Equity Research: First Applied Material (603806.SH)

Date: April 10, 2026
Rating: BUY (Maintained)
Current Price: CNY 17.73
Target Price Implied Upside: Significant upside driven by earnings recovery and multiple expansion in 2026-2028.

Executive Summary

First Applied Material Co., Ltd. ("First Applied" or the "Company"), a global leader in photovoltaic (PV) encapsulation materials and an emerging player in high-end electronic materials, has released its full-year financial results for 2025. While the headline numbers reflect a challenging year marked by industry-wide destocking and margin compression, a granular analysis of the fourth quarter (Q4) and forward-looking guidance reveals a pivotal inflection point. The Company is transitioning from a period of defensive consolidation to aggressive profit restoration and diversification.

In 2025, First Applied reported total revenue of CNY 15.49 billion, a year-over-year (YoY) decline of 19.1%, and attributable net profit of CNY 770 million, down 41.1% YoY. These declines were primarily driven by the broader solar industry’s supply-demand imbalance, which pressured product pricing and compressed gross margins to 11.0% (a contraction of 3.8 percentage points). However, the underlying operational resilience remains robust. The Company maintained its dominant market share in PV films at over 50%, with shipments reaching 2.81 billion square meters. More importantly, the sequential improvement in Q4 2025—where net profit rose 65.7% YoY despite a slight revenue dip—signals the beginning of a profitability repair cycle.

Our investment thesis for First Applied rests on three core pillars that distinguish it from pure-play solar material competitors:

1. Immediate Margin Repair via Pricing Power and Inventory Advantage: The PV film segment is experiencing a structural price correction. Following upstream resin price increases in early 2026, First Applied executed three consecutive price hikes for its films in March 2026. Coupled with its strategic advantage of holding low-cost inventory, we anticipate a significant expansion in gross margins starting in Q1 2026. This dynamic positions the Company to capture disproportionate earnings growth as the industry stabilizes.
2. Strategic Globalization and Product Mix Optimization: First Applied is successfully mitigating geopolitical and trade risks by expanding its overseas manufacturing footprint. With existing capacities in Thailand (350 million sqm) and Vietnam (250 million sqm), the proportion of overseas sales is projected to rise from 26% in 2025 to over 30% in 2026. Furthermore, the introduction of new high-value products, such as CPI (Colorless Polyimide) films for satellite solar wings, opens entirely new addressable markets beyond terrestrial PV.
3. Successful Diversification into High-End Electronic Materials: The Company’s "second growth curve" is no longer a concept but a reality. The photosensitive dry film business achieved revenue of CNY 680 million in 2025, capturing 15% of the domestic market and penetrating top-tier PCB supply chains (e.g., Shennan Circuits, Dongshan Precision). We forecast a >50% volume growth in this segment for 2026. Additionally, the aluminum-plastic film business is scaling up to meet the nascent demand for solid-state battery packaging, positioning First Applied at the forefront of next-generation energy storage technology.

We have revised our earnings estimates upward to reflect these positive developments. We now project attributable net profits of CNY 1.80 billion, CNY 2.28 billion, and CNY 2.63 billion for 2026, 2027, and 2028, respectively. This represents a dramatic 134% YoY growth in 2026, followed by sustainable double-digit growth in subsequent years. At the current share price of CNY 17.73, the stock trades at a forward P/E of approximately 27x for 2026, which we deem attractive given the certainty of margin recovery and the premium valuation warranted by its diversified tech-materials platform. We maintain our BUY rating.

Key Takeaways

1. Financial Performance Review: Navigating the Trough

The 2025 fiscal year was characterized by headwinds inherent to the mature stage of the PV industry cycle. However, First Applied demonstrated superior cost control and market retention capabilities compared to peers.

Table 1: Key Financial Metrics (2024A - 2028E)

*Note: 2024 Gross Margin derived from reported data trends; 2025 reported at 11.0%.

Revenue and Profit Analysis:
The 19.1% decline in revenue to CNY 15.49 billion was largely attributable to lower average selling prices (ASPs) across the PV material sector, rather than a loss of volume. In fact, the Company’s ability to maintain shipment volumes amidst a contracting market underscores its competitive moat. The 41.1% drop in net profit to CNY 770 million reflects the operating leverage working in reverse during the downturn; fixed costs remained relatively stable while margins compressed. However, the non-GAAP net profit (deducting non-recurring items) stood at CNY 670 million, indicating that core operational profitability, while depressed, remained positive.

Q4 2025 Sequential Improvement:
A critical signal for investors is the performance in the fourth quarter of 2025.
* Revenue: CNY 3.7 billion, down 6.8% YoY and 3.3% QoQ. This stabilization suggests that the destocking phase among downstream module manufacturers is nearing its end.
* Net Profit: CNY 80 million, up 65.7% YoY. Although it declined 57.2% QoQ (likely due to seasonal factors and year-end provisions), the YoY growth in a difficult comparative base is noteworthy.
* Gross Margin: 10.5% in Q4, improving by 1.6 percentage points QoQ. This sequential expansion is the first concrete evidence that the worst of the margin compression may be behind us, setting the stage for the more aggressive repairs expected in 2026.

Cash Flow and Balance Sheet Health:
First Applied maintains a fortress balance sheet, which provides it with the flexibility to invest counter-cyclically.
* Operating Cash Flow: Generated CNY 1.46 billion in 2025, demonstrating strong cash conversion capabilities even in a down cycle.
* Inventory Management: Inventory levels decreased by 14.1% YoY to CNY 1.6 billion by year-end 2025. This deliberate drawdown not only improved working capital efficiency but also positioned the Company to benefit from the subsequent rise in raw material costs by having locked in lower-cost inputs earlier in the cycle.
* Capital Expenditure: Total CapEx for 2025 was CNY 430 million, down 28.3% YoY, reflecting a prudent approach to expansion during uncertainty. However, Q4 CapEx surged to CNY 120 million (up 722.8% YoY), signaling renewed confidence and the commencement of new projects, likely related to the electronic materials and overseas capacity expansions.

2. Core Business Segment Analysis: PV Materials

The Photovoltaic Material segment remains the cash cow of the enterprise, contributing approximately 92% of total revenue in 2025 (CNY 14.25 billion). The narrative here is shifting from "volume growth" to "profit quality and global reach."

A. Market Dominance and Unit Economics

First Applied shipped 2.81 billion square meters of PV film in 2025, maintaining a global market share of over 50%. This dominance is not merely a function of scale but of technological consistency and customer stickiness. Module manufacturers prioritize supply security and quality consistency, areas where First Applied has established an unassailable lead.

Our analysis of the unit economics reveals a significant competitive advantage:
* Estimated Net Profit per Square Meter: We calculate the net profit per square meter to be in the range of CNY 0.25 – 0.30.
* Peer Comparison: This metric is significantly superior to industry peers, many of whom struggled to break even or incurred losses in 2025. This differential is driven by First Applied’s vertical integration efficiencies, superior yield rates, and economies of scale in procurement. Even in a commoditized market, the Company acts as the "low-cost producer," allowing it to dictate terms and maintain profitability when others cannot.

B. The 2026 Margin Repair Catalyst

The most immediate driver for re-rating the stock is the anticipated margin expansion in 2026. The dynamics are as follows:
1. Upstream Cost Push: In early 2026, prices for EVA and POE resins (key raw materials) began to rise due to supply constraints and increased demand.
2. Pricing Power Execution: Unlike previous cycles where film manufacturers absorbed cost increases, First Applied successfully passed these costs downstream. In March 2026 alone, the Company announced three consecutive price hikes for its film products.
3. Inventory Arbitrage: Having reduced inventory levels by 14.1% in 2025, the Company entered 2026 with a leaner stockpile. Crucially, the remaining inventory and recent purchases were made at pre-hike prices. As these lower-cost materials are processed and sold at the new, higher ASPs, the gross margin will expand mechanically.
4. Forecast Impact: We project the gross margin for the PV segment to recover from 11.0% in 2025 to approximately 16.3% in 2026. This 530 basis point expansion is the primary driver behind our 134% earnings growth forecast for 2026.

C. Globalization Strategy: Mitigating Trade Barriers

The geopolitical landscape for solar manufacturing is increasingly fragmented, with the US and Europe implementing tariffs and local content requirements. First Applied’s proactive overseas expansion is a strategic imperative that is already yielding results.

• Current Overseas Capacity:
  • Thailand: 350 million square meters annual capacity.
  • Vietnam: 250 million square meters annual capacity.
  • Total Overseas: 600 million square meters.
• Sales Mix Shift: In 2025, overseas sales accounted for 26% of total revenue. We forecast this ratio to exceed 30% in 2026 and continue trending upward.
• Strategic Benefit: Overseas production not only bypasses certain tariff barriers but also typically commands higher margins due to the premium placed on non-Chinese origin supply in Western markets. This geographic diversification reduces the Company’s exposure to domestic Chinese price wars and policy risks.

D. Product Innovation: Beyond Standard Films

While standard EVA/POE films remain the bulk of sales, First Applied is innovating in niche, high-value segments:
* CPI (Colorless Polyimide) Film: The Company is actively collaborating with downstream satellite solar wing manufacturers to develop and validate CPI films. These materials are critical for space applications due to their lightweight, high transparency, and radiation resistance. Successful commercialization would open a high-margin, low-volume market distinct from the cyclical terrestrial PV industry, further diversifying the revenue base.
* Backsheet Consolidation: Backsheet shipments declined by 45.5% YoY to 55 million square meters in 2025, reflecting the industry-wide shift towards double-glass modules which do not require backsheets. Recognizing this structural decline, First Applied is integrating its backsheet business with its 3C electronic tape coating operations. This consolidation allows for shared R&D and production resources, focusing on developing high-margin coated products for electronics rather than fighting a losing battle in declining PV backsheets.

3. Second Growth Curve: Electronic Materials Breakthrough

The diversification into electronic materials is the key long-term value driver for First Applied, transforming it from a solar-cycle dependent company into a broad-based advanced materials platform. In 2025, this segment showed remarkable traction, particularly in photosensitive dry films.

A. Photosensitive Dry Film: Scaling and Penetration

Photosensitive dry film is a critical material in the Printed Circuit Board (PCB) manufacturing process, used for imaging circuit patterns. Historically, this market was dominated by Japanese and American firms. First Applied’s entry and rapid scaling represent a significant import substitution success story.

• 2025 Performance:
  • Revenue: CNY 680 million.
  • Volume: 190 million square meters, up 8.7% YoY.
  • Gross Margin: Stable at ~24%, significantly higher than the PV film segment.
  • Market Share: Domestic market share reached 15%, a substantial milestone.
• Customer Validation: The Company has successfully entered the supply chains of leading PCB manufacturers, including Shennan Circuits and Dongshan Precision. These are tier-1 customers with stringent quality requirements, serving high-end sectors like telecommunications, automotive electronics, and consumer devices. Their adoption serves as a powerful endorsement of First Applied’s product quality.
• 2026 Outlook: We expect acceleration in this segment. With the foundation laid in 2025, the Company plans to deepen penetration with existing high-end clients and onboard new ones. We forecast volume growth of over 50% in 2026. Given the high margins, this growth will be accretive to overall profitability.

B. Aluminum-Plastic Film: Positioning for Solid-State Batteries

Aluminum-plastic film is the essential packaging material for pouch-type lithium-ion batteries. As the industry eyes solid-state batteries (SSBs) as the next frontier, the demand for high-performance aluminum-plastic films is expected to surge, as SSBs predominantly utilize pouch cell formats due to their flexibility and safety characteristics.

• 2025 Performance:
  • Revenue: CNY 140 million.
  • Volume: 15 million square meters, up 12.6% YoY.
• Strategic Expansion: The Company plans to further expand aluminum-plastic film capacity in 2026. This is not just about meeting current demand for liquid electrolyte pouch cells but is a strategic bet on the solid-state battery timeline. By establishing capacity and qualifying products now, First Applied aims to be a primary supplier when SSBs begin mass commercialization later in the decade.
• Synergy: The production technologies for aluminum-plastic films share similarities with other coating businesses within the Company, allowing for cross-pollination of technical expertise and operational efficiencies.

4. Operational Efficiency and Cost Control

In times of revenue contraction, operational discipline becomes paramount. First Applied demonstrated commendable control over its expense structure in 2025.

• Period Expenses: Total period expenses amounted to CNY 840 million, a decrease of 17.2% YoY.
• Expense Ratio: The expense ratio stood at 5.4%, virtually flat YoY (+0.1 ppt), despite the significant drop in revenue. This indicates that the Company managed to cut absolute costs in line with the business contraction, preventing margin erosion from spiraling out of control.
• R&D Investment: Importantly, cost-cutting did not come at the expense of innovation. R&D expenses were maintained at healthy levels (part of the CNY 468 million total management/R&D spend), ensuring the pipeline for new products like CPI and advanced dry films remains robust.
• Q4 Expense Spike: Q4 period expenses rose to CNY 210 million (up 70.1% YoY), with the expense ratio ticking up to 5.6%. This was likely due to year-end accruals, bonus provisions, and increased spending on new project launches. We view this as a temporary fluctuation rather than a structural trend.

Risks / Headwinds

While the outlook is positive, institutional investors must consider the following risks that could impact the investment thesis:

1. Intensifying Competition in PV Films

Although First Applied holds a 50%+ market share, the PV film industry remains fragmented with numerous smaller players. If the margin recovery in 2026 proves lucrative, it may attract renewed capacity expansion from competitors or new entrants, potentially leading to another round of price wars. While First Applied is the low-cost producer, sustained aggressive pricing by rivals could cap the upside of margin expansion.

2. Downstream Demand Volatility

The PV industry is highly sensitive to global macroeconomic conditions, interest rates, and government subsidy policies.
* Installation Slowdown: If global solar installation growth falls short of expectations in 2026-2027 due to economic recession or policy shifts in key markets (EU, US, China), demand for films will weaken.
* Technology Shift: The rapid adoption of double-glass modules continues to erode the backsheet market. While First Applied is adapting, any faster-than-expected shift in module technology that renders current film types obsolete (e.g., new encapsulation methods) poses a technological risk.

3. Raw Material Price Fluctuations

The margin repair thesis relies on the ability to pass on raw material cost increases. If resin prices rise too sharply or too quickly, there may be a lag in passing these costs to customers, temporarily squeezing margins. Conversely, if resin prices collapse, the Company may face pressure to lower film prices, limiting margin expansion. The inventory arbitrage benefit is a one-time gain; sustainable margins depend on long-term pricing power.

4. Execution Risk in New Businesses

The electronic materials segment (dry film, aluminum-plastic film) is growing rapidly but still constitutes a small portion of total revenue (~5-6%).
* Technical Hurdles: High-end PCB and battery materials require extremely high consistency and yield rates. Any quality issues could lead to loss of key customers like Shennan Circuits.
* Market Adoption: The timeline for solid-state battery commercialization is uncertain. If SSB adoption is delayed, the ROI on the expanded aluminum-plastic film capacity may be lower than expected in the near term.

5. Geopolitical and Trade Risks

While overseas capacity mitigates some trade risks, it introduces others. Operations in Thailand and Vietnam are subject to local labor laws, potential political instability, and evolving trade rules (e.g., US investigations into Southeast Asian solar exports). Any adverse trade ruling targeting Southeast Asian solar components could impact the profitability of the overseas subsidiaries.

Rating / Sector Outlook

Sector Outlook: Photovoltaic Materials

The PV materials sector is emerging from a prolonged period of oversupply and margin compression. We believe the industry has reached a "clearing point" where weaker competitors have been forced out or are operating at a loss, creating space for leaders like First Applied to restore pricing power. The sector is transitioning from a "growth at all costs" phase to a "quality and profitability" phase. We are Overweight on the sector, specifically favoring companies with integrated supply chains, global footprints, and technological leadership.

Sector Outlook: Electronic Materials

The electronic materials sector, particularly for PCBs and advanced batteries, remains structurally attractive due to the secular trends of electrification, AI hardware expansion, and energy storage. Import substitution in China provides a tailwind for domestic suppliers who can meet high-end specifications. We are Overweight on this sub-sector, viewing it as a higher-margin, less cyclical complement to the PV business.

Company Rating: BUY (Maintained)

We maintain our BUY rating on First Applied (603806.SH). The current valuation does not fully reflect the magnitude of the earnings recovery expected in 2026 nor the long-term optionality provided by the electronic materials business.

Valuation Analysis:
* Current Price: CNY 17.73
* 2026E EPS: CNY 0.69
* 2026E P/E: ~26.8x
* 2027E P/E: ~21.2x
* PEG Ratio: Considering the 134% earnings growth in 2026 and ~26% in 2027, the PEG ratio is highly attractive (<1.0 on a forward-looking basis when smoothing growth).

Historically, market leaders in specialized materials trade at P/E multiples of 25-35x during growth phases. Given First Applied’s dual-engine growth (PV recovery + Electronics expansion), we believe a multiple of 25-30x on 2026 earnings is justified. This implies a target price range of CNY 17.25 – CNY 20.70, with significant upside potential as earnings visibility improves throughout 2026.

Investment View

Core Investment Logic

1. The "Turnaround" Play: High Certainty of Earnings Rebound
The most compelling aspect of First Applied at this juncture is the high visibility of its 2026 earnings recovery. Unlike speculative growth stories, the drivers here are mechanical and observable:
* Price Hikes: Already implemented in March 2026.
* Cost Base: Locked in via low-cost inventory.
* Volume: Stable market share ensures volume baseline.
This combination creates a high-confidence scenario for a 134% YoY profit increase in 2026. For institutional investors, this offers a rare opportunity to buy into a cyclical recovery with tangible, near-term catalysts.

2. Valuation Re-rating from "Solar Component" to "Advanced Materials Platform"
The market has historically valued First Applied as a solar component supplier, subjecting it to the volatile valuations of the PV sector. However, the successful scaling of the photosensitive dry film and aluminum-plastic film businesses challenges this narrow classification.
* As the electronic materials segment grows to contribute 10-15% of revenue (and a disproportionately higher share of profit due to higher margins), the Company’s valuation multiple should expand to reflect its diversified tech-materials profile.
* Investors should view the current P/E of ~27x not as expensive for a solar stock, but as reasonable for a diversified materials leader with double-digit long-term growth prospects.

3. Defensive Qualities in a Volatile Market
First Applied offers a blend of growth and defense:
* Balance Sheet Strength: With CNY 7.66 billion in cash and equivalents and a low debt-to-asset ratio (19.5%), the Company is well-insulated from credit tightening.
* Dividend Potential: Strong cash flow generation supports consistent dividend payouts, providing a yield cushion for investors.
* Market Leadership: In times of industry stress, market share tends to consolidate towards the leader. First Applied’s 50%+ share is a moat that protects its long-term viability.

Strategic Recommendations for Investors

For Long-Term Institutional Holders:
* Accumulate on Weakness: Any short-term volatility driven by broader market sentiment or temporary PV news flow should be viewed as a buying opportunity. The fundamental trajectory for 2026-2028 is upward.
* Monitor Quarterly Margins: Key metrics to watch in upcoming quarterly reports are the gross margin progression (targeting >15% in H1 2026) and the revenue growth rate of the electronic materials segment.

For Tactical Traders:
* Catalyst Watch: Pay attention to monthly PV installation data in China and Europe, as well as announcements regarding solid-state battery partnerships. Positive news in these areas could trigger short-term multiple expansion.
* Price Action: The stock has shown resilience, trading between CNY 11.74 and CNY 20.16 over the past year. A breakout above the CNY 20 level, supported by strong Q1 2026 earnings confirmation, could signal the start of a new bullish leg.

Conclusion

First Applied Material stands at a strategic crossroads, having successfully navigated the trough of the PV cycle while simultaneously building a robust second growth engine in electronic materials. The 2025 annual report, while showing headline declines, contains the seeds of a powerful recovery. The convergence of margin repair, global expansion, and product diversification creates a compelling risk-reward profile.

We believe the market is underestimating the speed and magnitude of the 2026 earnings rebound. With a projected net profit of CNY 1.8 billion in 2026, up from CNY 770 million in 2025, the Company is poised to deliver exceptional shareholder value. The maintenance of our BUY rating reflects our confidence in management’s execution, the Company’s competitive moats, and the favorable industry dynamics unfolding in 2026.

Investors should position themselves to benefit from both the cyclical upswing in PV profitability and the secular growth of high-end electronic materials. First Applied is no longer just a solar film company; it is becoming a foundational supplier for the future of energy and electronics.

Appendix: Detailed Financial Forecasts & Assumptions

Revenue Forecast Breakdown

1. PV Film Segment:
* 2025 Base: CNY 14.25 billion.
* 2026 Forecast: CNY 16.5 billion (approx.).
* Assumption: Volume growth of 5-8% driven by global solar installation growth. ASP increase of 10-12% driven by March 2026 price hikes and product mix shift towards higher-efficiency modules (requiring more premium films).
* 2027-2028 Forecast: Moderate volume growth (3-5% annually) as the market matures. Revenue growth driven by inflation-linked pricing and new product introductions (CPI).

2. Electronic Materials Segment:
* Photosensitive Dry Film:
* 2025 Base: CNY 680 million.
* 2026 Forecast: CNY 1.02 billion (+50% volume growth, stable ASP).
* 2027-2028 Forecast: Continued growth at 20-25% annually as market share expands to 20-25% domestically and initial export sales begin.
* Aluminum-Plastic Film:
* 2025 Base: CNY 140 million.
* 2026 Forecast: CNY 250 million (+78% growth) driven by capacity expansion and new customer qualifications.
* 2027-2028 Forecast: Accelerated growth if solid-state battery pilots scale up.

3. Other Segments (Backsheet/3C Tapes):
* Expected to remain flat or decline slightly in revenue but improve in margin due to product mix optimization.

Margin Forecast Assumptions

• Gross Margin:

  • 2025: 11.0% (Reported).
  • 2026: 16.3%. Driven by PV film margin recovery to ~15-16% and higher contribution from high-margin electronic materials (24%+).
  • 2027: 17.6%. Further optimization of overseas production efficiencies and scale effects in electronic materials.
  • 2028: 19.0%. Mature product mix with significant high-value electronic material contribution.

• Operating Expenses:

  • Expected to grow in absolute terms to support R&D and sales expansion in electronic materials, but the expense ratio should gradually decline from 5.4% to ~5.0% as revenue scales faster than fixed overheads.

Cash Flow and CapEx

• CapEx: We forecast CapEx to remain elevated in 2026-2027 (CNY 900 million annually) to fund the expansion of electronic material capacities and overseas PV facilities. This is sustainable given the strong operating cash flow (projected CNY 2.2 billion in 2026).
• Free Cash Flow: Expected to turn strongly positive in 2026 as working capital normalizes and earnings surge.

Disclaimer and Regulatory Information

Analyst Certification:
The analysts responsible for this report, Zeng Duohong (S0600516080001) and Guo Yanan (S0600523070003), hereby certify that the views expressed in this report accurately reflect their personal, independent, and objective views about the subject securities and issuers. They also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Important Disclosures:
* Conflict of Interest: Soochow Securities Co., Ltd. and its affiliates may hold positions in the securities mentioned in this report and may engage in trading activities or provide investment banking services to the companies covered.
* No Investment Advice: This report is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. It does not take into account the specific investment objectives, financial situation, or particular needs of any specific person. Investors should seek independent financial advice before making any investment decisions.
* Risk Warning: The securities market involves risks, including the loss of principal. Past performance is not indicative of future results.

Rating Definitions (Soochow Securities):
* Buy: Expected return > 15% relative to the benchmark (CSI 300 for A-shares) over the next 6-12 months.
* Outperform: Expected return between 5% and 15% relative to the benchmark.
* Neutral: Expected return between -5% and 5% relative to the benchmark.
* Underperform: Expected return between -15% and -5% relative to the benchmark.
* Sell: Expected return < -15% relative to the benchmark.

Contact Information:
Soochow Securities Institute
No. 5 Xingyang Street, Suzhou Industrial Park, Suzhou, 215021, China
Website: http://www.dwzq.com.cn

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