Report Interpretation

Overview

UBS reviews Arashi Vision’s weak 2Q26 results, attributing the earnings loss to rising memory-chip costs, competitive pressure and heavy investment in consumer camera drones. The firm retains a Neutral rating and lowers its target price to Rmb124, but sees a stronger product-launch pipeline supporting growth in 2027.

Core views

Arashi Vision reported 1H26 revenue of Rmb5.5bn and net profit of Rmb30mn, representing 50% year-on-year revenue growth but a 94% decline in profit. This implies that 2Q26 revenue rose 31% year-on-year while net profit declined 116% year-on-year and turned negative. Revenue was slightly below UBS’s 35% growth expectation, while the earnings loss was materially worse than its expected 73% year-on-year decline. UBS attributes the reversal in profitability to higher chip costs and competition, with camera-drone losses also exceeding its expectation. UBS notes that 2Q26 revenue growth decelerated from 58% in 2Q25 to 31%, partly because the June launch of Luna Ultra provided limited incremental support and because competition with DJI remained intense. Gross margin fell 12 percentage points year-on-year to 38%, in line with UBS’s expectation, as chip costs increased and competitive pressure intensified. Operating spending was also higher than expected: selling-and-marketing and R&D expense ratios rose by 3 and 4 percentage points year-on-year to 19% and 18%, respectively. UBS links this increase to ramp-up investment in the new drone business and R&D for upgraded cameras, a new drone product and interchangeable-lens cameras. Drone investment was a major earnings drag. Antigravity-related subsidiaries disclosed losses in 1H26; Shenzhen Yingling Technology reported Rmb229mn of revenue and a Rmb290mn net loss. Arashi Vision held a 58.2% stake, implying a roughly Rmb169mn share of that loss. Cash flow and working capital also deteriorated as the company procured approximately Rmb2bn of memory chips in 1H26 amid the materials-cost cycle. Operating cash flow was negative Rmb2.8bn in 1H26 and negative Rmb1.3bn in 2Q26. Inventory rose from Rmb2.9bn at end-2025 to Rmb6.2bn at end-1H26, including about Rmb1.7bn of memory chips, while finished-goods inventory increased 38.17% as the company prepared for new launches. UBS also cites an approximately Rmb55mn 1H26 foreign-exchange loss, equivalent to around a one-percentage-point margin drag. Following the results, UBS cuts 2026-28E earnings by 59%/2%/1%. The large 2026 reduction reflects higher operating expenses and losses in the camera-drone business, while the smaller later-year changes indicate that UBS still expects growth to recover in 2027 on the back of a strong product-launch pipeline. Its forecasts show revenue rising from Rmb14.046bn in 2026E to Rmb18.913bn in 2027E and Rmb24.876bn in 2028E, while diluted EPS recovers from Rmb0.67 in 2026E to Rmb2.41 and Rmb4.15. UBS reduces its SOTP-based price target from Rmb126 to Rmb124 and retains Neutral. The valuation assigns Rmb94 to the camera segment, based on 39x 2027E P/E and a 149% 2026-28E EPS CAGR from a low 2026 base, and Rmb30 to the drone segment, based on 9x 2027E P/S. At the Rmb119.30 share price on 28 August 2026, UBS shows 3.9% forecast price appreciation, 0.1% forecast dividend yield and a 4.0% forecast stock return, below its 6.8% market-return assumption.

Analysis framework

UBS compares reported revenue and profit with its forecasts, then traces the earnings miss through revenue growth, gross margin, operating expenses, drone-subsidiary losses, inventory and operating cash flow. It revises earnings forecasts and values the camera and drone businesses separately under a sum-of-the-parts framework.

Methodology notes

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation

  UBS values the camera and drone segments separately, then combines them into a Rmb124 target price.

• Valuation methodsP/E and PEG Valuation

  Forward P/E valuation for the camera segment

  The camera segment is valued at 39x 2027E P/E, with UBS citing a 149% 2026-28E EPS CAGR from a low 2026 base.

• Valuation methodsPS valuation

  Forward price-to-sales valuation for the drone segment

  UBS assigns the drone segment a Rmb30 value using 9x 2027E P/S.

Asset mapping & comparison

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

• Arashi Vision (688775.SS)

  Primary covered company; its camera business supports most of UBS’s target value while the developing drone business is currently loss-making.

  Strengths

  Leading smart-imaging franchise, a strong 2027 product-launch pipeline, and separate value assigned to camera and drone segments.

  Weaknesses

  Slowing revenue growth, lower gross margin, elevated operating expenses, negative operating cash flow and rising inventory.

  Comparison

  UBS cites intense competition with DJI as a factor behind weaker growth and margin pressure.

  Risks

  Weaker consumer demand, increased price competition, slower new-product ramp-up or global expansion, larger cost increases, and foreign-exchange losses.

Key data

• 1H26 revenue / net profitRmb5.5bn / Rmb30mn+50% / -94% year-on-year
• 2Q26 revenue / net profit growth+31% / -116% YoYRevenue was slightly below UBS’s +35% expectation; earnings were weaker than UBS’s -73% expectation.
• 2Q26 gross margin38%Down 12 percentage points year-on-year amid higher chip costs and competition.
• 1H26 / 2Q26 operating cash flow-Rmb2.8bn / -Rmb1.3bnPrimarily due to memory-chip procurement and inventory preparation.
• End-1H26 inventoryRmb6.2bnUp from Rmb2.9bn at end-2025; includes about Rmb1.7bn of memory chips.
• 2026-28E EPS revisions-59% / -2% / -1%Mainly reflects higher operating expenses and 2026 drone-business losses.
• 2026E / 2027E / 2028E diluted EPSRmb0.67 / Rmb2.41 / Rmb4.15UBS expects earnings recovery after the 2026 low point.

Impact & implications

UBS sees 2026 as a period of margin and earnings pressure from component costs, competition and investment in drones. Its relatively limited revisions beyond 2026 and unchanged Neutral rating reflect confidence that product launches can support 2027 growth, but the target-price upside remains modest.

Risks

• Consumer demand may be weaker than expected if sentiment weakens.
• Price competition in domestic and overseas markets could rise.
• New-product sales may ramp more slowly than expected.
• Global expansion may progress more slowly than expected.
• Costs could increase more than expected.
• Currency fluctuations could cause foreign-exchange losses.