Shares of Hua Hong Grace (01347) plunged more than 10% in Thursday trading, falling 9.78% to HK$132.8 with turnover reaching HK$38.74 billion.

The sell-off came after the company released its second-quarter results, which showed record quarterly sales of $717.5 million, up 26.8% year-on-year and 8.6% quarter-on-quarter. Gross margin improved to 16.5%, rising 5.6 percentage points from a year ago and 3.5 percentage points sequentially. Net profit attributable to shareholders surged 385.9% year-on-year to $38.6 million, up 84.6% from the prior quarter.

Where to begin

Despite the strong second-quarter performance, the market focused on the company's third-quarter revenue guidance, which fell short of expectations. Hua Hong Grace expects third-quarter sales to range between $770 million and $780 million, with gross margin projected between 16% and 18%.

Goldman Sachs noted that the company's third-quarter revenue guidance implies sequential growth of 7% to 9%, while gross margin is expected to range between 16% and 18%, compared to the second quarter's 16.5%, indicating continued margin improvement amid capacity expansion. However, the midpoint of the revenue guidance came in 11% and 6% below Goldman's and market consensus estimates, respectively, reflecting a weaker-than-expected outlook. The gross margin guidance, at 16% to 18%, exceeded Goldman's forecast of 15.3% and the market's expectation of 16.5%.