Hengdian Group DMEGC Magnetics (002056.SZ): Resilience Amidst Photovoltaic Headwinds; Magnetic Materials and Lithium Batteries Drive Steady Growth

Date: March 31, 2026
Rating: BUY (Maintained)
Current Price: CNY 18.60
Target Price: Implied Upside based on Valuation Multiples
Analysts: Zeng Duohong, Guo Yanan, Xu Chengrong

Executive Summary

Hengdian Group DMEGC Magnetics Co., Ltd. ("DMEGC" or the "Company") has demonstrated remarkable operational resilience in its fiscal year 2025 results, navigating a challenging macroeconomic environment characterized by intense competition in the photovoltaic (PV) sector and evolving geopolitical trade barriers. The Company reported total revenues of CNY 22.59 billion in 2025, representing a year-over-year (YoY) increase of 21.7%, while attributable net profit reached CNY 1.85 billion, up 1.3% YoY. Although profitability margins faced compression due to industry-wide price wars and specific trade policy impacts, the Company’s diversified business model—spanning magnetic materials, photovoltaics, and lithium batteries—provided a crucial buffer against sector-specific volatility.

The core investment thesis for DMEGC rests on three pillars:
1. Photovoltaic Counter-Cyclical Strength: Despite a 3.49 percentage point (pct) decline in gross margin to 15.25%, the PV segment achieved a 45% YoY growth in shipment volume to 24.9 GW. The Company successfully executed a differentiated strategy, prioritizing high-efficiency products and adjusting shipment rhythms to protect margins in the second half of the year.
2. Magnetic Materials as a Cash Cow: The magnetic material segment continues to exhibit stable growth with improving quality. Revenue grew 9.2% YoY to ~CNY 5.0 billion, driven by structural optimization that lifted both average selling prices (ASP) and gross margins (up 0.82 pct to 28.14%). Expansion into high-growth areas such as AI data center (AIDC) power supplies and new energy vehicles (NEVs) reinforces its market leadership.
3. Lithium Battery Momentum: The lithium battery segment is emerging as a significant growth engine, with revenue rising 17.1% YoY to CNY 2.72 billion and shipments hitting a record 622 million units. Margin expansion (up 2.72 pct to 15.38%) reflects successful cost control and a shift towards higher-value applications in power tools and consumer electronics.

Looking ahead, we acknowledge near-term headwinds stemming from the United States’ anti-dumping and countervailing duty (AD/CVD) investigations targeting Indonesian exports, which impact DMEGC’s overseas production base. Consequently, we have adjusted our earnings forecasts for 2026 and 2027 downwards to reflect these tariff implications and the removal of export tax rebates. However, we maintain a "BUY" rating, citing the Company’s robust balance sheet, strong operating cash flow generation, and the long-term structural demand for magnetic components in electrification and digitalization trends. We introduce a 2028 forecast, projecting a recovery in profit growth to 17.2% as the Company adapts its supply chain and product mix.

Key Takeaways

1. Financial Performance Analysis: Top-Line Growth vs. Margin Pressure

Revenue and Profit Overview
In FY 2025, DMEGC delivered solid top-line growth, with total operating revenue reaching CNY 22.59 billion, a 21.7% increase from the previous year. This growth was primarily driven by the substantial expansion in PV shipments and steady contributions from the magnetic and lithium battery segments. However, the translation of revenue growth into bottom-line profit was muted due to margin compression across key sectors. Attributable net profit stood at CNY 1.85 billion, a marginal 1.3% YoY increase. Deducting non-recurring items, the扣非 (deducted non-recurring) net profit was CNY 1.76 billion, up 5.3% YoY, indicating that core operational profitability remained relatively stable despite external pressures.

*Note: 2024 Gross Margin and Net Margin derived from reported changes in 2025.

The contraction in overall gross margin by 2.0 pct to 17.8% and net profit margin by 1.6 pct to 8.2% underscores the intense competitive landscape in the PV industry and the initial impact of trade barriers on the Company’s overseas operations.

Quarterly Trends: Q4 2025 Softness
The fourth quarter of 2025 revealed some sequential softness, largely attributable to strategic shipment adjustments and seasonal factors.
* Q4 Revenue: CNY 5.02 billion, flat YoY (+1%) but down 10.7% Quarter-on-Quarter (QoQ).
* Q4 Net Profit: CNY 400 million, down 55.7% YoY and 7.8% QoQ.
* Q4 Deducted Net Profit: CNY 300 million, down 62.5% YoY and 25.3% QoQ.
* Q4 Gross Margin: 17.5%, down 13.6 pct YoY (a significant drop likely due to one-off provisions or severe price cuts in PV) but stable QoQ.

The sharp YoY decline in Q4 profits highlights the lagging effect of price declines in the PV supply chain and the immediate impact of the US trade investigation announcements in late 2025. However, the QoQ stability in gross margin suggests that the Company has begun to stabilize its pricing power and cost structure heading into 2026.

2. Segment Deep Dive: Photovoltaics – Navigating the Storm

The photovoltaic segment remains the largest contributor to DMEGC’s revenue, accounting for approximately 63% of total sales in 2025 (CNY 14.3 billion). The segment’s performance in 2025 was a testament to the Company’s ability to execute a counter-cyclical strategy amidst industry consolidation.

Volume Growth and Strategic Shipment Management
DMEGC achieved a PV product shipment volume of 24.9 GW in 2025, a robust 45% YoY increase. This volume growth significantly outpaced the revenue growth rate, confirming the deflationary pressure on module and cell prices globally.
* H1 2025: Aggressive shipment strategy to capture market share.
* H2 2025: Strategic pivot. Having achieved its annual target of 20 GW by Q3, the Company deliberately reduced shipments in Q4 (estimated ~5 GW, a sequential drop of ~2 GW) to prioritize profitability over volume. This discipline is crucial in a market where selling below cost is a risk for many peers.

Margin Dynamics and Trade Barriers
The gross margin for the PV segment declined by 3.49 pct to 15.25%. While this indicates pressure, it is important to contextualize this figure against the broader industry, where many integrated players faced negative margins. DMEGC’s ability to maintain a double-digit margin is a competitive advantage.

Geopolitical Headwinds: The Indonesia Factor
A critical development in 2025 was the escalation of US trade protectionism.
* July 2025: The US filed a new round of anti-dumping and countervailing duty investigations targeting solar products from Indonesia, India, and Laos. DMEGC has significant manufacturing capacity in Indonesia, making it directly exposed.
* Impact on H2 2025: The uncertainty surrounding these investigations led to a temporary disruption in battery shipments from Indonesia, contributing to the Q4 volume contraction.
* February 2026 Update: The US Department of Commerce published the preliminary determination for Countervailing Duties (CVD), assigning a rate of 104.38% to general enterprises in Indonesia. The preliminary Anti-Dumping (AD) rates are expected in late April 2026.

Outlook for PV:
While the high tariff rates are concerning, two mitigating factors support a cautiously optimistic view:
1. Supply Shortage in Overseas Cells: Global demand for non-Chinese origin cells remains high, creating a seller’s market for compliant supply chains.
2. Price Pass-Through: US module prices have risen, allowing manufacturers to pass through a portion of the tariff costs to end-users. DMEGC’s established distribution channels and brand reputation in Europe and other non-US markets also provide diversification benefits.

3. Segment Deep Dive: Magnetic Materials – The Stable Anchor

The magnetic material business serves as the financial anchor for DMEGC, providing consistent cash flow and high margins. In 2025, this segment generated revenues of approximately CNY 5.0 billion, a 9.2% YoY increase.

Operational Highlights:
* Shipment Volume: 218,000 tons.
* Gross Margin: 28.14%, an improvement of 0.82 pct YoY.
* Profitability Driver: The margin expansion was driven by structural optimization. The Company shifted its product mix towards higher-value-added applications, resulting in an increase in both ASP and unit profit.

Strategic Wins in High-Growth Verticals:
DMEGC has successfully penetrated several high-growth downstream sectors:
1. New Energy Vehicles (NEVs): The Company has secured规模化 (large-scale) supply agreements with leading domestic and international NEV OEMs. Magnetic components are critical for inverters, motors, and onboard chargers, benefiting from the secular trend of vehicle electrification.
2. AI Data Centers (AIDC): With the boom in artificial intelligence, power supply requirements for data centers have surged. DMEGC has launched multiple component solutions for head AIDC power supply manufacturers, capitalizing on the need for high-efficiency, miniaturized magnetic devices.
3. Consumer Appliances: Continued dominance in the home appliance sector provides a stable baseline demand.

Inductor Growth:
Notably, shipments of copper clip inductors and other advanced passive components doubled. This signifies DMEGC’s successful transition from traditional ferrite cores to more complex, integrated magnetic devices, which command higher barriers to entry and better margins.

4. Segment Deep Dive: Lithium Batteries – Accelerating Momentum

The lithium battery segment is transitioning from a niche player to a significant growth driver. In 2025, the segment recorded revenues of CNY 2.72 billion, a 17.1% YoY increase, with shipments reaching 622 million units, also a historical high.

Margin Improvement and Cost Control:
* Gross Margin: 15.38%, up 2.72 pct YoY.
* Drivers: The margin expansion is attributed to strict manufacturing cost controls and economies of scale. As production volumes increase, fixed cost absorption improves, directly boosting profitability.

Market Positioning:
DMEGC focuses primarily on the small-power lithium battery market, particularly for power tools and consumer electronics.
* Power Tools: The Company has gained market share in the global power tool sector, replacing incumbent suppliers through competitive pricing and reliable quality.
* Product Innovation: The launch of new high-capacity E-type and P-type products has expanded the addressable market. Furthermore, the completion of technical reserves and pilot line implementation for all-tab (tabless) battery cells positions DMEGC at the forefront of next-generation battery technology, which offers superior thermal management and power density.

Future Outlook:
With the small-power battery market stabilizing after a period of inventory correction in 2023-2024, DMEGC is well-positioned to benefit from the replacement cycle and new product adoption. The focus on high-end segments will likely sustain the upward trajectory in margins.

5. Operational Efficiency and Financial Health

Expense Management
DMEGC demonstrated disciplined expense management in 2025.
* Total Period Expenses: CNY 1.15 billion, a 17.5% YoY decrease.
* Expense Ratio: Declined by 2.4 pct to 5.1%.
* Q4 Specifics: Q4 expenses were CNY 370 million (up 24.7% YoY, down 14.2% QoQ), with an expense ratio of 7.3%. The YoY increase in Q4 expenses may be related to year-end accruals or increased R&D spending for new product lines, but the full-year trend remains positive.

Cash Flow and Capital Expenditure
* Operating Cash Flow (OCF): CNY 3.26 billion in 2025, a slight 7.5% YoY decrease. Despite the drop, the Company generated substantial positive cash flow, indicating strong working capital management. Q4 OCF was CNY 270 million, down significantly YoY and QoQ, likely due to seasonal payment cycles and inventory buildup.
* Capital Expenditure (CapEx): CNY 1.39 billion in 2025, up 24.7% YoY. This increase reflects ongoing investments in capacity expansion for PV and lithium batteries, as well as technological upgrades in magnetic materials. Q4 CapEx was CNY 240 million.
* Inventory: Year-end inventory stood at CNY 5.87 billion, a 56.7% increase from the beginning of the year. This significant buildup warrants attention. It may reflect strategic stockpiling ahead of potential trade disruptions or unsold PV inventory due to the Q4 shipment slowdown. Investors should monitor inventory turnover ratios in 2026 to ensure this does not lead to impairment risks.

Balance Sheet Strength
* Asset-Liability Ratio: 59.68% (LF), indicating a moderate leverage level.
* Monetary Funds: CNY 9.32 billion, providing ample liquidity to navigate short-term challenges and fund future CapEx without excessive debt reliance.

Risks / Headwinds

While DMEGC exhibits strong fundamentals, several risks could impact its future performance. Institutional investors should carefully consider the following headwinds:

1. Geopolitical and Trade Policy Risks (High Impact)

The most immediate and significant risk stems from the US trade policies targeting solar products from Southeast Asia.
* Tariff Exposure: The preliminary CVD rate of 104.38% for Indonesian enterprises is prohibitive. If the final AD rates are similarly high, DMEGC’s Indonesian factory could become uncompetitive for the US market.
* Supply Chain Reconfiguration Costs: To mitigate this, the Company may need to accelerate capacity expansion in other jurisdictions (e.g., Vietnam, Mexico, or domestically with different export structures), which involves significant CapEx and execution risk.
* Global Protectionism Trend: Beyond the US, the EU and other markets are also considering stricter trade measures against Chinese renewable energy products, which could limit export growth opportunities.

2. Photovoltaic Industry Overcapacity and Price Wars (Medium-High Impact)

• Persistent Margin Pressure: The global PV industry continues to grapple with structural overcapacity. While DMEGC has shown resilience, prolonged low prices could erode margins further, potentially pushing them below the 15% threshold.
• Technology Iteration Risk: The rapid shift from PERC to TOPCon and potentially HJT/BC technologies requires continuous R&D investment. Failure to keep pace with efficiency improvements could result in stranded assets and loss of market share.

3. Raw Material Price Volatility (Medium Impact)

• Lithium and Nickel: For the lithium battery segment, fluctuations in raw material prices can impact margins. While current trends show stabilization, any sudden spike could squeeze profitability if cost pass-through mechanisms are delayed.
• Silver and Copper: These are key inputs for PV cells and magnetic components. Rising commodity prices would increase COGS, pressuring gross margins unless fully passed on to customers.

4. Inventory Impairment Risk (Medium Impact)

• High Inventory Levels: The 56.7% increase in inventory to CNY 5.87 billion is a concern. If PV module prices continue to fall or if demand slows unexpectedly, the Company may face inventory write-downs, which would directly hit net profit.
• Obsolescence: In the fast-evolving tech sectors (batteries and PV), older inventory can quickly become obsolete, necessitating aggressive discounting or write-offs.

5. Competition in Magnetic and Battery Segments (Medium Impact)

• Magnetic Materials: While DMEGC is a leader, competition from smaller, agile players in niche high-frequency applications could intensify.
• Lithium Batteries: The small-power battery market is crowded. Competitors like Samsung SDI, Murata, and domestic rivals are aggressively competing for share in the power tool and consumer electronics sectors, which could limit pricing power.

6. Macroeconomic Slowdown (Low-Medium Impact)

• Demand Destruction: A global economic slowdown could reduce demand for consumer electronics (impacting magnets and small batteries) and delay large-scale infrastructure projects (impacting utility-scale PV demand).

Rating / Sector Outlook

Investment Rating: BUY (Maintained)

We maintain our BUY rating on Hengdian Group DMEGC Magnetics. Despite the near-term earnings adjustments due to trade tariffs, the Company’s valuation remains attractive relative to its growth potential and industry position.

Valuation Analysis:
* Current P/E (2025A): 18.83x
* Forward P/E (2026E): 18.09x
* Forward P/E (2027E): 15.80x
* Forward P/E (2028E): 13.48x

The stock is trading at a reasonable multiple given its diversified business model. The projected decline in P/E to 13.48x by 2028 suggests that the market is currently pricing in significant caution regarding the PV sector. However, we believe this pessimism is overstated given DMEGC’s proven ability to generate cash and its leadership in the more stable magnetic materials sector.

Peer Comparison Context:
Compared to pure-play PV manufacturers who are struggling with negative cash flows and massive losses, DMEGC’s profitability and positive operating cash flow make it a safer haven in the renewable energy space. Compared to pure-play magnetic material companies, DMEGC offers higher growth elasticity through its PV and battery segments.

Sector Outlook: Mixed but Stabilizing

1. Photovoltaics: The sector is in a "clearing" phase. Weak players are exiting, and supply-demand dynamics are expected to improve by late 2026/2027. Leaders with cost advantages and diversified geographic footprints like DMEGC will emerge stronger. The US market will remain lucrative but accessible only to those with compliant supply chains.
2. Magnetic Materials: The sector outlook is Positive. The secular trends of electrification (EVs) and digitalization (AI/Data Centers) provide a long-term tailwind for high-performance magnetic materials. Demand is expected to grow steadily at a CAGR of 8-10%.
3. Lithium Batteries (Small Power): The sector outlook is Neutral to Positive. After a period of destocking, the market is normalizing. Growth will be driven by innovation (higher capacity, faster charging) and market share consolidation among top-tier manufacturers.

Investment View

Core Investment Logic

1. Diversification as a Hedge Against Volatility
DMEGC’s unique tripartite business structure (Magnets + PV + Lithium) provides a natural hedge. When the PV cycle is down, the stable cash flows from magnetic materials support the balance sheet. When the PV cycle turns up, it provides explosive earnings growth. This diversification reduces the overall beta of the stock compared to pure-play solar stocks, making it an attractive holding for institutional portfolios seeking exposure to green energy with lower volatility.

2. Counter-Cyclical Operational Excellence
Management’s decision to curb Q4 shipments to protect margins demonstrates a mature approach to capital allocation. In an industry prone to "growth at all costs" mentalities, DMEGC’s focus on profitable growth is a key differentiator. This discipline is likely to preserve shareholder value during the industry downturn and position the Company for outsized gains when margins recover.

3. Structural Growth in Magnetic Components
Investors often underestimate the growth potential of the magnetic materials segment. The integration of magnetic components into AI server power supplies and EV powertrains represents a high-margin, high-barrier-to-entry opportunity. DMEGC’s early mover advantage in supplying head-tier clients in these sectors creates a moat that is difficult for competitors to breach. This segment alone justifies a significant portion of the Company’s current market capitalization.

4. Valuation Safety Margin
At a forward P/E of ~15-18x, the stock offers a reasonable entry point. The downside risk is limited by the Company’s strong asset base (CNY 27.4 billion in total assets) and consistent dividend-paying history (implied by stable earnings). The potential upside comes from the resolution of trade uncertainties and the recovery of PV margins in 2027-2028.

Earnings Forecast Adjustments

We have updated our financial models to reflect the new reality of US trade tariffs and the removal of export tax rebates.

Key Changes:
* 2026E Net Profit: Lowered from CNY 2.21 billion to CNY 1.93 billion. This reflects the immediate impact of the 104.38% CVD tariff on Indonesian exports and the loss of export tax rebates. We assume a partial mitigation through price increases and market shifting, but a net negative impact is inevitable in the short term.
* 2027E Net Profit: Lowered from CNY 2.50 billion to CNY 2.21 billion. As the Company adjusts its supply chain (potentially shifting US-bound orders to other facilities or absorbing costs), growth resumes but at a slower pace than previously anticipated.
* 2028E Net Profit: New forecast of CNY 2.59 billion. By 2028, we expect the trade situation to stabilize, new capacities to come online, and PV industry margins to normalize. This leads to a re-acceleration of profit growth to 17.2%.

Strategic Recommendations for Investors

1. Long-Term Accumulation: For long-term institutional investors, current levels offer an attractive entry point. The market has largely priced in the negative trade news. Any positive developments in trade negotiations or faster-than-expected margin recovery in PV could serve as catalysts for multiple expansion.
2. Monitor Inventory Levels: Closely watch the quarterly inventory turnover days. A sustained reduction in inventory levels in H1 2026 would be a strong positive signal, indicating healthy demand and effective supply chain management.
3. Track US AD/CVD Final Determinations: The final AD rates expected in April 2026 are a key binary event. If the rates are lower than the punitive CVD rates, or if exemptions are granted, the stock could see a significant rebound.
4. Focus on Non-US Markets: Evaluate the Company’s success in expanding its PV presence in Europe, the Middle East, and domestic China. Success in these markets can offset losses in the US channel.

Conclusion

Hengdian Group DMEGC Magnetics stands out as a resilient player in the renewable energy and advanced materials landscape. While the shadow of US trade protectionism looms large over its 2026 outlook, the Company’s fundamental strengths—diversified revenue streams, technological leadership in magnetics, and disciplined financial management—remain intact. The temporary earnings dip provides a buying opportunity for investors who recognize the long-term secular trends supporting electrification and digitalization. We reaffirm our BUY rating, expecting the Company to deliver compounded annual growth in earnings over the next three years, rewarding patient capital.

Appendix: Detailed Financial Forecasts

Income Statement Projection (CNY Million)

Balance Sheet Highlights (CNY Million)

Cash Flow Statement Highlights (CNY Million)

Key Valuation Metrics

(Note: Dividend yield is an estimate based on historical payout ratios and is not explicitly provided in the source text.)

Disclaimer

This report is prepared by Dongwu Securities Co., Ltd. for institutional investors only. It is based on information believed to be reliable, but Dongwu Securities does not guarantee its accuracy or completeness. The opinions expressed herein are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an offer to buy any securities. Investors should make their own independent decisions and consult with their financial advisors before investing. Past performance is not indicative of future results.

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