Hengdian Group DMEGC Magnetics Co., Ltd. (002056.SZ): 2025 Annual Review – Photovoltaic Resilience and Magnetic Material Growth Drive Long-Term Value

Executive Summary

Investment Thesis:
Hengdian Group DMEGC Magnetics Co., Ltd. ("DMEGC" or the "Company") has demonstrated robust operational resilience in a challenging macroeconomic and industry-specific environment throughout 2025. The Company’s annual report reveals a strategic pivot towards high-value differentiation across its three core business segments: Photovoltaics (PV), Magnetic Materials, and Lithium-ion Batteries. While the broader PV industry faced significant margin compression and overcapacity issues, DMEGC successfully leveraged its differentiated product portfolio—specifically high-power, lightweight, and aesthetically optimized modules—to maintain profitability and secure a top-10 global ranking. Simultaneously, the magnetic materials segment benefited from structural growth in New Energy Vehicles (NEVs) and AI server infrastructure, while the lithium battery division is poised for a new growth cycle driven by technological advancements in all-tab designs and expansion into power tools.

Key Financial Highlights (2025 Actuals):
* Revenue: RMB 22.59 billion, representing a year-over-year (YoY) increase of 21.70%.
* Net Profit Attributable to Shareholders: RMB 1.85 billion, a modest YoY increase of 1.34%.
* Non-GAAP Net Profit: RMB 1.76 billion, up 5.34% YoY, indicating underlying operational strength despite one-off items or accounting adjustments affecting the headline net profit figure.
* Q4 2025 Performance: Revenue of RMB 5.03 billion (+0.96% YoY, -10.69% QoQ); Net Profit of RMB 399 million (-55.72% YoY, -7.80% QoQ). The sequential decline in Q4 profits reflects seasonal factors and continued industry-wide pricing pressures, yet the full-year performance underscores the Company’s ability to navigate volatility.

Forward-Looking Outlook & Valuation:
We maintain a "BUY" rating on DMEGC. Our analysis suggests that the worst of the industry consolidation phase may be behind us, with profitability expected to bottom out and recover as competition rationalizes. We project revenue to grow to RMB 26.97 billion in 2026E, RMB 29.42 billion in 2027E, and RMB 33.90 billion in 2028E. Correspondingly, we forecast Net Profit Attributable to Shareholders to reach RMB 2.21 billion (2026E), RMB 2.45 billion (2027E), and RMB 2.77 billion (2028E). This translates to an Earnings Per Share (EPS) of RMB 1.36, RMB 1.51, and RMB 1.70, respectively. At current valuation levels, the stock trades at attractive multiples relative to its projected growth trajectory and return on equity (ROE) improvements.

Strategic Expansion into Compute-Power Synergy:
A notable strategic development is the Company’s entry into the "Compute-Power Coordination" sector via its industrial fund’s participation in the Series A financing of BCI, a vertical integrated operator of next-generation computing infrastructure. This move signals DMEGC’s intent to diversify beyond traditional manufacturing into high-growth tech infrastructure, potentially creating new synergies between its energy storage capabilities and data center power demands.

Key Takeaways

1. Photovoltaic Segment: Differentiation as a Shield Against Industry Headwinds

The global photovoltaic industry in 2025 was characterized by intense price wars, supply chain oversupply, and shifting trade policies. In this context, DMEGC’s PV segment stood out not merely through volume growth, but through profitability resilience.

Operational Performance:
* Revenue Contribution: The PV segment generated approximately RMB 14.31 billion in revenue in 2025, constituting the largest portion of the Company’s total income.
* Shipment Volume: Total shipments reached 24.9 GW, marking a substantial >45% YoY growth. This volume expansion significantly outpaced the industry average, demonstrating the Company’s aggressive market capture strategy.
* Global Standing: According to InfoLink Consulting, DMEGC ranked among the top 10 global PV module suppliers in 2025. This ranking validates the effectiveness of its sales network and brand recognition in key international markets.

Strategic Differentiation:
DMEGC’s ability to sustain margins while competitors struggled can be attributed to its rigorous adherence to a differentiation strategy. Rather than competing solely on price for standard utility-scale modules, the Company focused on niche, high-value applications:
* Product Portfolio Innovation: The successful规模化 (scaled) shipment of ultra-high-power modules, lightweight components, all-black aesthetic modules, and anti-glare solutions. These products cater to specific customer needs in residential, commercial, and specialized agricultural (greenhouse) sectors where price sensitivity is lower than in utility-scale projects.
* System Solutions: By offering comprehensive system solutions rather than just hardware, DMEGC enhanced customer stickiness and captured higher value-added services.
* N-Type Capacity Optimization: Anticipating the technological shift from P-type to N-type cells, DMEGC proactively allocated N-type production capacity both domestically and overseas. The report highlights that overseas N-type capacity remained at full production and full sales status throughout the year. This agility allowed the Company to capitalize on the premium pricing associated with higher-efficiency N-type technology before it became commoditized.

Market Adaptation:
The Company effectively navigated complex overseas policy landscapes. By adopting a "local-for-local" or regionally diversified manufacturing and sales approach, DMEGC mitigated risks associated with trade barriers (such as tariffs or local content requirements in Europe and North America). The focus on "high-quality markets" ensured that volume growth did not come at the expense of detrimental margin erosion.

2. Magnetic Materials Segment: Benefiting from the AI and NEV Supercycles

The magnetic materials business, historically the cornerstone of DMEGC’s identity, continues to evolve from a traditional component supplier to a critical enabler of modern electronics and electrification.

Financial and Operational Metrics:
* Revenue: The segment contributed approximately RMB 5.0 billion in revenue.
* Shipment Volume: Total magnetic material shipments exceeded 218,000 tons.
* Profitability Improvement: Crucially, the segment achieved a double increase in both average selling price (ASP) per ton and gross margin per ton. This indicates a successful mix shift towards higher-value products and improved operational efficiency.

Growth Drivers:
* New Energy Vehicles (NEVs): The electrification of transport requires significant amounts of high-performance soft magnetic materials for inverters, onboard chargers, and motors. DMEGC’s deep integration into the NEV supply chain has provided a stable and growing demand base.
* AI Servers and Data Centers: The explosion in Artificial Intelligence has driven unprecedented demand for high-efficiency power management components. AI servers require robust inductors and transformers to handle high current loads with minimal energy loss. DMEGC’s rapid scale-up in shipping new component types for AI servers highlights its ability to pivot quickly to emerging tech trends.
* Global Manufacturing Footprint: To mitigate geopolitical risks and serve international customers more effectively, DMEGC is accelerating its global layout. Beyond optimizing domestic capacity, the Company is expanding its magnetic material and device manufacturing bases overseas. This globalization strategy not only hedges against trade friction but also positions DMEGC closer to key end-markets in Europe and Southeast Asia.

Competitive Moat:
The combination of scale (218k tons), technological leadership in high-frequency and high-power applications, and a diversified customer base across consumer electronics, automotive, and industrial sectors creates a formidable moat. The "double lift" in price and margin suggests that DMEGC possesses pricing power in specialized segments, insulating it from the commoditization seen in lower-end magnetic materials.

3. Lithium-Ion Battery Segment: New Engines Igniting Future Growth

The lithium battery segment, focused primarily on small power applications (small dynamics), is transitioning from a period of capacity building to one of technological maturation and market expansion.

Performance Overview:
* Revenue: RMB 2.72 billion.
* Shipment Volume: 620 million units, representing a ~17% YoY growth.
* Market Position: The Company has solidified its leadership in the electric two-wheeler and smart home appliance markets while making significant inroads into the power tool sector.

Strategic Initiatives:
* Product Matrix Expansion: DMEGC has successfully launched multiple new high-capacity E-type and P-type battery products. These formats are tailored for specific high-drain applications, enhancing the Company’s appeal to premium OEMs.
* Technological Breakthrough – All-Tab Technology: A critical milestone in 2025 was the completion of technical reserves and the establishment of a pilot line for all-tab (tabless) battery cells. All-tab technology reduces internal resistance, improves heat dissipation, and enables faster charging—key features for next-generation power tools and high-performance e-bikes. The successful mid-scale trial (pilot) positions DMEGC to compete with leading global players in the high-end small power battery market.
* Cost Efficiency and Margin Recovery: On the production side, the Company focused on lean manufacturing, improving production efficiency, and strictly controlling manufacturing costs. These efforts have led to a steady recovery in gross margins, reversing previous downward trends caused by raw material volatility and initial ramp-up costs.

Future Outlook:
The lithium segment is described as having a "new engine ready to launch." The convergence of new product launches (high-capacity E/P types), technological superiority (all-tab), and market expansion (power tools) suggests that this segment could become a significant contributor to earnings growth in 2026-2028. The shift from low-margin commodity cells to specialized, high-performance cells aligns with the Company’s broader strategy of value-added differentiation.

4. Strategic Diversification: Entry into Compute-Power Coordination

In a move that expands the Company’s strategic horizon beyond traditional manufacturing, DMEGC announced in January 2026 that its subsidiary, the "Hengdian DMEGC Equity Investment Fund," participated in the Series A equity financing of BCI.

Significance of the Investment:
* BCI Profile: BCI is identified as a vertical integrated comprehensive operator of next-generation computing infrastructure. This likely involves data center operations, edge computing facilities, or specialized AI compute clusters.
* "Compute-Power Coordination" (算电协同): This concept refers to the synergistic integration of computing power demand with energy supply and management. As AI workloads grow, so does their energy consumption. DMEGC’s expertise in photovoltaics (energy generation) and lithium batteries (energy storage) positions it uniquely to provide green, stable, and efficient power solutions for data centers.
* Strategic Rationale: This investment is not merely financial; it is a strategic foothold in a high-growth adjacent sector. It allows DMEGC to:
1. Gain insights into the energy needs of future data centers.
2. Potentially secure off-take agreements for its PV and storage products.
3. Diversify its revenue streams into the digital infrastructure economy, which exhibits different cyclicality compared to traditional manufacturing.

This move demonstrates management’s forward-looking vision, recognizing that the future of energy lies not just in generation, but in its intelligent application and coordination with digital loads.

Financial Analysis and Forecasts

Historical Performance Review (2025)

The 2025 financial results reflect a company in transition, balancing volume growth with margin preservation amidst industry turbulence.

Q4 2025 Specifics:
The fourth quarter showed signs of seasonal weakness and intensified competition. Revenue declined quarter-on-quarter by 10.69%, and net profit fell by 7.80% QoQ and 55.72% YoY. The significant YoY drop in Q4 profit warrants attention but should be viewed in the context of the full-year resilience. It likely reflects year-end inventory adjustments, accelerated recognition of expenses, or particularly aggressive pricing in the PV market during the holiday season. However, the fact that the full-year net profit still grew suggests that the first three quarters provided a strong buffer.

Forward-Looking Financial Projections (2026-2028)

Our forecasts are built on the assumption of gradual industry consolidation, continued success in DMEGC’s differentiation strategy, and the ramp-up of new growth engines in lithium and magnetic materials.

Revenue Projections

• 2026E: RMB 26.97 billion (+19.39% YoY). Growth will be driven by the full-year contribution of 2025’s expanded PV capacity and the beginning of meaningful revenue from the new lithium battery products.
• 2027E: RMB 29.42 billion (+9.09% YoY). Growth moderates as the base effect kicks in, but quality of earnings improves.
• 2028E: RMB 33.90 billion (+15.22% YoY). Acceleration expected from the maturity of the "Compute-Power" initiatives and widespread adoption of all-tab lithium batteries.

Profitability and Margins

• Gross Margin Trend: We project gross margins to stabilize and slightly improve from the 2025 low of 17.82%.
  • 2026E: 14.81% (Conservative estimate reflecting ongoing PV competition).
  • 2027E: 14.88%
  • 2028E: 15.11%
  • Note: The model assumes a conservative margin profile for the near term due to potential lingering price pressure in PV, but expects the higher-margin magnetic and lithium businesses to lift the blended margin over time.
• Net Profit Growth:
  • 2026E: RMB 2.21 billion (+19.31% YoY). EPS: RMB 1.36.
  • 2027E: RMB 2.45 billion (+11.07% YoY). EPS: RMB 1.51.
  • 2028E: RMB 2.77 billion (+13.01% YoY). EPS: RMB 1.70.

Key Financial Ratios Forecast

Balance Sheet Strength:
DMEGC maintains a healthy balance sheet. As of 2025, monetary funds stood at RMB 9.29 billion, providing ample liquidity for capital expenditures and R&D. The debt structure is manageable, with short-term borrowings at RMB 1.61 billion and negligible long-term debt (RMB 1 million). The current ratio and quick ratio remain robust, supporting the Company’s ability to weather industry downturns and invest in counter-cyclical opportunities.

Cash Flow Dynamics:
Operating cash flow in 2025 was RMB 3.26 billion. We project a significant jump to RMB 7.08 billion in 2026E, reflecting improved working capital management and stronger cash generation from the maturing PV and magnetic businesses. Capital expenditure (investing cash flow) is expected to remain disciplined at around RMB 1 billion annually, focusing on high-return projects like the lithium pilot lines and overseas magnetic facilities.

Risks / Headwinds

While the investment case for DMEGC is compelling, institutional investors must consider the following risks that could impact financial performance and stock valuation.

1. Downstream Demand Volatility

• Photovoltaics: The PV industry is highly cyclical and dependent on government subsidies, interest rates, and global economic health. A slowdown in installations in key markets like Europe, China, or the US due to economic recession or policy shifts could lead to inventory buildups and further price declines.
• Consumer Electronics & Tools: The lithium battery and magnetic material segments are exposed to consumer spending trends. A global downturn could reduce demand for electric two-wheelers, power tools, and consumer appliances, impacting shipment volumes.

2. Raw Material Price Fluctuations

• Lithium and Cobalt: Although prices have stabilized compared to the peaks of 2022-2023, volatility in lithium carbonate and other battery raw materials can still squeeze margins if not fully passed through to customers.
• Polysilicon and Silver: For the PV segment, fluctuations in polysilicon prices and industrial silver (used in conductive pastes) directly affect manufacturing costs. While DMEGC has some hedging capabilities, extreme volatility can disrupt margin forecasts.
• Rare Earth Metals: The magnetic materials business relies on rare earth elements. Geopolitical tensions or supply chain disruptions in rare earth mining could lead to cost spikes.

3. Intensifying Market Competition

• PV Sector Consolidation: The PV industry is undergoing a brutal consolidation phase. Larger players with deeper pockets may engage in predatory pricing to gain market share, potentially forcing DMEGC to choose between volume and margin. While differentiation helps, it is not immune to systemic price collapses.
• Battery Competition: The small power battery market is seeing increased entry from established giants and new startups. Technological obsolescence is a risk; if DMEGC’s all-tab technology fails to gain traction or is surpassed by alternative chemistries/designs, the anticipated growth engine could stall.

4. Policy and Geopolitical Risks

• Trade Barriers: DMEGC has significant overseas exposure. Tariffs, anti-dumping duties, or local content requirements in the EU, US, or India could adversely affect export revenues. The Company’s overseas capacity layout is a mitigation strategy, but regulatory environments are unpredictable.
• Subsidy Changes: Reductions in feed-in tariffs or EV subsidies in key markets could dampen demand overnight.

5. Execution Risk in New Ventures

• Compute-Power Investment: The investment in BCI and the move into "compute-power coordination" is a new strategic direction. There is execution risk regarding the integration of this new business line and the realization of synergies. If the AI infrastructure boom slows or if BCI fails to execute, the financial return on this investment may be limited.

Rating / Sector Outlook

Sector Outlook: Cautiously Optimistic with Structural Winners Emerging

Photovoltaics:
The PV sector is currently in a "clearing" phase. Overcapacity is being addressed through bankruptcies and mergers among weaker players. We expect the industry to reach a supply-demand balance by late 2026 or 2027. In this environment, companies with technological differentiation (N-type, BC, HJT) and global distribution networks will emerge stronger. DMEGC’s focus on distributed generation and specialized modules positions it well to survive the consolidation and thrive in the subsequent upcycle.

Magnetic Materials:
This sector enjoys a favorable secular tailwind. The dual drivers of electrification (NEVs) and digitalization (AI/Data Centers) ensure steady demand growth. Unlike PV, the magnetic materials market is less prone to catastrophic price wars due to the customized nature of components and higher switching costs for customers. We view this segment as a stable cash cow with growth potential.

Lithium Batteries (Small Power):
The small power battery market is transitioning from price-driven to performance-driven competition. As applications become more demanding (e.g., high-power tools, fast-charging e-bikes), manufacturers with superior technology (like all-tab) and cost control will gain market share. We expect this segment to contribute increasingly to overall profitability.

Investment Rating: BUY

We maintain a BUY rating on Hengdian DMEGC (002056.SZ).

Rationale for Rating:
1. Valuation Attractiveness: Based on our 2026E EPS of RMB 1.36, the stock trades at a Forward P/E of approximately 14.55x. Given the projected ROE improvement to nearly 20% and the diversified nature of the business, this multiple offers a margin of safety.
2. Resilience Proven: The 2025 annual report confirms that DMEGC can grow revenue and maintain profitability even in a hostile PV environment. This operational resilience de-risks the investment thesis.
3. Multiple Growth Engines: Unlike pure-play PV companies, DMEGC benefits from the uncorrelated growth cycles of magnetic materials and lithium batteries. This diversification smooths earnings volatility.
4. Strategic Optionality: The entry into the compute-power sector provides a call option on the AI infrastructure boom, potentially re-rating the stock as a tech-enabled energy company rather than just a manufacturer.

Target Price Implication:
While a specific target price is not explicitly recalculated here beyond the provided data, the consistent earnings growth and improving ROE support a valuation rerating. Investors should look for the stock to perform in line with or exceed the CSI 300 index, with potential for alpha generation as margins recover in 2026-2027.

Investment View

Core Investment Logic

1. The "Differentiation" Alpha in Photovoltaics
In an industry where homogenization leads to zero-sum games, DMEGC’s commitment to differentiation is its primary competitive advantage. By focusing on distributed PV scenarios (residential, commercial, agricultural) rather than just utility-scale ground stations, the Company accesses customers who value aesthetics, ease of installation, and specific performance traits over mere lowest-cost-per-watt. This strategy protects margins. The >45% shipment growth in 2025 proves that there is ample demand for these specialized products. As the industry consolidates, DMEGC’s brand equity in these niche markets will become more valuable, allowing it to capture market share from distressed competitors.

2. The Magnetic Materials "Steady Anchor"
The magnetic materials business provides the financial stability required to fund innovation in PV and Lithium. With shipments exceeding 218,000 tons and rising ASPs, this segment is benefiting from the AI and NEV supercycles. The expansion into AI server components is particularly noteworthy, as it ties DMEGC’s fortunes to the highest-growth sector in technology. The global expansion of manufacturing capacity further de-risks this segment from geopolitical shocks. We view this as the "steady anchor" of the portfolio, providing consistent cash flows and high ROIC.

3. The Lithium "Turnaround Story"
The lithium battery segment is the most dynamic part of the investment thesis. After a period of heavy investment and margin pressure, the segment is now showing signs of maturity. The 17% volume growth combined with margin recovery indicates that the Company has found the right product-market fit. The all-tab technology is a key catalyst. If successfully commercialized at scale, it could propel DMEGC into the premium tier of the small power battery market, commanding higher prices and locking in long-term contracts with major tool and e-mobility OEMs. This segment represents the highest potential for earnings surprise on the upside.

4. Strategic Foresight: Compute-Power Synergy
The investment in BCI is a subtle but powerful signal. It suggests that management understands the future convergence of energy and computing. By positioning itself early in the "Compute-Power Coordination" space, DMEGC is not just investing in a startup; it is preparing its core businesses (PV and Storage) for the next decade’s dominant energy consumer: the Data Center. This strategic alignment could open up new B2B channels and enhance the Company’s narrative as a holistic energy solution provider.

Important Financial and Operational Changes

• Shift in Profit Mix: Historically, PV dominated the profit pool. Going forward, we expect the magnetic materials and lithium segments to contribute a larger share of total profits due to their higher and more stable margins. This structural shift improves the quality of earnings.
• Capital Allocation Discipline: The Company has shown discipline in capital expenditure, focusing on high-return projects (N-type PV, All-tab Lithium) rather than blind capacity expansion. This is reflected in the stable debt levels and strong cash position.
• Globalization of Supply Chain: The active layout of overseas production bases for both PV and Magnetic materials marks a transition from a "China-based exporter" to a "Global Manufacturer." This reduces tariff risks and enhances customer service capabilities.

Investment Implications for Institutional Investors

For Long-Only Funds:
DMEGC offers a balanced exposure to the green energy transition. It is less volatile than pure-play solar stocks due to the diversification into magnetics and batteries. The improving ROE trajectory (projected to reach 23% by 2028) makes it an attractive compounder. Accumulation on dips is recommended, particularly if short-term PV sentiment worsens, as the fundamental long-term story remains intact.

For Growth-Oriented Investors:
The lithium battery segment’s technological breakthroughs (all-tab) and the strategic entry into compute-power infrastructure provide growth optionality. Investors should monitor the progress of the lithium pilot line and the BCI investment closely, as these could serve as catalysts for multiple expansion.

For Value Investors:
At a forward P/E of ~14.5x and a P/B of ~2.9x, the stock is reasonably valued given its 17-19% ROE. The strong balance sheet and consistent dividend history (noted in previous reports) provide a floor for the stock price. The margin recovery in 2026-2027 offers a clear path to earnings growth that is not fully priced in.

Conclusion

Hengdian DMEGC Magnetics Co., Ltd. has successfully navigated the turbulent waters of 2025, emerging with strengthened market positions and a clearer strategic direction. The Company’s ability to grow revenue by 21.7% while maintaining profitability in a harsh PV environment is a testament to its operational excellence and strategic foresight.

The tripartite engine of PV Differentiation, Magnetic Material Innovation, and Lithium Battery Technological Breakthroughs provides a robust foundation for future growth. Furthermore, the strategic foray into compute-power coordination demonstrates management’s ambition to stay ahead of industry curves.

We believe the market has underestimated the resilience of DMEGC’s business model and the potential for margin recovery in the coming years. With a projected EPS growth of 19% in 2026 and an improving ROE profile, DMEGC represents a compelling investment opportunity in the clean energy and advanced materials sector. We reiterate our BUY rating, encouraging investors to look beyond the short-term noise of the PV cycle and focus on the Company’s long-term structural advantages.

Appendix: Detailed Financial Tables

Income Statement Summary (RMB Million)

Balance Sheet Highlights (RMB Million)

*Note: The 2028E Balance Sheet figures in the source document show a significant discontinuity (drop in assets/liabilities), which may reflect a specific accounting adjustment, spin-off assumption, or data anomaly in the original source. Investors should verify these long-term balance sheet projections with subsequent quarterly reports. The Income Statement and Cash Flow projections remain consistent with the growth narrative.

Cash Flow Statement (RMB Million)

*Note: The negative Operating CF and large net cash decrease in 2028E in the source model appear anomalous compared to the profitable income statement. This may reflect aggressive working capital assumptions or capex timing. Core investment logic relies more on the Income Statement and near-term Cash Flow trends (2025-2027), which show strong cash generation.

Valuation Multiples

Disclaimer:
This report is prepared by Pacific Securities Co., Ltd. for institutional clients. The information contained herein is based on sources believed to be reliable, but no representation or warranty, express or implied, is made regarding its accuracy or completeness. The opinions expressed 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 bear the associated risks. Past performance is not indicative of future results.