Equity Research: Hangzhou First Applied Material Co., Ltd. (603806.SH)

Date: April 9, 2025
Sector: New Energy / Electronic Materials
Analyst: Institutional Research Team
Current Price: CNY 18.52
Rating: BUY
Target Price Implied Upside: Significant upside based on 2026-2028 earnings recovery and multiple expansion potential.

Executive Summary

Hangzhou First Applied Material (First Applied) has released its full-year financial results for 2025, revealing a year of strategic transition amidst cyclical headwinds in the photovoltaic (PV) sector. While top-line revenue and net profit declined due to industry-wide pressure, the company demonstrated remarkable resilience by maintaining profitability in its core PV encapsulation film business and successfully scaling its second growth curve in electronic materials.

Key Financial Highlights for 2025:
* Revenue: CNY 15.49 billion, a year-over-year (YoY) decline of 19.1%.
* Net Profit Attributable to Shareholders: CNY 770 million, a YoY decline of 41.1%.
* Q4 2025 Performance: Revenue of CNY 3.70 billion (-6.8% YoY, -3.3% QoQ); Net Profit of CNY 82 million (+65.7% YoY, -57.2% QoQ). The sequential drop in Q4 profit is attributed to seasonal factors and year-end provisions, but the YoY growth signals underlying operational stabilization.

Investment Thesis:
We maintain a BUY rating on First Applied. The investment case is underpinned by three core pillars:
1. Unassailable Leadership in PV Films: Despite a challenging market where most competitors incurred losses, First Applied maintained a global market share of over 50% and achieved a gross margin of 10.46%. Its strategic shift towards overseas production (Thailand and Vietnam) and high-value differentiated products (BC, TOPCon, HJT specific films) has created a significant profitability moat.
2. Accelerating Growth in Electronic Materials: The company’s photoresist dry film business is emerging as a robust second growth engine. With domestic market share rising to 15%, entry into top-tier PCB supply chains (Shennan Circuits, Dongshan Precision, Kinwong), and capacity expansion in Jiangmen, this segment is poised for volume and margin expansion driven by AI server and automotive PCB demand.
3. Future-Proof Innovation Pipeline: First Applied is actively positioning itself in next-generation technologies, including perovskite, thin-film batteries, and space photovoltaics. This R&D depth ensures long-term relevance and opens new total addressable markets (TAMs) beyond traditional silicon-based PV.

We have adjusted our earnings forecasts for 2026-2027 to CNY 1.68 billion and CNY 2.13 billion respectively, and introduced a 2028 forecast of CNY 2.58 billion. At the current price, the stock trades at approximately 29x, 23x, and 19x P/E for 2026, 2027, and 2028, respectively. Given the company’s dominant market position, improving margin structure, and successful diversification, we believe the current valuation does not fully reflect the earnings recovery trajectory starting in 2026.

Key Takeaways

1. Financial Performance Analysis: Navigating the Cycle

The 2025 fiscal year was characterized by intense competition and price erosion in the photovoltaic supply chain. However, First Applied’s financials reveal a company that is not only surviving but structurally strengthening its balance sheet and product mix.

1.1 Revenue and Profitability Trends

• Top-Line Contraction: The 19.1% decline in revenue to CNY 15.49 billion primarily reflects lower average selling prices (ASPs) across the PV industry rather than a loss of volume dominance. In fact, shipment volumes remained stable, indicating that the company held its ground while competitors struggled.
• Profit Resilience: The 41.1% decline in net profit to CNY 770 million is less severe than the revenue decline, suggesting effective cost management and a shift towards higher-margin products. The Q4 net profit increase of 65.7% YoY is a critical signal that the worst of the margin compression may be behind us, or that the company’s premium product mix is beginning to offset commodity price pressures.

1.2 Margin Structure Improvement

• Gross Margin Recovery Potential: While the overall gross margin compressed to 11.0% in 2025 (from 14.7% in 2024), the underlying dynamics show improvement in specific segments. The PV film business maintained a 10.46% gross margin, which is exceptional given that many peers were operating at negative margins.
• Overseas Premium: The divergence between domestic (8.0%) and overseas (16.4%) gross margins for PV films highlights the value of First Applied’s global manufacturing footprint. As the overseas revenue share increases (up 9 percentage points to 29%), the blended margin profile of the company is structurally set to improve.

1.3 Cash Flow and Balance Sheet Health

• Strong Operating Cash Flow: Despite lower profits, the company generated CNY 1.46 billion in net operating cash flow in 2025. This demonstrates strong working capital management and the ability to convert earnings into cash, a crucial trait in capital-intensive industries.
• Low Leverage: The资产负债率 (Debt-to-Asset Ratio) stands at a healthy 19.52%, with a net debt-to-equity ratio of -29.13%, indicating a net cash position. This fortress balance sheet provides the flexibility to fund capacity expansions (Jiangmen, Thailand, Vietnam) without significant financial strain.

Source: Company Reports, Guojin Securities Institute Estimates

2. Core Business Driver: Photovoltaic Encapsulation Films

The PV encapsulation film business remains the cash cow of First Applied, contributing the vast majority of revenue. The company’s performance in 2025 underscores its status as the undisputed global leader, leveraging scale, technology, and global footprint to outperform the sector.

2.1 Market Dominance and Volume Stability

• Global Share >50%: First Applied shipped 2.81 billion square meters of PV films in 2025, essentially flat year-over-year. In an industry where total installed capacity grew but many manufacturers cut production due to losses, maintaining flat shipments while holding >50% global market share is a testament to customer stickiness and supply chain reliability.
• Leadership in Advanced Technologies: The company’s dominance is even more pronounced in advanced cell technologies. It supplies over 70% of the encapsulation materials for Back Contact (BC) modules. As the industry shifts from PERC to TOPCon, HJT, and BC technologies, First Applied’s early mover advantage in these specialized films secures its premium positioning.

2.2 Product Mix Optimization and Technology Iteration

The PV industry is undergoing a rapid technological transition. First Applied has successfully aligned its product portfolio with these trends:
* Specialized Films for N-Type Cells: The company launched high-transmittance, low-water-vapor-transmission-rate (WVTR), and high-reliability films specifically designed for TOPCon, Heterojunction (HJT), and BC cells. These films command higher prices and margins compared to standard EVA films used in older PERC modules.
* Innovative Products: The mass supply of light-converting films and 0BB (Zero Busbar) skin films represents a significant technological leap. 0BB technology reduces silver paste consumption and improves module efficiency, and First Applied’s specialized skin films are critical for enabling this architecture.
* Margin Impact: The shift towards these differentiated products is the primary driver behind the company’s ability to maintain a 10.46% gross margin in 2025. As the penetration of N-type cells increases globally, the proportion of high-margin specialized films in First Applied’s sales mix will rise, further boosting profitability.

2.3 Global Manufacturing Footprint: The Overseas Advantage

One of the most critical strategic moves by First Applied has been the aggressive expansion of its overseas production capacity. This strategy addresses two key challenges: trade barriers (tariffs) and the desire for higher margins.

• Capacity Expansion:
  • Thailand: 350 million square meters capacity came online in 2025.
  • Vietnam: 250 million square meters capacity came online in 2025.
  • Total Overseas Capacity: Reached 600 million square meters by end-2025.
• Sales Mix Shift: The overseas sales contribution increased by 9 percentage points to 29% in 2025. This trend is expected to continue as global PV module manufacturers expand their non-China production bases to serve US and European markets.
• Profitability Differential:
  • Domestic Gross Margin: 8.0%
  • Overseas Gross Margin: 16.4%
  • Implication: The overseas business is twice as profitable as the domestic business. As the overseas revenue share grows from 29% towards 40-50% in the coming years, the blended gross margin of the PV film segment could structurally re-rate upwards by 200-300 basis points, even if domestic margins remain pressured.

2.4 Future Growth Frontiers: Beyond Silicon

First Applied is not resting on its laurels in traditional silicon PV. The company is actively investing in R&D for next-generation energy technologies, ensuring it remains a material science leader regardless of the dominant PV technology of the future.

• Perovskite Solar Cells: Developing specialized encapsulation films that address the unique stability and moisture sensitivity challenges of perovskite modules.
• Thin-Film Batteries: Exploring encapsulation solutions for flexible and lightweight thin-film applications.
• Space Photovoltaics: A high-barrier, high-margin niche. First Applied is developing ultra-lightweight, radiation-resistant encapsulation materials for space-based solar power generation. This segment, while small today, offers significant long-term growth potential and enhances the company’s technological brand equity.
• Edge Sealing Butyl Rubber: New products for module edge sealing complement the main encapsulation film, offering a "total solution" approach to module manufacturers and increasing share of wallet.

3. Second Growth Curve: Electronic Materials (Photoresist Dry Film)

While PV films provide the cash flow, the electronic materials segment, specifically photoresist dry film, is the primary driver of future earnings growth and valuation re-rating. This business is transitioning from a "start-up" phase to a "scale-up" phase, characterized by rapid revenue growth, market share gains, and improving economies of scale.

3.1 Rapid Growth and Market Penetration

• Revenue and Volume: In 2025, the photoresist dry film business generated CNY 682 million in revenue, a YoY increase of 15.1%. Sales volume reached 1.89 billion square feet, up 18.7% YoY. This growth rate significantly outpaces the general PCB industry, indicating successful market share capture.
• Domestic Market Share: The company’s domestic market share rose to 15%. Given the historical dominance of Japanese and American suppliers in this high-precision material, reaching 15% share is a significant milestone. It validates the quality and reliability of First Applied’s products in demanding industrial applications.
• Profitability: The segment maintained a gross margin of approximately 24%. This is substantially higher than the PV film business and indicates a favorable competitive landscape and strong pricing power for localized, high-quality supply.

3.2 Customer Validation and Supply Chain Entry

A critical de-risking event for the electronic materials business was the successful entry into the supply chains of leading Printed Circuit Board (PCB) manufacturers. In 2025, First Applied secured qualifications with:
* Shennan Circuits: A leader in high-end communication and AI server PCBs.
* Dongshan Precision: A major player in consumer electronics and automotive PCBs.
* Kinwong Electronic: A top-tier manufacturer for automotive and industrial PCBs.

Entry into these supply chains is not merely a sales victory; it is a rigorous technical validation. These customers require extremely high consistency and yield rates. Successful qualification implies that First Applied’s dry film meets international standards, paving the way for further expansion into other top-tier global PCB makers.

3.3 Product Upgrading: Targeting High-End Applications

The company is strategically moving up the value chain within the dry film segment, shifting from standard multi-layer board applications to high-end High-Density Interconnect (HDI) and substrate-like PCB (SLP) applications.

• AI Server and HDI Demand: The boom in AI servers requires complex, high-layer-count HDI PCBs. First Applied has launched high-resolution, high-adhesion dry films specifically designed for these applications. These products have higher technical barriers and command premium pricing.
• Automotive PCBs: With the electrification of vehicles, automotive PCBs require high reliability and thermal stability. First Applied’s specialized dry films for automotive applications are seeing increased adoption.
• Surface Treatment Films: The introduction of special dry films for PCB surface treatment expands the company’s product breadth, allowing it to offer a more comprehensive suite of materials to PCB fabricators.

3.4 Capacity Expansion to Support Growth

To sustain the high growth trajectory, First Applied is aggressively expanding its production capacity.
* Current Capacity: 300 million square feet.
* Jiangmen Project: A new 210 million square feet capacity project has commenced construction in Jiangmen.
* Future Capacity: Upon completion, total design capacity will reach 500 million square feet.
* Impact: This 67% increase in capacity will remove supply bottlenecks, allow for greater economies of scale, and enable the company to pursue larger contracts with global PCB giants. We expect this capacity to come online in phases, supporting revenue growth in 2026 and 2027.

4. Valuation and Earnings Forecast

4.1 Earnings Forecast Adjustments

Based on the 2025 annual report and our analysis of the PV and electronic materials sectors, we have updated our financial model.

• 2026 Outlook: We anticipate a strong recovery in net profit to CNY 1.68 billion (+117.6% YoY). This rebound is driven by:
  1. Base Effect: The low base of 2025 profits.
  2. Margin Expansion: Increased contribution from high-margin overseas PV films and high-end electronic materials.
  3. Volume Growth: Moderate recovery in global PV installations and continued double-digit growth in dry film shipments.
• 2027-2028 Outlook: We project net profits of CNY 2.13 billion and CNY 2.58 billion, representing CAGRs of ~20-25%. This sustainable growth is supported by the maturation of the electronic materials business and the structural margin improvement in the PV segment.

Note: P/E calculated based on current price of CNY 18.52.

4.2 Valuation Methodology

We employ a relative valuation approach, comparing First Applied to its peers in the new material and PV auxiliary sectors, as well as considering its historical valuation bands.

• Peer Comparison: Traditional PV film peers often trade at lower multiples (10-15x P/E) due to perceived commoditization and cyclical risks. However, First Applied commands a premium due to its:
  1. Monopoly-like Position: >50% market share provides pricing power and stability.
  2. Diversification: The electronic materials business offers a tech-growth profile (higher multiple) that pure-play PV companies lack.
  3. Global Footprint: Overseas assets reduce geopolitical risk and enhance margins.
• Historical Band: Historically, First Applied has traded in a 20-35x P/E range during periods of stable growth. Given the expected earnings CAGR of ~20% for 2026-2028, a forward P/E of 23-29x is justified.
• Target Valuation: Applying a 2026E P/E of 29x (reflecting the high visibility of the 2026 recovery and the growth premium of the electronic materials segment) suggests a fair value significantly above the current price. Even using a conservative 2027E P/E of 23x, the upside remains attractive.

4.3 Investment Rating

We maintain a BUY rating. The stock offers an asymmetric risk-reward profile:
* Downside Protection: Limited by the company’s strong balance sheet, dominant market share, and current low valuation relative to its long-term earnings power.
* Upside Catalysts: Faster-than-expected recovery in PV margins, accelerated adoption of AI-server related dry films, and successful commercialization of space/perovskite materials.

Risks / Headwinds

While the investment thesis is robust, investors must consider the following risks that could impact the company’s financial performance and stock price.

1. Downstream Demand Volatility

• PV Installation Slowdown: The PV industry is highly policy-dependent and sensitive to interest rates. A significant slowdown in global solar installations (particularly in key markets like Europe, the US, or China) would reduce demand for encapsulation films, leading to further price wars and margin compression.
• PCB Cycle Downturn: The electronic materials business is tied to the semiconductor and consumer electronics cycles. A prolonged downturn in consumer electronics or a delay in AI infrastructure spending could slow the growth of the dry film business.

2. International Trade and Geopolitical Risks

• Tariffs and Trade Barriers: As First Applied expands its overseas footprint, it becomes more exposed to international trade policies. New tariffs on Chinese-owned factories in Southeast Asia (Thailand, Vietnam) by the US or EU could erode the margin advantage of overseas production.
• Supply Chain Decoupling: Efforts by Western countries to decouple from Chinese supply chains could lead to customers preferring non-Chinese suppliers for critical materials, potentially limiting First Applied’s market share growth in premium Western markets.

3. Execution Risk in Electronic Materials

• Capacity Utilization: The Jiangmen project requires significant capital expenditure. If demand for dry films does not grow as expected, the new capacity could lead to lower utilization rates, depressing margins through higher fixed cost absorption.
• Technological Obsolescence: The electronic materials sector is fast-moving. Failure to keep pace with the latest PCB manufacturing technologies (e.g., sub-micron resolution requirements) could result in loss of competitiveness against established Japanese rivals (like Hitachi Chemical or Asahi Kasei).

4. Raw Material Price Fluctuations

• Resin and Chemical Costs: The production of both PV films and dry films relies on petrochemical derivatives (EVA resin, POE resin, photoresist monomers). Significant spikes in crude oil prices or supply disruptions in these raw materials could increase COGS and squeeze margins if the company cannot pass costs onto customers.

5. Competition Intensification

• PV Film Competitors: While First Applied is the leader, competitors like Haiyou New Material and Mingguan New Material are expanding capacity. If these competitors engage in aggressive pricing to gain share, it could trigger a renewed price war, threatening First Applied’s margin leadership.
• Dry Film Competition: The domestic dry film market is becoming more crowded. New entrants or existing competitors lowering prices could pressure the 24% gross margin currently enjoyed by First Applied.

Rating / Sector Outlook

Sector Outlook: Photovoltaic Materials

The PV materials sector is currently in a phase of consolidation and optimization. The era of blind capacity expansion is over, replaced by a focus on cost efficiency, technological differentiation, and global supply chain resilience.
* Short-Term (6-12 months): Continued pressure on prices and margins as excess capacity is worked off. However, the rate of decline is slowing, and leading players are beginning to stabilize.
* Medium-Term (1-3 years): Industry consolidation will likely reduce the number of viable competitors, benefiting scale leaders like First Applied. The shift to N-type technologies (TOPCon, HJT, BC) will create a structural premium for companies with advanced R&D capabilities.
* Long-Term: Global energy transition trends remain intact. Solar power is becoming the cheapest source of electricity in many regions, ensuring long-term demand growth. Companies with global footprints and diversified product portfolios will capture disproportionate value.

Sector Outlook: Electronic Materials

The electronic materials sector, particularly for PCBs, is experiencing a structural upgrade.
* AI and High-Performance Computing: The demand for HDI and SLP boards for AI servers is creating a high-growth niche. Materials that enable higher density and better thermal management are in short supply and command premium prices.
* Localization Trend: In China, there is a strong push for localization of critical electronic materials to reduce dependence on imports. First Applied is a primary beneficiary of this trend, supported by government policies and customer willingness to qualify domestic suppliers.

Company Rating: BUY

We reaffirm our BUY rating for First Applied. The company has successfully navigated the trough of the PV cycle while simultaneously building a high-growth electronic materials business. The convergence of these two narratives—cyclical recovery in PV and structural growth in electronics—creates a compelling investment opportunity. The current valuation offers an attractive entry point for long-term investors seeking exposure to the energy transition and advanced manufacturing sectors.

Investment View

Strategic Analysis: The "Dual-Engine" Model

First Applied’s investment appeal lies in its successful transformation from a single-product PV supplier to a diversified platform for advanced functional materials. This "Dual-Engine" model mitigates risk and enhances growth potential.

Engine 1: The Cash Cow (PV Films)

• Role: Provides stable cash flow, funds R&D and capacity expansion, and offers downside protection.
• Key Metric to Watch: Overseas revenue share and blended gross margin. As overseas share rises, margins should expand, driving earnings beat potential.
• Strategic Moat: Scale (>50% share), Customer Stickiness (qualified by all major module makers), and Global Footprint (Thailand/Vietnam).

Engine 2: The Growth Star (Electronic Materials)

• Role: Drives revenue growth, expands TAM, and justifies a higher valuation multiple.
• Key Metric to Watch: Dry film shipment volume growth, market share in high-end HDI/AI segments, and gross margin stability.
• Strategic Moat: Technical validation by top-tier PCB makers, rapid capacity expansion, and localization tailwinds.

Catalysts for Stock Price Appreciation

1. Quarterly Margin Expansion: Evidence in upcoming quarterly reports that the blended gross margin is trending upwards, driven by the overseas PV mix and high-end dry film sales.
2. AI Server Supply Chain Wins: Announcement of additional major contracts with global PCB manufacturers for AI-related dry films.
3. Industry Consolidation: Exit of weaker competitors in the PV film space, leading to improved pricing power for First Applied.
4. New Technology Breakthroughs: Commercial milestones in perovskite or space PV materials, signaling success in future-proofing the business.

Conclusion

Hangzhou First Applied Material stands at a pivotal juncture. Having weathered the storm of the 2024-2025 PV downturn with its leadership intact, the company is now positioned to capitalize on the industry’s recovery and its own internal growth drivers. The combination of a dominant, cash-generating PV film business and a rapidly scaling, high-margin electronic materials business creates a unique profile in the Chinese materials sector.

For institutional investors, First Applied offers a rare combination of safety (market leadership, strong balance sheet) and growth (electronic materials, overseas expansion). The current price reflects the pains of the past cycle but does not fully price in the earnings recovery of 2026-2028. We recommend accumulating positions on weakness, with a medium-to-long-term horizon, to benefit from the company’s dual-engine growth trajectory.

Appendix: Detailed Financial Analysis & Ratios

1. Profitability Analysis

2. Operational Efficiency

3. Solvency and Liquidity

4. Cash Flow Analysis

Deep Dive: Competitive Landscape Analysis

Photovoltaic Encapsulation Film Market

The global PV encapsulation film market is an oligopoly, with First Applied as the clear leader.

Competitors:
1. Haiyou New Material (China): The second-largest player. Aggressively expanding capacity but lacks the global footprint and product breadth of First Applied. Margins are typically lower.
2. Mingguan New Material (China): Another significant domestic competitor. Focuses on cost leadership but lags in high-end specialized films.
3. Swiss Krono / Others (International): Smaller players with niche presence.

First Applied’s Competitive Advantages:
* Scale Economies: With >50% share, First Applied enjoys superior purchasing power for raw materials (EVA/POE resins) and lower unit manufacturing costs.
* R&D Lead: The company’s ability to launch specialized films for TOPCon/HJT/BC ahead of competitors allows it to capture the high-margin segment of the market.
* Global Supply Chain: The Thailand and Vietnam factories allow First Applied to serve global module makers who are diversifying away from China, a capability few competitors match.

Photoresist Dry Film Market

The dry film market has historically been dominated by Japanese and US companies.

Competitors:
1. Hitachi Chemical (Japan): Global leader, strong in high-end applications.
2. Asahi Kasei (Japan): Major player with strong technology.
3. DuPont (US): Significant presence in the market.
4. Domestic Chinese Peers: Several smaller players are entering the market, but few have achieved the scale and customer validation of First Applied.

First Applied’s Competitive Advantages:
* Cost Performance: Offers comparable quality to Japanese peers at a more competitive price, appealing to cost-conscious PCB makers.
* Local Service: Proximity to Chinese PCB manufacturers (who produce >50% of global PCBs) allows for faster technical support and customization.
* Supply Chain Security: Chinese PCB makers are actively seeking to localize supply chains to mitigate geopolitical risks, favoring domestic leaders like First Applied.

ESG Considerations

Environmental, Social, and Governance (ESG) factors are increasingly important for institutional investors.

• Environmental:
  • Positive: First Applied’s products enable renewable energy generation (PV) and energy-efficient electronics (AI servers).
  • Challenge: Manufacturing processes involve chemical usage. The company must maintain strict environmental compliance, particularly in its overseas factories, to avoid reputational risk.
  • Initiative: The company is investing in recycling technologies for PV modules and reducing waste in production.
• Social:
  • Labor Practices: As a global employer, adherence to international labor standards in Thailand and Vietnam is critical.
  • Product Safety: Ensuring the long-term reliability and safety of PV modules (which last 25+ years) is a key social responsibility.
• Governance:
  • Management Quality: The management team has demonstrated strategic foresight in expanding overseas and diversifying into electronics.
  • Transparency: The company maintains good disclosure practices, as evidenced by the detailed annual report.

Final Investment Recommendation

Summary:
Hangzhou First Applied Material is a high-quality compounder in the materials sector. It has successfully defended its core franchise in PV films during a downturn and is executing a successful diversification strategy into electronic materials. The financials for 2025, while showing declines, reveal a company that is gaining market share, improving its product mix, and strengthening its global footprint.

Why Buy Now?
1. Valuation Disconnect: The market is pricing First Applied as a cyclical PV stock at the bottom of its cycle, ignoring the growth optionality of its electronic materials business and the structural margin improvement from overseas expansion.
2. Earnings Inflection Point: 2026 is projected to be a year of significant earnings recovery (+117% YoY). Buying before this inflection point offers superior risk-adjusted returns.
3. Strategic Moat: The company’s dual moats (scale in PV, technology/validation in Electronics) are widening, not narrowing.

Action:
We recommend ACCUMULATE on any weakness below CNY 18.00, with a BUY rating for long-term portfolios. The target price is derived from a 2026E P/E of 29x, implying a significant upside from current levels.

Monitor:
* Quarterly gross margin trends.
* Progress of the Jiangmen dry film project.
* Global PV installation data and policy changes in the US/EU.

Disclaimer: This report is for informational purposes only and does not constitute investment advice. Investors should conduct their own due diligence and consult with financial advisors before making investment decisions. The views expressed herein are subject to change without notice.