Zhuzhou CRRC Times Electric's 2Q26 results missed expectations; focus on power semiconductor profitability recovery in 2H26

Overview

This report reviews Zhuzhou CRRC Times Electric's 2Q26 results. While revenue and net profit both grew YoY, net profit missed expectations. The report believes near-term profitability in the emerging equipment business remains under pressure, while highlighting the potential for power semiconductor improvement in 2H26 amid price increases, demand recovery, and capacity ramp-up; it maintains a Neutral rating.

Core views

The company released its 2Q26 results and held an earnings call on August 19. Quarterly revenue rose 4% YoY to RMB8.0bn, 5% below BofA's expectation; gross margin was 32.5%, up 1.4ppt YoY and down 0.8ppt QoQ, but above its 31.3% expectation. Adjusted EBIT rose 7% YoY and 88% QoQ to RMB1.3bn. Net profit was RMB1.1bn, up 3% YoY but 14% below its RMB1.2bn expectation, mainly due to higher R&D expenses and foreign-exchange losses. The report therefore characterizes the results as below expectations. By business, rail equipment revenue rose 7% YoY and continued to provide relatively stable growth; emerging equipment revenue declined 0.5% YoY, indicating near-term pressure. The core components business, mainly comprising power semiconductors and sensors, recorded revenue of RMB1.6bn, up 26% YoY, a notable improvement from the 4% YoY decline in 1Q26. New energy vehicle drive systems revenue rose 27% YoY to RMB779mn, benefiting from steady commercial vehicle market shipments. Renewable energy revenue fell 72% YoY to RMB223mn. The report attributes this to a high base from the rush to install wind and solar projects in China in 2Q25, rather than treating it as a standalone long-term conclusion. The report focuses on the subsequent recovery in power semiconductor profitability. Zhuzhou Phase III silicon carbide production lines are in the capacity ramp-up stage, with a target of reaching full capacity by mid-2027. Meanwhile, CRRC Times Semiconductor's 1H26 net profit margin fell YoY to 8%, below 17% in 2025, due to lower government subsidies, increased depreciation, rising material costs, and pressure on average selling prices. The company announced power semiconductor price increases in July, and management expects profitability to improve in 2H26. The report therefore regards power semiconductor profit recovery in the second half as a key item to watch, while continuing to believe that near-term profitability pressure in the emerging equipment business has not been fully resolved. Based on the 2Q26 results, BofA cuts its 2026, 2027, and 2028 earnings forecasts by 5%, 4%, and 3%, respectively, mainly due to higher operating expense assumptions; corresponding 2026E EPS falls from RMB3.40 to RMB3.30, 2027E from RMB3.96 to RMB3.90, and 2028E from RMB4.33 to RMB4.29. The report expects 2026 earnings to grow 7% YoY. On valuation, the HKD43 H-share target price is below the previous HKD44, using a sum-of-the-parts methodology: the rail equipment business is valued at 9x average 2026–2027 P/E, down from 10x previously; the emerging equipment business is valued at 16x, down from 18x previously. The lower target multiples reflect the report's view that long-term growth in both businesses is normalizing. The A-share target price is cut from RMB59 to RMB56, based on an unchanged 50% A-H premium that is broadly in line with the current level. The report maintains Neutral ratings on both H shares and A shares, believing that railway aftermarket opportunities and rising share in emerging equipment can partly offset near-term profitability pressure.

Analysis framework

The report first compares quarterly revenue, gross margin, EBIT, and net profit with its own expectations, then breaks down revenue changes across rail equipment, core components, NEV drive systems, and renewable energy. It combines semiconductor net profit margins, pricing, costs, and capacity ramp-up to explain profitability pressure and the path to recovery. Finally, it cuts earnings forecasts and conducts a sum-of-the-parts valuation by assigning separate P/E multiples to rail equipment and emerging equipment.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-parts valuation

  The report values rail equipment and emerging equipment separately using their respective applicable P/E multiples and then sums them to derive the H-share target price.

• Valuation MethodPE/PEG valuation

  Segment P/E valuation

  The report applies average 2026–2027 P/E of 9x to rail equipment and 16x P/E to emerging equipment, benchmarking them against relevant H shares and peer averages.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Analysis of the linkage among revenue growth, price adjustments, and profit margins

  The report assesses conditions for second-half profitability recovery through revenue growth by business, power semiconductor price increases, material and depreciation costs, average selling price pressure, and changes in net profit margins.

Asset mapping & comparison

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

• Zhuzhou CRRC Times Electric H Shares (3898.HK)

  The report is supported by stable rail equipment growth and long-term opportunities in emerging equipment and power semiconductors, but believes recent earnings are under pressure.

  Strengths

  Rail equipment revenue rose 7% YoY; core components revenue rose 26% YoY; railway aftermarket opportunities and increased emerging equipment market share offer long-term opportunities.

  Weaknesses

  2Q26 net profit missed expectations; emerging equipment revenue declined 0.5% YoY, while semiconductor net profit margin fell to 8%.

  Comparison

  The 9x P/E for rail equipment is broadly in line with the H-share peer average; the 16x P/E for emerging equipment is in line with the peer average.

  Risks

  Weaker railway investment and procurement, declining power semiconductor demand, intensified competition, and capacity expansion or yields below expectations.

• Zhuzhou CRRC Times Electric A Shares (688187.SS)

  The A-share target price is derived from the H-share valuation, applying a 50% A-H premium.

  Strengths

  The assumed A-H premium remains at 50%, broadly in line with the current level.

  Weaknesses

  Earnings forecasts were cut due to higher operating expense assumptions.

  Comparison

  The 50% A-H premium remains unchanged and is broadly consistent with the current level.

  Risks

  The same as for H shares, including railway investment, power semiconductor demand, competition, capacity expansion yields, and capacity ramp-up gross margin risks.

Key data

• 2Q26 RevenueRMB8.0bnUp 4% YoY, 5% below BofA's expectation
• 2Q26 Gross Margin32.5%Up 1.4ppt YoY and down 0.8ppt QoQ, above the 31.3% expectation
• 2Q26 Net ProfitRMB1.1bnUp 3% YoY, 14% below the RMB1.2bn expectation
• Core Components RevenueRMB1.6bnUp 26% YoY, versus a 4% YoY decline in 1Q26
• CRRC Times Semiconductor 1H26 Net Profit Margin8%Below 17% in 2025
• 2026/27/28 Earnings Forecast Revisions-5% / -4% / -3%Mainly reflecting higher operating expense assumptions
• H-share Target PriceHKD43Previously HKD44
• A-share Target PriceRMB56Previously RMB59

Impact & implications

The report believes that power semiconductor price increases, the recovery in core components revenue, and silicon carbide capacity ramp-up provide potential support for improved profitability in 2H26. However, lower government subsidies, higher depreciation and material costs, pricing pressure, and near-term pressure in the emerging equipment business continue to constrain overall earnings performance. Railway aftermarket opportunities and rising share in emerging equipment represent longer-term opportunities.

Risks

• Railway fixed-asset investment and China State Railway Group EMU procurement are weaker than expected.
• Urban rail transit development is slower than expected due to insufficient funding.
• Downturns in electric vehicle and renewable energy markets lead to weak power semiconductor demand.
• Intensified competition from other domestic companies.
• Delays in new capacity commissioning or yields falling short of expectations.
• Gross margins during capacity ramp-up are below expectations.

What to watch

• Whether power semiconductor profitability improves in 2H26 as management expects following the July price increases.
• The ramp-up progress of Zhuzhou Phase III silicon carbide production lines and the target of reaching full capacity by mid-2027.
• Revenue trends in rail equipment, core components, NEV drive systems, and renewable energy businesses.