DMALL (02586.HK) reported its 2026 interim results, delivering a 7.1% year-on-year revenue increase to RMB 1.155 billion, while net profit surged 66.2% to RMB 103 million. Adjusted net profit climbed 52.7% to RMB 118 million. The core AI retail solutions business generated RMB 647 million, up 24.0%, and overseas revenue skyrocketed 84.8%, now accounting for 12.2% of total sales. However, beneath this seemingly strong performance lie structural concerns: the gross margin slipped from 38.4% to 37.2%, yet the net profit margin rose from 5.8% to 8.9%, a divergence driven by aggressive cost-cutting.

As of the August 12 close, DMALL shares traded at HKD 5.515, down over 20% year-to-date, bringing its market capitalization below HKD 5 billion. Even more alarming, market estimates suggest the company is at risk of being removed from the Stock Connect program, which would further drain liquidity.

AI Strategy Gains Traction, Overseas Expansion Delivers

Three key highlights stand out in the interim report. First, profit growth significantly outpaced revenue growth. Revenue rose 7.1%, but net profit increased 66.2% and adjusted net profit climbed 52.7%, underscoring effective cost control and operational efficiency. In the first half of 2026, per-employee productivity reached RMB 956,000, up 18.8% year-on-year.

Second, the AI retail core solutions segment became a growth driver, with revenue increasing 24.0% to RMB 647 million. The company's AI strategy is moving from concept to reality: an AI replenishment agent completed a pilot at Pangdonglai, the firm partnered with Muxi Shares to develop integrated hardware-software AI retail solutions, and it became an early developer in the WeChat AI ecosystem. This signals a shift from a "retail digital solutions provider" to a "retail AI agent service provider."

Third, overseas markets showed explosive growth. International revenue rose 84.8%, with its share of total revenue climbing from 7.1% to 12.2%. DMALL deepened collaborations with global retail giants like DFI Retail Group, Singapore's Cold Storage, and the Philippines' SM Group, with efficient delivery of overseas benchmark projects.

Gross Margin Declines 1.2 Points, Cash Plummets 24%

Behind the impressive figures are structural issues. The gross margin fell, but the net margin rose, a phenomenon driven by cost savings. In the first half of 2026, the overall gross margin dropped from 38.4% to 37.2%, a 1.2 percentage point decline. However, the net profit margin rose from 5.8% to 8.9%, a 3.1 percentage point increase, due to a sharp reduction in expenses.

Specifically, the gross margin for AI retail core solutions plunged from 68.3% to 56.3%, a 12 percentage point drop. The company attributed this to the initial low profitability of Dmall OS project implementations and the impact of new clients selecting specific products and services. Still, a 12-point margin decline suggests the new business is far less profitable than expected. The gross margin for AI retail value-added services improved from 10.4% to 12.8%, providing only a minor offset.

Meanwhile, costs were aggressively cut. R&D expenses fell 24.7% to RMB 143 million, and general and administrative expenses dropped 12.9% to RMB 121 million. The workforce shrank from 1,453 to 1,290 employees, with staff costs declining from RMB 320 million to RMB 260 million. The cost reductions far exceeded the gross margin decline, which is the primary reason for the higher net profit margin.

However, the quality of the profit is questionable. Cost of inventory sold surged 123% to RMB 203 million, up from RMB 91 million. The company explained this as "increased procurement costs due to delivering integrated solutions to clients," indicating a shift from software services to integrated hardware-software delivery, which is fundamentally altering the cost structure. Cash and cash equivalents fell 24% to RMB 654 million, a decline of approximately RMB 206 million, despite profit growth. The 24.7% drop in R&D spending during a critical "AI strategy upgrade" phase has raised concerns about the sustainability of technology investment.

Wumart Dependency and Stock Connect Removal Risk Loom

The most fundamental structural risk for DMALL remains unresolved. Revenue from the "Wumart system" accounts for 60.3% of total sales. The interim report shows that revenue from Client A, identified as Wumart Group, was RMB 696 million, representing 60.3% of total revenue. This highlights the company's weak independent customer acquisition capabilities and heavy reliance on a single related-party client. Any change in the Wumart partnership could be devastating to revenue.

AI-related revenue remains negligible. Despite the company's aggressive AI promotion, AI-related revenue in the first half was only RMB 36.8 million, accounting for just 3.2% of total revenue. AI has yet to become a true revenue pillar, and commercialization is still in its early stages.

The most critical risk is the potential removal from Stock Connect. Market estimates suggest DMALL could be removed as early as September. If excluded, mainland investors would be unable to buy shares through the Stock Connect channel, forcing existing northbound funds to exit. For a stock with already thin daily trading volumes, this would be a devastating liquidity blow.

From HKD 26.8 Billion to HKD 4.8 Billion: Peak at IPO, No Recovery Since

On December 6, 2024, DMALL went public on the Hong Kong Stock Exchange at HKD 30.21 per share, with an initial market capitalization of approximately HKD 26.8 billion. However, the stock crashed 54.32% on its debut, closing at HKD 13.8 and halving its market value. The next day, it fell another 44.93% to HKD 7.6, a 74.84% drop from the IPO price, shrinking its market cap to about HKD 6.7 billion. The stock has never mounted a sustained recovery since.

In March 2025, after being included in Stock Connect, the stock briefly rallied to HKD 14.98. But this rebound was short-lived. As of August 12, 2026, the share price has fallen back to HKD 5.515, a nearly 60% decline from its Stock Connect peak. In less than two years, approximately HKD 22 billion in market value has been wiped out, reducing the company's valuation from HKD 26.8 billion to under HKD 5 billion.