Highlights

• iFlytek’s 3Q26 revenue missed expectations, rising 8.0% yoy to Rmb6.56b amid its ongoing business refocus. Gross margin eased 0.4ppt yoy to 40.0%. Attributable net profit rose 31.0% yoy to Rmb226m, supported by non-recurring investment gains and government grants, while net loss excluding non-recurring items reached Rmb126m as elevated R&D and selling expenses weighed on profitability. Further Spark upgrades are scheduled for 22 October.
   
• Downgrade to SELL with a lower target price of Rmb30.00.
   

Analysis

• Revenue growth picked up in 3Q26 but fell short of our forecast. iFlytek Inc’s (iFlytek) revenue rose 8.0% yoy to Rmb6.56b, 8-9% below our forecast of Rmb7.23b, bringing 9M26 revenue to Rmb18.19b, up 7.1% yoy. Management is taking a more selective approach to government projects, scaling back the smart city business while focusing on smart education and smart medical services. G-end revenue declined 2.4% yoy as the smart city business contracted, while smart education and smart medical revenue each grew more than 20% yoy. Meanwhile, the company continues to strengthen its consumer offerings and deepen enterprise penetration.
   
• Higher operating expenses weighed on profitability. 3Q26 gross margin eased 0.4ppt yoy to 40.0%, while operating expenses expanded 15.1% yoy to Rmb2.98b. R&D and selling expenses increased 17.4% and 16.0% yoy, respectively, to Rmb1.32b each, widening the operating loss to Rmb354m. Attributable net profit rose 31.0% yoy to Rmb226m, supported by Rmb352m of non-recurring gains, including Rmb248m in investment gains and Rmb165m in government grants. Excluding non-recurring items, iFlytek swung to a net loss of Rmb126m from a net profit in 3Q25.