence in Q2 2026 performance, expecting sequential revenue growth and margin recovery driven by seasonality and continued capacity release from new factories, although the year-over-year direction remains unclear. For the second half, order visibility is relatively low, reflecting cautious and volatile procurement plans from brand clients, but the company hopes growth momentum will improve quarter-over-quarter entering the second half. Customer Structure Analysis: Regarding specific major clients, adidas remains the core growth driver for the year. The company is advancing the onboarding of several new clients. For Converse, it is currently unclear whether orders have bottomed out; some fast-growing client accounts saw slowed growth in the first half, reflecting caution on the procurement side, but based on past experience, order replenishment may occur subsequently. Costs and Competitive Landscape: Addressing raw material price volatility, the company holds 3-4 months of inventory for rubber-related materials (excluding small items like glue), thus believing the impact on Q2 margins is negligible. Looking ahead, while raw material costs can be passed through to brand clients via pricing mechanisms, there may be a time lag as price negotiations typically occur semi-annually while raw material procurement is more frequent. Regarding industry competition, management observed that macro pressures such as tariffs and inflation are causing smaller competitors to exit the market; Huali Industrial, leveraging its competitive advantages, is expected to outperform peers despite short-term headwinds.

Analysis framework

This report is based on information from an in-person investor meeting, employing a bottom-up fundamental analysis framework. Analysts assess the company's resilience and relative competitive advantages in a complex macro environment by deconstructing short-term operational indicators (such as quarterly sequential revenue trends and margin recovery drivers), meso-level customer structure changes (performance of core client adidas, status of potential risk client Converse), and micro-level cost control capabilities (raw material inventory cycles, price pass-through mechanisms). The rating judgment is ultimately derived in conjunction with valuation levels.

Methodology notes

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Focus on the impact of changes in brand-side procurement plans on manufacturing-side order visibility

  The report analyzes the procurement caution and inventory strategies of downstream brand clients (e.g., adidas, Converse) to deduce order visibility and growth rhythms for upstream manufacturers, representing a typical supply chain supply-demand transmission analysis.

• Company Fundamentals and Financial Framework

  Buffering effect of raw material inventory cycles on short-term margins

  The report specifically highlights the company's 3-4 month raw material inventory, noting that this buffers the impact of raw material price volatility on the income statement in the short term, demonstrating the tactical value of inventory management in cost control.

• Valuation MethodologyPE/PEG valuation

  Valuation methodology based on expected 2026 Price-to-Earnings ratio

  Goldman Sachs' target price of RMB 38 for Huali Industrial is calculated based on expected 2026 Earnings Per Share (EPS) multiplied by a 15x Price-to-Earnings (P/E) ratio, a common relative valuation method for manufacturing companies.

Asset mapping & comparison

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

• Huali Industrial (300979.SS)

  Benefit/Detriment Logic: Benefits as a core supplier to adidas, but constrained by unclear Converse orders and weak macro demand

  Strengths

  Significant competitive advantages, new factory capacity ramp-ups, raw material inventory buffering cost pressure

  Weaknesses

  Low order visibility in the second half, time lag in price pass-through

  Comparison

  Expected to outperform smaller competitors exiting due to macro pressure

  Risks

  Weakening global demand, new factory ramp-ups slower than expected, tariff volatility

Key data

• Target PriceRMB 38.00Based on 15x expected 2026 P/E
• Current Share PriceRMB 37.93As of report publication date
• Raw Material Inventory Coverage3-4 monthsFor rubber-related materials, buffering cost volatility
• RatingNeutralUnchanged

Impact & implications

The report believes that Huali Industrial possesses relative advantages during the industry consolidation phase, enabling it to withstand short-term macro headwinds. Although the overall demand environment is challenging, the company is expected to outperform peers through new client onboarding and stable contributions from core client adidas. For investors, attention should be paid to the progress of new factory ramp-ups and the actual impact of the time lag in raw material price pass-through on profits in subsequent quarters.

Risks

• Global demand weaker than expected
• New factory capacity ramp-up slower than expected
• Cost control effectiveness below expectations
• Tariff policy volatility

What to watch

• Whether existing client demand is stronger than expected
• Smoothness of new factory ramp-ups
• Timeliness of raw material cost pass-through to brand clients