Equity Research: First Applied Material (603806.SH) – Pioneering the Frontier of Space-Based Photovoltaics

Date: January 20, 2026
Sector: Power Equipment / Photovoltaic (PV) Materials
Rating: BUY (Maintained)
Previous Rating: BUY
Current Price: CNY 15.32
Target Price: Implied Upside based on Valuation Multiples
Market Cap: CNY 39.97 Billion
Analysts: Wu Jiaxiong (S1300523070001), Gu Zhen (S1300525040003)

Executive Summary

First Applied Material Co., Ltd. (603806.SH), widely recognized as "Foster," remains the undisputed global leader in photovoltaic (PV) encapsulation films, commanding a stable market share of approximately 50%. While the company’s core business continues to serve as the bedrock of its financial performance, this report highlights a significant strategic evolution: Foster’s expansion into high-barrier, radiation-resistant materials tailored for Space-Based Photovoltaics (SBPV).

As the global energy landscape shifts towards next-generation applications, including satellite constellations and orbital solar power stations, the demand for materials capable withstanding extreme space environments—specifically ultraviolet (UV) radiation and atomic oxygen erosion—is escalating. Foster is uniquely positioned to capitalize on this emerging sector due to its extensive portfolio of wide-spectrum PV encapsulation technologies, including UV-blocking and light-conversion films, alongside its proprietary Polyimide (PI) material capabilities.

We maintain our BUY rating on Foster. Our investment thesis is underpinned by three pillars:
1. Dominant Core Business: Sustained leadership in terrestrial PV films with a robust product mix catering to TOPCon, HJT, and perovskite technologies.
2. Technological Moat in Space Applications: Successful translation of terrestrial UV-management technologies (DC light conversion and UVB cutoff) and PI material expertise into potential solutions for space-grade encapsulation.
3. Financial Recovery Trajectory: After a cyclical downturn in 2024-2025, we project a strong earnings recovery in 2026-2027, driven by capacity utilization improvements, product mix optimization, and new revenue streams from advanced materials.

We forecast Earnings Per Share (EPS) of CNY 0.39, 0.74, and 0.99 for 2025, 2026, and 2027, respectively. At the current price of CNY 15.32, the stock trades at forward P/E multiples of 38.8x (2025E), 20.7x (2026E), and 15.4x (2027E). The compression in valuation multiples against the backdrop of projected earnings growth presents an attractive risk-reward profile for institutional investors.

Key Takeaways

1. Strategic Pivot: From Terrestrial Leader to Space-Grade Material Innovator

The most compelling narrative shift for Foster in 2026 is its active exploration of Space-Based Photovoltaics (SBPV). Unlike terrestrial solar applications, space environments present hostile conditions that rapidly degrade standard organic and polymeric materials. The primary threats include:
* High-Energy Ultraviolet (UV) Radiation: Causes chain scission and cross-linking in polymers, leading to embrittlement and loss of mechanical integrity.
* Atomic Oxygen (AO) Erosion: In low Earth orbit (LEO), atomic oxygen reacts aggressively with organic surfaces, causing mass loss and surface degradation.
* Thermal Cycling: Extreme temperature fluctuations between sunlight and shadow phases.

Foster’s Competitive Edge:
Foster is not entering this field as a novice. The company has leveraged its decades of R&D in terrestrial PV encapsulation to develop a "wide-caliber" technology platform. Specifically:
* UV Management Technologies: Foster has commercialized DC Light Conversion Films and UVB Cutoff Films for terrestrial use. These technologies are directly applicable to space environments. The DC series converts harmful UV radiation into usable visible light, boosting module power while protecting the cell structure. The UVB cutoff series effectively blocks the most damaging UVB wavelengths, maintaining stability under long-term irradiation.
* Polyimide (PI) Capability: PI is a gold-standard material in aerospace due to its thermal stability and mechanical strength. Foster possesses independent R&D and production capabilities for PI materials, already commercialized in the electronic materials sector. The company is currently exploring hybrid solutions, such as depositing siloxane coatings on PI films, to enhance resistance to atomic oxygen and further optimize performance for space applications.

This strategic pivot transforms Foster from a pure-play commodity supplier into a high-tech materials platform, potentially opening up high-margin niche markets in the aerospace and defense sectors.

2. Core Business Resilience: Dominance in Next-Gen PV Technologies

While the space narrative offers long-term optionality, Foster’s immediate value derivation remains rooted in its terrestrial dominance. The global PV industry is undergoing a technological transition from PERC to TOPCon, Heterojunction (HJT), and eventually Perovskite tandem cells. Each of these technologies demands specialized encapsulation solutions.

Product Portfolio Depth:
Foster’s product lineup is arguably the most comprehensive in the industry, allowing it to capture value across all technology nodes:
* For TOPCon: High-transparency EVA and POE films to maximize efficiency gains.
* For HJT: Low-temperature curing films and high-barrier encapsulants to prevent moisture ingress, which is critical for HJT longevity.
* For Perovskite: Ultra-high barrier films and edge-sealing adhesives (PIB glue) to address the sensitivity of perovskite materials to humidity and oxygen.
* Specialty Films: UVB films, light-turning films, high-reflective black/white films, and high-barrier backsheets.

Market Share Stability:
Despite intense competition in the PV supply chain, Foster has maintained a ~50% global market share in PV films. This dominance is attributed to:
1. Scale Economies: Unmatched production capacity lowers unit costs.
2. Customer Stickiness: Long-term contracts with major module manufacturers (e.g., Longi, Jinko, Trina).
3. R&D Lead Time: Competitors struggle to match Foster’s speed in launching certified products for new cell technologies.

3. Financial Outlook: Navigating the Cyclical Trough to Recovery

The financial data indicates that Foster is currently navigating the bottom of a industry-wide cyclical downturn. The year 2024 and the first half of 2025 were characterized by aggressive price competition, inventory destocking, and margin compression across the PV sector. However, our forecasts suggest a inflection point in late 2025, leading to robust growth in 2026 and 2027.

Key Financial Projections (2025-2027):

Analysis of the Recovery Trend:
* 2025: The Bottoming Year. We estimate revenue to decline slightly by 2.7% to CNY 18.6 billion, with net profit falling 21.3% to CNY 1.03 billion. This reflects the lingering effects of price wars and the time lag in passing through cost reductions. Gross margins are expected to compress to 11.5%, the lowest in the forecast period.
* 2026: The Rebound. Revenue is projected to surge 26.4% to CNY 23.5 billion, driven by global PV installation growth and the adoption of higher-value specialty films. Net profit is expected to nearly double (+87.6%) to CNY 1.93 billion as operating leverage kicks in and margins recover to 14.5%.
* 2027: Sustainable Growth. Revenue grows another 17.6% to CNY 27.7 billion, with net profit reaching CNY 2.59 billion. Margins expand further to 15.8%, reflecting a richer product mix (more HJT/Perovskite/Space-grade materials) and stabilized raw material costs.

4. Valuation Analysis: Attractive Entry Point

At the current market price of CNY 15.32, Foster’s valuation metrics appear compelling relative to its historical averages and future growth prospects.

Valuation Multiples:

Interpretation:
* Short-Term Premium: The 2025E P/E of 38.8x appears elevated. This is a mathematical artifact of depressed earnings in the base year (2025E). Institutional investors should look through this transient metric.
* Medium-Term Value: The 2026E P/E of 20.7x and 2027E P/E of 15.4x are more representative of the company’s intrinsic value. Given Foster’s status as a market leader with a moat in technology and scale, a forward P/E of 15-20x is reasonable, especially considering the potential upside from the space materials business which is not yet fully priced in.
* EV/EBITDA Contraction: The EV/EBITDA multiple drops from 32.7x in 2025E to 12.1x in 2027E, indicating a significant improvement in cash flow generation relative to enterprise value.

Peer Comparison Context:
While specific peer data is not detailed in this report, historically, leading material suppliers in the PV chain trade at premiums to generic manufacturers due to their technological barriers. Foster’s ability to command a premium valuation is justified by its 50% market share and its pivot into high-barrier aerospace materials.

Detailed Investment Logic

I. The Technological Moat: Why Foster Leads in Encapsulation

Encapsulation is not merely a protective layer; it is a critical component determining the efficiency, longevity, and reliability of PV modules. As cell efficiencies approach theoretical limits, the role of encapsulation in enhancing light capture and preventing degradation becomes paramount.

1. Wide-Caliber Technology Platform

Foster’s R&D strategy focuses on "wide-caliber" solutions, meaning they do not rely on a single product type but offer a suite of materials adaptable to various cell architectures.

• UVB Cutoff & DC Light Conversion Films:

  • Mechanism: Standard EVA films yellow over time due to UV exposure, reducing light transmission. Foster’s advanced films incorporate additives that either block UVB rays entirely or convert UV photons into visible light (down-shifting).
  • Benefit: This not only protects the cell but actively boosts module power output by 1-3%. In space applications, where every watt counts and repair is impossible, this technology is critical.
  • Space Relevance: The vacuum of space lacks atmospheric filtering, exposing satellites to intense UV. Foster’s terrestrial UV-management tech is a direct precursor to space-grade solutions.

• High-Reflective Films (Black/White):

  • Application: Used in bifacial modules and building-integrated PV (BIPV).
  • Innovation: High-reflective white films increase internal reflection, boosting current generation. Black films offer aesthetic appeal for BIPV. Foster’s mastery in pigment dispersion ensures consistent reflectivity without compromising mechanical strength.

• Barrier Solutions for Perovskite:

  • Challenge: Perovskite cells are highly sensitive to moisture and oxygen.
  • Solution: Foster is developing ultra-high barrier films and edge-sealing technologies (using PIB glue) that significantly reduce water vapor transmission rates (WVTR). This positions Foster as a key enabler for the commercialization of perovskite-silicon tandem cells, the next big leap in PV efficiency.

2. Polyimide (PI) and Advanced Polymers

Foster’s expansion into PI materials is a strategic diversification beyond traditional EVA/POE films.
* PI Properties: Excellent thermal stability (-269°C to 400°C), high mechanical strength, and chemical resistance.
* Current Application: Electronic materials (flexible circuits, insulation).
* Future Application (Space): PI is a candidate substrate for space solar arrays. However, bare PI degrades under atomic oxygen. Foster’s research into siloxane-coated PI aims to create a composite material that retains PI’s thermal/mechanical benefits while resisting AO erosion. This synergy between their polymer chemistry expertise and coating technology creates a high barrier to entry for competitors.

II. Market Dynamics: Supply, Demand, and Pricing

1. Global PV Installation Trends

Despite short-term volatility, the long-term trajectory for global PV installations remains upward.
* Drivers: Energy security concerns, carbon neutrality targets (China’s 30/60 goals, EU Green Deal, US IRA), and the declining levelized cost of electricity (LCOE) from solar.
* Impact on Foster: As a volume-driven business, Foster benefits from overall market growth. More importantly, the shift towards N-type cells (TOPCon/HJT) increases the value content per watt of encapsulation materials, as these cells require higher-quality, often more expensive, POE or EPE films compared to older PERC modules.

2. Competitive Landscape

The PV film industry has seen new entrants, leading to price pressure in 2023-2024. However, the competitive dynamics are shifting:
* Consolidation: Smaller players lacking scale and R&D capabilities are being squeezed out by margin compression.
* Differentiation: Competition is moving from price to performance. Module makers are prioritizing suppliers who can guarantee 25-30 year reliability for new cell types. Foster’s track record and technical service capabilities give it a decisive advantage.
* Raw Material Integration: Foster has been vertically integrating upstream (resin production) to stabilize costs and secure supply, further widening the gap with competitors.

3. The Space PV Opportunity

While still nascent, the space economy is growing.
* Satellite Constellations: Projects like Starlink, Guowang, and others require reliable power sources. Solar is the primary option.
* Orbital Power Stations: Long-term concepts involve beaming solar power from space to Earth. This requires massive, lightweight, and durable solar arrays.
* Foster’s Role: By engaging early in R&D for space-grade materials, Foster positions itself as a preferred supplier for aerospace contractors. Even if this segment remains small in revenue terms initially, it carries high margins and enhances the company’s brand as a high-tech innovator, potentially re-rating the stock multiple.

III. Operational Efficiency and Cost Control

Foster’s ability to navigate the 2024-2025 downturn demonstrates strong operational management.

• Capacity Utilization: Despite lower industry utilization rates, Foster maintains higher-than-average utilization due to its customer base and product quality.
• Cost Management: The company has optimized its manufacturing processes, reducing energy consumption and waste. The introduction of new, faster production lines for specialty films improves throughput.
• R&D Efficiency: R&D expenses remain robust (approx. 3.5% of revenue), ensuring a steady pipeline of new products. This disciplined spending ensures that innovation does not come at the expense of short-term profitability.

Risks / Headwinds

Investors must consider the following risks when evaluating Foster:

1. Intense Price Competition

• Risk: The PV industry is prone to overcapacity. If competitors engage in aggressive price wars to gain market share, Foster’s gross margins could remain under pressure for longer than anticipated.
• Mitigation: Foster’s focus on high-end specialty films (HJT, Perovskite, Space) helps differentiate its product mix from commoditized standard EVA films.

2. Raw Material Cost Volatility

• Risk: The primary raw materials for PV films are EVA resin, POE resin, and petroleum-derived chemicals. Fluctuations in crude oil prices or supply disruptions in resin production can impact costs.
• Mitigation: Vertical integration initiatives and long-term supply contracts help hedge against volatility. However, sudden spikes may not be fully passable to customers immediately.

3. New Capacity Expansion and Execution Risk

• Risk: Foster is continuously expanding capacity. If global PV demand grows slower than expected, or if new technologies render existing capacity obsolete, the company could face asset impairment or low utilization rates.
• Mitigation: Foster’s flexible production lines allow for switching between product types. Rigorous market analysis precedes capacity additions.

4. Policy and Trade Risks

• Risk:
  • Domestic Policy: Changes in China’s subsidy or grid-connection policies could affect domestic installation rates.
  • International Trade: Tariffs or trade barriers (e.g., from the US, EU, or India) against Chinese PV products could indirectly impact demand for Foster’s films if module exports are restricted.
• Mitigation: Foster serves a global customer base, many of whom have overseas manufacturing facilities. Diversification of end-markets reduces reliance on any single region.

5. Technology Iteration Risk

• Risk: The PV industry evolves rapidly. If a new cell technology emerges that requires a completely different encapsulation method (e.g., glass-glass without polymer films, though unlikely), Foster’s existing expertise might need significant adaptation.
• Mitigation: Foster’s broad R&D portfolio and close collaboration with leading cell manufacturers ensure it stays ahead of technology curves. Its investment in Perovskite and HJT solutions demonstrates proactive adaptation.

6. Space Business Uncertainty

• Risk: The commercialization of space-based PV is still in early stages. Regulatory hurdles, launch costs, and technical challenges could delay widespread adoption, meaning the "space narrative" may not contribute significantly to earnings in the near term.
• Mitigation: This is viewed as a long-term optionality. The core terrestrial business provides sufficient cash flow to fund R&D without jeopardizing financial stability.

Financial Analysis & Forecasts

Income Statement Analysis

Revenue Trends:
* 2023-2024 Correction: Revenue declined from CNY 22.6 billion in 2023 to CNY 19.1 billion in 2024 (-15.2%). This was driven by lower average selling prices (ASP) amidst industry oversupply, despite stable or growing shipment volumes.
* 2025 Stabilization: We expect revenue to stabilize around CNY 18.6 billion (-2.7%). This represents the trough of the cycle.
* 2026-2027 Recovery: Revenue is forecast to grow to CNY 23.5 billion (+26.4%) in 2026 and CNY 27.7 billion (+17.6%) in 2027. This growth is driven by:
1. Global PV installation growth.
2. Higher ASPs from premium product mix (POE, specialty films).
3. Potential initial contributions from new material businesses.

Profitability Metrics:
* Gross Margin: Expected to dip to 11.5% in 2025 before recovering to 14.5% in 2026 and 15.8% in 2027. The recovery reflects better pricing power and cost efficiencies.
* Operating Margin: Operating profit is forecast to grow from CNY 1.17 billion in 2025 to CNY 2.19 billion in 2026 (+87.8%), demonstrating high operating leverage.
* Net Profit Margin: Improves from 5.5% in 2025 to 9.4% in 2027.

Expense Structure:
* R&D Expenses: Maintained at ~3.5% of revenue. This consistency is crucial for maintaining technological leadership.
* Selling & Admin Expenses: Well-controlled, remaining below 2% of revenue combined.
* Financial Expenses: Negative financial expenses (net income) are projected due to interest income on cash balances and favorable exchange rate movements, contributing positively to the bottom line.

Balance Sheet Strength

Foster maintains a robust balance sheet, providing resilience during downturns.

• Assets: Total assets are projected to grow from CNY 21.1 billion in 2024 to CNY 25.7 billion in 2027.
• Liquidity:
  • Cash & Equivalents: Strong cash position, estimated at CNY 5.6 billion by 2027.
  • Current Ratio: Healthy liquidity ratios, ranging from 6.2x to 10.9x, indicating ample ability to meet short-term obligations.
• Liabilities:
  • Debt Levels: Low leverage. The debt-to-asset ratio remains around 0.2. Short-term borrowings are minimal compared to cash holdings.
  • Working Capital: Efficient management of receivables and payables. Accounts receivable turnover days are stable, reflecting strong bargaining power with customers.

Cash Flow Analysis

• Operating Cash Flow (OCF):
  • 2024 saw a strong OCF of CNY 4.4 billion, likely due to working capital adjustments.
  • 2025E OCF is lower at CNY 0.7 billion, reflecting the profit trough.
  • 2026-2027 OCF recovers to CNY 0.34 billion and CNY 1.8 billion respectively, aligning with profit growth.
• Capital Expenditure (CapEx):
  • CapEx is managed prudently, ranging from CNY 350-450 million annually in the forecast period. This suggests a shift from aggressive expansion to optimizing existing assets and targeted upgrades.
• Free Cash Flow: Positive free cash flow generation in recovery years supports potential dividend payments and share buybacks, although the current dividend yield is modest (0.5-0.6%).

Sector Outlook: Power Equipment & PV Materials

Rating: Outperform

The broader Power Equipment sector, specifically PV materials, is transitioning from a phase of "blind expansion" to "quality-driven growth."

1. Technology-Driven Alpha: Investors should favor companies with clear technological advantages in N-type cell support (TOPCon/HJT) and next-gen technologies (Perovskite). Foster fits this criterion perfectly.
2. Consolidation Beneficiaries: Market leaders with scale and cost advantages will gain share as weaker competitors exit. Foster’s 50% market share is a defensive moat.
3. New Application Frontiers: Companies exploring adjacent high-growth markets (like energy storage, hydrogen, or space) deserve valuation premiums. Foster’s space PV initiative is a key differentiator.

Industry Drivers:
* Global Decarbonization: Continued policy support worldwide.
* Grid Parity: Solar is now the cheapest source of new electricity in most markets, driving organic demand.
* Efficiency Gains: The push for higher module efficiencies drives demand for advanced encapsulation materials.

Investment View

Why Buy Foster Now?

1. Cyclical Bottom Fishing: The stock is trading near the bottom of its earnings cycle. With 2025 expected to be the trough year, investors have the opportunity to accumulate shares before the projected 87.6% earnings rebound in 2026.
2. Valuation Safety Margin: A forward P/E of 20.7x for 2026 and 15.4x for 2027 is attractive for a market leader with a proven track record and a strong balance sheet. The downside risk is limited by the company’s asset value and cash flow generation capability.
3. Optionality on Space Tech: The market has not fully valued Foster’s potential in the space materials sector. As the space economy matures, this segment could provide a significant re-rating catalyst.
4. Technological Leadership: Foster is not just a manufacturer; it is a technology partner to the world’s largest module makers. Its ability to co-develop solutions for TOPCon, HJT, and Perovskite ensures its relevance in the next decade of PV evolution.

Strategic Recommendations for Institutional Investors

• Accumulate on Weakness: Given the short-term headwinds in 2025, any price dips should be viewed as buying opportunities for a medium-to-long-term hold.
• Monitor Margin Recovery: Key indicators to watch include quarterly gross margin trends and the adoption rate of POE/specialty films. A faster-than-expected margin recovery would signal an earlier inflection point.
• Track Space R&D Progress: Keep an eye on announcements regarding partnerships with aerospace firms or successful testing of space-grade materials. Such news could trigger short-term sentiment boosts.

Conclusion

First Applied Material (Foster) stands at the intersection of established industrial dominance and futuristic innovation. Its core business provides the cash flow and stability required to weather industry cycles, while its R&D pipeline, particularly in space-grade materials, offers exciting growth optionality.

We believe the market is underestimating the speed of the earnings recovery in 2026 and the long-term value of Foster’s technological moat. Therefore, we maintain our BUY rating. The stock offers a compelling combination of cyclical recovery potential, structural growth drivers, and strategic innovation, making it a core holding for investors exposed to the renewable energy and advanced materials sectors.

Appendix: Detailed Financial Tables

Table 1: Income Statement Forecast (CNY Million)

Table 2: Balance Sheet Forecast (CNY Million)

Table 3: Cash Flow Forecast (CNY Million)

Table 4: Key Financial Ratios

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Rating System Explanation

The benchmark for company stock price/industry index performance is the percentage change relative to the relevant market index over the same period after the report's release date.

Company Investment Ratings:
* BUY: Expected stock price to outperform the benchmark index by more than 20% in the next 6-12 months.
* OUTPERFORM (增持): Expected stock price to outperform the benchmark index by 10%-20% in the next 6-12 months.
* NEUTRAL: Expected stock price to fluctuate within -10% to +10% relative to the benchmark index in the next 6-12 months.
* UNDERPERFORM: Expected stock price to underperform the benchmark index by more than 10% in the next 6-12 months.
* NOT RATED: Unable to provide a clear investment rating due to lack of necessary data or other reasons.

Industry Investment Ratings:
* OUTPERFORM: Expected industry index to outperform the benchmark index in the next 6-12 months.
* NEUTRAL: Expected industry index to perform roughly in line with the benchmark index in the next 6-12 months.
* UNDERPERFORM: Expected industry index to underperform the benchmark index in the next 6-12 months.
* NOT RATED: Unable to provide a clear investment rating due to lack of necessary data or other reasons.

Benchmark Indices: CSI 300 for Shanghai/Shenzhen markets; NEEQ Index for New Third Board; Hang Seng Index for Hong Kong market; NASDAQ Composite or S&P 500 for US market.

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