AUX Electric (AUX) reported 1H26 revenue/attributable net profit (NP) of RMB17,504/1,108mn (-12.9/-40.8% YoY), in line with its profit alert. We attribute the pressured 1H26 revenue and NP largely to: 1) sustained geopolitical tensions in the Middle East and weak domestic consumer demand; 2) pressured GPM amid persistently high raw material costs and the RMB appreciation. As the world's fifth largest air conditioner (AC) provider, the company has built a multi-tier brand matrix covering different price segments. We believe its manufacturing efficiency and cost control barriers remain high, and we expect a steady recovery in its earnings in the medium to long term alongside the recovery of consumer demand. Maintain BUY.
Domestic sales dented by soft demand
By region: 1) 1H26 domestic sales revenue fell by 4.1% YoY to RMB8,870mn, largely dragged by weakening domestic consumer demand. According to AVC data, 1H26 AC sector-wide retail sales value/volume fell 15.9/13.1% YoY. 2) 1H26 overseas sales revenue came down by 20.3% YoY to RMB8,633mn. Specifically, revenue from Asia (excluding China)/Europe/North America/South America was RMB4,923/1,479/1,083/770mn (-18.8/-33.1/-2.1/-18.0% YoY), which we attribute largely to changing international dynamics and the RMB appreciation. According to the General Administration of Customs, 1H26 China's AC export volume/value fell by 9.2/9.7% YoY to 51.42mn units/USD9.63bn, showing significant regional divergence. The company focuses on high-potential core regions and drives the transition of overseas markets towards dual improvements in scale and profit. We expect it to gradually unleash operating upsides as phased pressures in overseas markets ease.
Household/central ACs: Revenue and GPM came down
By product: 1H26 household/central AC revenue declined by 14.1/9.0% YoY to RMB15,388/1,748mn, which we attribute largely to lower overseas revenue amid the RMB appreciation, as well as lower household AC sales volume from the Middle East due to geopolitical factors. Household/central AC GPM fell by 2.5/3.4pp YoY to 15.4/27.6%, which we attribute largely to persistently high raw material costs. 2) By brand: 1H26 revenue from the master brand AUX fell by 7.9% YoY to RMB9,168mn. Revenue from the two sub-brands, ShinFlow and Aufit, was RMB370/924mn (-26.5/+79.0% YoY). We attribute Aufit's robust revenue growth largely to effective brand operations. ODM revenue declined by 24.7% YoY to RMB6,675mn.
Earnings forecasts and valuation
We cut our 2026/2027/2028 revenue and GPM forecasts to factor in the pending recovery of consumer demand and elevated raw material costs. We lower our 2026/2027/2028 attributable NP forecasts by 24.9/25.7/25.8% to RMB1,811/ 1,973/2,163mn (previous: RMB2,412/2,654/2,917mn), implying EPS of RMB1.14/ 1.24/1.36. We value the stock at 9x 2026E PE, in line with its peers' average of 9x on Wind consensus. While the company's core capabilities trail behind leaders, it boasts a high overseas sales proportion, which we expect to unleash operating upside after phased pressures in overseas markets ease. It also features a high dividend yield. Our target price is HKD11.93 (previous: HKD12.04, based on 7x 2026E PE, implying EPS of RMB1.52, assuming an exchange rate of RMB1 = HKD1.163). Maintain BUY.
Risks: intensified competition, supply chain stability and cost control risks, overseas operation and geopolitical risks.