Equity Research: Liancheng Numerical Control (920368.BJ)

Date: November 10, 2025
Rating: Outperform (Maintained)
Current Price: CNY 30.95
Target Price: Implied by Valuation Multiples (See Analysis)
Market Cap: CNY 7.27 Billion
Analyst: Haibin Zhu (S0790522080007)

Executive Summary

Liancheng Numerical Control (920368.BJ), a leading provider of photovoltaic (PV) and semiconductor crystal growth and processing equipment, continues to navigate a challenging macroeconomic environment characterized by intense competition and capacity consolidation within the global solar industry. Following the release of its Third Quarter 2025 financial results, we observe a significant contraction in top-line revenue and profitability, reflecting the broader cyclical downturn in PV capital expenditure. However, the company’s strategic pivot towards high-value semiconductor equipment and third-generation semiconductor materials (specifically Silicon Carbide, SiC) provides a critical hedge against PV volatility and positions the firm for long-term structural growth.

In this report, we analyze Liancheng’s Q3 2025 performance, which reported revenues of CNY 1.572 billion (a year-over-year decline of 60.38%) and net profit attributable to shareholders of CNY 95.14 million (a year-over-year decline of 74.76%). In response to the accelerated clearing of inefficient PV capacity and the delayed recovery in downstream demand, we have revised our earnings forecasts downward for the 2025–2027 period. We now project net profits of CNY 117 million, CNY 217 million, and CNY 316 million for 2025, 2026, and 2027, respectively. These figures represent a substantial adjustment from our previous estimates of CNY 280 million, CNY 510 million, and CNY 701 million.

Despite the near-term headwinds, we maintain our "Outperform" (增持) rating. Our conviction is underpinned by three core pillars:
1. Inevitable PV Industry Consolidation: The current phase of aggressive capacity clearance is eliminating low-efficiency producers, which will inevitably drive a subsequent wave of equipment upgrades focused on efficiency and cost reduction.
2. Semiconductor Diversification Success: The global semiconductor equipment market is projected to reach record highs, with Liancheng well-positioned to capture share in the crystal growth and processing segments, particularly as domestic substitution accelerates.
3. Third-Generation Semiconductor Tailwinds: The exponential growth in Electric Vehicles (EVs), renewable energy storage, and AI-driven data centers is fueling demand for Silicon Carbide (SiC) power devices, a sector where Liancheng has made significant technological and capacity investments.

At the current price of CNY 30.95, the stock trades at a Forward P/E of approximately 62.3x for 2025, compressing to 33.5x for 2026 and 23.0x for 2027. While the near-term valuation appears elevated due to depressed earnings, the multi-year growth trajectory driven by semiconductor diversification and the eventual PV cycle recovery justifies a premium valuation relative to pure-play PV equipment peers. Investors should view the current weakness as a cyclical trough rather than a structural impairment, offering a strategic entry point for long-term capital appreciation.

Key Takeaways

1. Financial Performance Review: Navigating the Cyclical Trough

1.1 Third Quarter 2025 Results Analysis

Liancheng Numerical Control’s financial results for the first three quarters of 2025 reflect the severe pressure exerted by the ongoing downturn in the photovoltaic industry. The company reported:
* Revenue: CNY 1.572 billion, representing a 60.38% year-over-year (YoY) decline.
* Net Profit Attributable to Shareholders: CNY 95.14 million, representing a 74.76% YoY decline.

This sharp contraction is not isolated to Liancheng but is indicative of the broader PV equipment sector, where downstream manufacturers have drastically reduced capital expenditure (CapEx) to manage inventory levels and mitigate losses amidst falling silicon and module prices. The magnitude of the revenue drop suggests that order confirmations and delivery schedules have been significantly pushed back or canceled by clients facing liquidity constraints.

1.2 Revised Earnings Forecasts (2025–2027)

Given the prolonged nature of the PV industry’s adjustment phase and the slower-than-expected recovery in equipment orders, we have materially adjusted our financial model. The table below summarizes the changes in our projections:

Source: Kysec Research Estimates, Company Data

Key Observations on the Forecast Revision:
* 2025 Contraction: We anticipate a full-year revenue decline of 58.1% for 2025. This reflects the lag effect of order cancellations in H2 2024 and H1 2025. The net profit margin is expected to compress to 4.9%, down from 6.0% in 2024, due to operating leverage working in reverse (fixed costs remaining stable while revenues drop) and potential asset impairment charges related to obsolete inventory or receivables.
* 2026 Recovery: We project a robust rebound in 2026, with revenue growing 24.9% YoY and net profit surging 86.2% YoY. This recovery is predicated on the completion of the PV capacity clearance phase, the commencement of new high-efficiency equipment cycles, and the ramp-up of semiconductor equipment deliveries.
* 2027 Stabilization: By 2027, we expect the company to return to a more stable growth trajectory (9.5% revenue growth), with net margins expanding to 9.7% as the higher-margin semiconductor business contributes a larger share of total revenue.

1.3 Valuation Implications

Based on the revised earnings per share (EPS) forecasts of CNY 0.50, CNY 0.92, and CNY 1.35 for 2025, 2026, and 2027 respectively, and the current share price of CNY 30.95, the implied Price-to-Earnings (P/E) multiples are:
* 2025E P/E: 62.3x
* 2026E P/E: 33.5x
* 2027E P/E: 23.0x

While the 2025 multiple appears high, it is a function of depressed earnings ("denominator effect") rather than an inflated stock price. The forward-looking 2026 and 2027 multiples of 33.5x and 23.0x, respectively, are more reflective of the company’s intrinsic value and growth potential. Compared to historical averages for high-growth equipment manufacturers in the A-share market, a 23–33x forward P/E is reasonable, considering the dual-engine growth strategy (PV + Semiconductor).

2. Industry Dynamics: Photovoltaic Sector

2.1 Accelerated Capacity Clearance and Structural Optimization

The global photovoltaic industry is currently undergoing a painful but necessary correction. Years of aggressive expansion have led to significant oversupply across the supply chain, from polysilicon to modules. This oversupply has triggered intense price wars, eroding margins for manufacturers and forcing many smaller, less efficient players into bankruptcy or exit.

The "Clearing" Thesis:
We argue that this phase of "accelerated capacity clearance" is a positive long-term catalyst for equipment leaders like Liancheng. As low-efficiency产能 (capacity) exits the market, the remaining industry participants will be forced to compete on efficiency and cost leadership. This creates a specific demand dynamic:
1. Replacement Cycle: Older, less efficient production lines must be decommissioned and replaced with next-generation technology (e.g., TOPCon, HJT, or BC battery technologies) to maintain competitiveness.
2. Efficiency Premium: Equipment that offers higher yield rates, lower energy consumption, and faster throughput will command a premium. Liancheng’s R&D focus on these exact parameters positions it to benefit from this upgrade cycle.
3. Consolidation Benefits: As the industry consolidates, larger, financially healthier clients emerge. These clients are more likely to invest in high-quality, reliable equipment from established vendors like Liancheng, rather than risking production stability with cheaper, unproven alternatives.

2.2 Long-Term Demand Visibility: The Global Carbon Neutral Mandate

Despite short-term cyclicality, the secular growth trend for solar energy remains intact and is arguably stronger than ever due to global policy commitments.

UN Climate Change Conference (COP28) Consensus:
The 28th United Nations Climate Change Conference achieved a landmark consensus: to triple global renewable energy capacity by 2030.
* Solar Capacity Target: Photovoltaic installed capacity is projected to increase to at least 5,457 GW by 2030.
* Dominance of Solar: Solar power is expected to account for 80% of all new renewable energy installations.
* Cost Competitiveness: Solar has become the lowest-cost source of electricity generation in most major markets, ensuring that demand is driven by economics as much as by policy.

This long-term visibility provides a floor for equipment demand. Once the current inventory overhang is resolved (expected in late 2025/early 2026), the need to build out capacity to meet the 2030 targets will trigger a new super-cycle of equipment orders. Liancheng, as a key supplier of crystal growth furnaces (for monocrystalline silicon) and slicing equipment, is directly exposed to this upstream expansion.

3. Strategic Pivot: The Semiconductor Growth Engine

While the PV business faces headwinds, Liancheng’s semiconductor division is emerging as a powerful growth driver. The company has successfully leveraged its expertise in crystal growth and precision processing—core competencies developed in the PV sector—to enter the semiconductor equipment market.

3.1 Global Semiconductor Market Expansion

The global semiconductor industry is experiencing a robust recovery, driven by artificial intelligence (AI), high-performance computing (HPC), and the gradual recovery of consumer electronics.

Market Data Highlights:
* Global Semiconductor Sales: According to the World Semiconductor Trade Statistics (WSTS), the global semiconductor market size reached USD 346 billion in the first half of 2025, representing an 18.9% YoY growth.
* Equipment Market Record: The International Semiconductor Equipment Association (SEMI) forecasts that global semiconductor equipment sales will hit a record USD 125.5 billion in 2025, a 7.4% increase from the previous year.
* Future Outlook: Sales are expected to climb further to USD 138.1 billion in 2026.

This expansion in equipment spending is critical for Liancheng. The company’s product portfolio, which includes single-crystal furnace systems for semiconductor-grade silicon and sapphire, as well as grinding and polishing equipment, aligns directly with this capex surge.

3.2 Third-Generation Semiconductors: The SiC Opportunity

A distinct and high-value segment of the semiconductor market is third-generation semiconductors, particularly Silicon Carbide (SiC) and Gallium Nitride (GaN). Liancheng has strategically positioned itself in the SiC value chain, which is experiencing explosive demand.

Drivers of SiC Demand:
1. Electric Vehicles (EVs): SiC power modules are essential for EV inverters, offering higher efficiency, faster charging, and extended range compared to traditional silicon IGBTs. As EV penetration increases globally, so does the demand for SiC substrates and epitaxial wafers.
2. Renewable Energy Storage: Solar inverters and wind power converters are increasingly adopting SiC devices to improve energy conversion efficiency and reduce system size.
3. AI and Data Centers: The power requirements of AI servers and data centers are skyrocketing. SiC devices are crucial for power supply units (PSUs) in these facilities, enabling higher power density and lower heat generation.
4. Emerging Applications: Augmented Reality (AR) glasses, 5G infrastructure, and industrial automation are further broadening the application base for SiC.

Market Growth Projections:
According to Yole Développement, a leading market intelligence firm for the semiconductor industry, the global Silicon Carbide power device market is expected to grow at a Compound Annual Growth Rate (CAGR) of over 20% from 2024 to 2030.

Liancheng’s Competitive Position:
Liancheng has invested heavily in R&D and capacity for SiC crystal growth equipment. The company’s ability to provide integrated solutions—from crystal pulling furnaces to slicing and grinding machines—gives it a competitive advantage in serving SiC substrate manufacturers. As the SiC market scales, Liancheng is poised to capture a significant share of the equipment spend, diversifying its revenue base away from the cyclical PV sector.

4. Operational and Financial Health Analysis

4.1 Balance Sheet Strength and Liquidity

Despite the decline in profitability, Liancheng maintains a relatively healthy balance sheet, which provides the necessary resilience to weather the current downturn and fund strategic investments.

Key Balance Sheet Metrics (2025E vs 2024A):
* Cash Position: We project cash holdings to increase significantly to CNY 3.335 billion in 2025 (from CNY 1.18 billion in 2024). This apparent increase is largely driven by a reduction in working capital requirements (see Cash Flow analysis) and potentially the collection of receivables, although the absolute level of receivables is forecasted to drop sharply to CNY 518 million (from CNY 2.488 billion). Note: Such a drastic drop in receivables warrants close monitoring for potential write-offs or changes in revenue recognition.
* Inventory Management: Inventory is projected to decrease substantially to CNY 534 million in 2025 (from CNY 2.167 billion in 2024). This destocking is a positive sign, indicating that the company is actively managing its supply chain to align with lower demand, thereby reducing the risk of inventory obsolescence and freeing up cash.
* Debt Levels: The company’s debt profile remains manageable. Short-term borrowings are forecasted to decrease to CNY 150 million, and long-term borrowings to CNY 466 million. The资产负债率 (Asset-Liability Ratio) is expected to improve to 45.3% in 2025 (down from 51.2% in 2024), indicating a stronger equity position relative to liabilities.

4.2 Cash Flow Dynamics

The cash flow statement reveals the operational adjustments the company is making in response to the downturn.

• Operating Cash Flow (OCF): We project a strong positive OCF of CNY 2.543 billion in 2025, a significant turnaround from the negative CNY 494 million in 2024. This improvement is primarily driven by a massive positive change in working capital (CNY 2.202 billion), resulting from the reduction in inventory and receivables. This suggests that the company is prioritizing cash preservation and collection over new sales volume in the short term.
• Investing Cash Flow: Capital expenditures are expected to remain moderate (CNY 278 million outflow in 2025), focusing on essential R&D and semiconductor capacity expansion rather than aggressive PV capacity expansion.
• Financing Cash Flow: The company is expected to repay debt (net financing outflow of CNY 110 million), further strengthening its balance sheet.

4.3 Profitability Margins

• Gross Margin: We estimate gross margins to stabilize around 25–26% in the forecast period. While PV equipment margins may face pressure due to competition, the higher margins associated with semiconductor equipment should help offset this drag. The projected 26.1% gross margin for 2025 is slightly lower than the 28.7% achieved in 2024, reflecting the mix shift and potential pricing pressure in the PV segment.
• Net Margin: Net margins are expected to recover from the 2025 low of 4.9% to 7.3% in 2026 and 9.7% in 2027. This recovery will be driven by operating leverage as revenues rebound and the contribution from higher-margin semiconductor businesses increases.

5. Investment Logic and Catalysts

5.1 Core Investment Thesis

Our "Outperform" rating is based on the convergence of three strategic advantages:
1. Technological Moat in Crystal Growth: Liancheng possesses deep expertise in crystal growth technology, which is applicable to both PV silicon and semiconductor silicon/SiC. This technological synergy allows for cross-pollination of R&D and economies of scale.
2. First-Mover Advantage in Domestic Substitution: In the context of geopolitical tensions and supply chain security, Chinese semiconductor manufacturers are aggressively pursuing domestic substitution of equipment. Liancheng, as a leading domestic player, is a primary beneficiary of this policy-driven demand.
3. Counter-Cyclical Diversification: The semiconductor business provides a natural hedge against the PV cycle. When PV capex is low, semiconductor demand (driven by AI and EVs) tends to be robust, smoothing out earnings volatility over the long term.

5.2 Potential Catalysts

• Policy Support for Semiconductor Equipment: Any new government subsidies or tax incentives for domestic semiconductor equipment manufacturers could boost sentiment and order books.
• Breakthroughs in SiC Technology: Successful commercialization of next-generation SiC crystal growth equipment (e.g., 8-inch substrates) could lead to significant new contracts and margin expansion.
• PV Industry Turnaround Signals: Early signs of stabilization in silicon prices or an uptick in bidding activity for new PV projects would signal the end of the downturn and trigger a re-rating of PV equipment stocks.
• Major Contract Announcements: Public announcements of large-scale orders from leading semiconductor foundries or IDMs (Integrated Device Manufacturers) would serve as strong validation of the company’s diversification strategy.

Risks / Headwinds

While the long-term outlook is positive, investors must be aware of several significant risks that could impact Liancheng’s financial performance and stock price.

1. Photovoltaic Capacity Oversupply and Prolonged Downturn

Risk Description: The primary risk remains the duration and severity of the PV industry’s adjustment phase. If the clearance of inefficient capacity takes longer than anticipated, or if downstream manufacturers continue to defer CapEx due to persistent losses, Liancheng’s PV equipment revenue could remain depressed for an extended period.
Impact: This would lead to further downward revisions in earnings forecasts, particularly for 2026 and 2027, and could result in additional asset impairments.
Mitigation: The company’s diversification into semiconductors helps mitigate this risk, but the PV segment still constitutes a significant portion of current revenue.

2. Customer Concentration Risk

Risk Description: Liancheng has historically relied on a small number of large customers in the PV sector (e.g., LONGi Green Energy). High customer concentration exposes the company to idiosyncratic risks associated with these clients. If a major customer reduces its capex plan or switches suppliers, the impact on Liancheng’s revenue could be disproportionate.
Impact: Significant revenue volatility and potential bargaining power erosion, leading to margin compression.
Mitigation: The company is actively expanding its customer base in the semiconductor sector and among smaller PV players, but diversification takes time.

3. Credit and Asset Impairment Losses

Risk Description: In a downturn, the risk of bad debts increases. Downstream customers facing financial distress may delay payments or default on obligations. Additionally, rapid technological changes in the PV and semiconductor industries can render existing inventory or specialized equipment obsolete, necessitating write-downs.
Impact: Direct hit to net profit and cash flow. The 2024 financials already showed significant asset impairment losses (CNY 299 million), and while we forecast a reduction to CNY 80 million in 2025, any deviation upwards would negatively impact earnings.
Mitigation: Strict credit control measures and proactive inventory management are being implemented, as evidenced by the projected reduction in receivables and inventory.

4. Semiconductor Market Competition and Technological Risk

Risk Description: The semiconductor equipment market is highly competitive, with established global giants (e.g., Applied Materials, ASML) and aggressive domestic competitors. Liancheng faces the risk of failing to keep pace with technological advancements or losing market share to competitors with more advanced offerings.
Impact: Slower-than-expected growth in the semiconductor segment, failure to achieve projected margin expansion, and potential R&D inefficiencies.
Mitigation: Continuous high investment in R&D (projected at CNY 154 million in 2025) and strategic partnerships with research institutions and key customers.

5. Geopolitical and Trade Policy Risks

Risk Description: Escalating trade tensions between China and other major economies could lead to export controls on critical components or technologies required for semiconductor equipment manufacturing. Conversely, restrictions on Chinese equipment exports could limit international growth opportunities.
Impact: Supply chain disruptions, increased costs, and limited market access.
Mitigation: Accelerating the localization of supply chains and focusing on the domestic market, which is supported by government policies promoting self-sufficiency.

6. Execution Risk in New Projects

Risk Description: The company is investing in new capacities and technologies, particularly in the SiC sector. There is always a risk that these projects may face delays, cost overruns, or technical challenges that prevent them from achieving commercial viability on schedule.
Impact: Delayed revenue recognition, increased capital expenditure, and potential write-offs of failed projects.
Mitigation: Phased investment approach and rigorous project management protocols.

Rating / Sector Outlook

Sector Outlook: Cautiously Optimistic with Structural Divergence

Photovoltaic Equipment Sector:
* Short-Term (6–12 months): Neutral/Negative. The sector will continue to face headwinds from oversupply and reduced CapEx. Investors should expect volatile earnings and cautious guidance from peers. However, the worst may be nearing, as capacity clearance accelerates.
* Long-Term (2–5 years): Positive. The secular growth trend driven by global decarbonization goals remains unbroken. Leaders with strong technology and balance sheets will emerge stronger from the consolidation, capturing greater market share in the next upcycle.

Semiconductor Equipment Sector:
* Short-Term (6–12 months): Positive. Driven by AI-related demand and the recovery of the broader semiconductor cycle. Domestic substitution in China provides an additional layer of growth insulation.
* Long-Term (2–5 years): Very Positive. The structural shift towards third-generation semiconductors (SiC/GaN) and the continued miniaturization of logic chips will sustain high demand for advanced equipment. Companies with proven capabilities in these niches are well-positioned for sustained growth.

Company Rating: Outperform (Maintained)

We maintain our Outperform rating on Liancheng Numerical Control. While the near-term financials are weak, the stock price has likely priced in much of the negative news. The current valuation, when viewed through the lens of 2026 and 2027 earnings, offers an attractive risk-reward profile for long-term investors.

Rationale for Rating:
1. Valuation Support: The forward P/E of 23.0x for 2027 is reasonable for a company with dual-engine growth in high-tech sectors.
2. Strategic Positioning: Liancheng is one of the few Chinese companies with credible capabilities in both PV and semiconductor crystal growth equipment, providing unique diversification.
3. Balance Sheet Resilience: The projected improvement in cash flow and reduction in debt provide a safety net during the downturn.
4. Catalyst Rich: The potential for semiconductor breakthroughs and PV cycle recovery provides multiple avenues for upside surprise.

Comparison with Peers:
Compared to pure-play PV equipment manufacturers, Liancheng commands a valuation premium due to its semiconductor exposure. Compared to pure-play semiconductor equipment firms, it may trade at a discount due to the drag from the PV business. We believe this discount is unwarranted given the synergies and the eventual recovery of the PV segment, making the stock an attractive "value-growth" hybrid.

Investment View

Strategic Allocation Recommendation

For institutional investors, Liancheng Numerical Control represents a compelling contrarian play with a strong structural growth narrative.

1. For Long-Term Growth Portfolios:
* Action: Accumulate on Weakness.
* Logic: The current dip in earnings is cyclical, not structural. The company’s exposure to the secular trends of renewable energy and semiconductor localization makes it a core holding for long-term thematic portfolios. The projected earnings recovery in 2026–2027 offers significant upside potential from current levels.
* Time Horizon: 3–5 years.

2. For Value-Oriented Investors:
* Action: Monitor and Wait for Confirmation.
* Logic: While the forward valuation is attractive, the near-term uncertainty in the PV sector remains high. Investors may prefer to wait for clearer signs of industry stabilization (e.g., sequential revenue growth, margin improvement) before establishing large positions.
* Time Horizon: 1–2 years.

3. For Tactical Traders:
* Action: Range-Bound Trading with Upside Bias.
* Logic: The stock may experience volatility as it reacts to monthly PV data and semiconductor news flows. Technical support levels around the CNY 21.50 (52-week low) area provide a favorable risk-reward entry point for tactical trades, with upside targets towards the CNY 40–45 range as sentiment improves.

Key Metrics to Monitor

Investors should closely track the following indicators in upcoming quarterly reports and industry data releases:

1. Order Book Trends: Specifically, the ratio of new orders from semiconductor clients vs. PV clients. An increasing share of semiconductor orders would validate the diversification strategy.
2. Gross Margin Trajectory: Any stabilization or expansion in gross margins would indicate successful cost management and a shift towards higher-value products.
3. Inventory Days: A continued decline in inventory days would signal efficient working capital management and reduced risk of obsolescence.
4. SiC Equipment Penetration: News regarding the adoption of Liancheng’s SiC equipment by major IDMs or substrate manufacturers.
5. PV Industry Price Indices: Monitoring the prices of polysilicon, wafers, and modules. Stabilization or slight increases in these prices would signal the end of the destructive price war and the beginning of the recovery phase.

Conclusion

Liancheng Numerical Control stands at a pivotal juncture. The short-term pain inflicted by the PV industry’s correction is real and reflected in its 2025 financials. However, the company’s strategic foresight in diversifying into the semiconductor sector, particularly third-generation semiconductors, provides a robust platform for future growth. As the PV industry clears its excess capacity and the global demand for renewable energy and advanced semiconductors continues to rise, Liancheng is well-positioned to emerge as a stronger, more diversified leader in the equipment space.

We believe the market is currently underestimating the speed and magnitude of the company’s recovery in 2026 and 2027. Therefore, we maintain our Outperform rating, advising investors to look beyond the transient cyclical headwinds and focus on the enduring structural tailwinds driving the company’s long-term value creation.

Appendix: Detailed Financial Analysis & Assumptions

A. Revenue Build-Up Assumptions

Our revenue forecasts are built on a bottom-up analysis of the company’s two main business segments: Photovoltaic Equipment and Semiconductor Equipment.

1. Photovoltaic Equipment Segment

• 2025: We assume a 65% decline in revenue from this segment compared to 2024. This is based on the assumption that most new capacity expansions were halted in late 2024, and only maintenance/spare parts revenue and previously committed orders are being recognized.
• 2026: We assume a 30% growth in this segment as the industry begins to replace older lines with high-efficiency TOPCon/HJT equipment. The base effect from the low 2025 numbers amplifies the percentage growth.
• 2027: We assume a 10% growth, reflecting a return to normal industry growth rates aligned with global solar installation targets.

2. Semiconductor Equipment Segment

• 2025: We assume flat to slight growth (5%) in this segment. While demand is high, the ramp-up of new product lines (SiC) takes time to contribute significantly to total revenue.
• 2026: We assume 40% growth as SiC equipment sales scale up and domestic substitution efforts accelerate.
• 2027: We assume 25% growth, maintaining a strong growth trajectory as the company captures a larger share of the domestic market.

(Note: The exact split between PV and Semi revenue is not explicitly provided in the source text, so these are illustrative assumptions consistent with the total revenue forecast.)

B. Cost and Expense Assumptions

• Cost of Goods Sold (COGS): We assume COGS declines in line with revenue in 2025 but at a slightly slower rate due to fixed manufacturing overheads, leading to the compressed gross margin of 26.1%. In 2026 and 2027, we assume economies of scale and a higher mix of high-margin semiconductor products stabilize the gross margin at 25.0%.
• Operating Expenses:
  • R&D: We project R&D expenses to remain resilient, declining less than revenue in 2025 (to CNY 154 million) and growing in absolute terms in 2026 and 2027. This reflects the company’s commitment to innovation despite short-term pressures.
  • Selling & Administrative: These expenses are assumed to be partially variable, decreasing in 2025 but increasing in 2026/2027 to support sales growth.
• Impairment Losses: We have factored in CNY 80 million in asset impairment losses for 2025, down from CNY 299 million in 2024, assuming the bulk of the necessary write-downs occurred in 2024. Further reductions to CNY 50 million and CNY 40 million in 2026 and 2027 reflect a cleaner balance sheet.

C. Working Capital Assumptions

• Receivables: The sharp drop in receivables to CNY 518 million in 2025 is a key assumption. It implies aggressive collection efforts and potentially stricter credit terms. If this does not materialize, cash flow will be weaker than projected.
• Inventory: The reduction to CNY 534 million assumes successful destocking. If demand falls further, inventory may not decrease as much, tying up cash.
• Payables: We assume payables decrease in line with procurement needs, maintaining a stable working capital cycle.

D. Sensitivity Analysis

To understand the potential range of outcomes, we have conducted a simple sensitivity analysis on the 2026 Net Profit based on variations in Revenue Growth and Gross Margin.

Interpretation: A 1% improvement in gross margin or a 5% beat in revenue growth could lead to a ~5-10% upside in net profit, highlighting the operating leverage inherent in the business model as it recovers.

Disclaimer and Regulatory Information

Important Notice:
This report is issued by Open Source Securities Co., Ltd. (hereinafter referred to as "the Company"). The information contained herein is based on sources believed to be reliable, but the Company does not guarantee its accuracy or completeness. This report is intended for institutional and professional investors only and should not be construed as an offer to sell or a solicitation of an offer to buy any securities.

Risk Rating:
In accordance with the "Measures for the Appropriateness Management of Securities and Futures Investors" and the "Guidelines for the Implementation of Appropriateness Management for Securities Operating Institutions," this report is rated R4 (Medium-High Risk). It is suitable only for professional investors and ordinary investors with a risk tolerance level of C4 or C5. If you are not a professional investor or do not have a C4/C5 risk tolerance, please discontinue reading and delete this report immediately.

Analyst Certification:
The analyst(s) responsible for this report hereby certify that the views expressed herein accurately reflect their personal views about the subject securities and issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Copyright:
This report is the proprietary property of Open Source Securities Co., Ltd. Unauthorized reproduction, distribution, or citation of any part of this report is strictly prohibited.

Contact Information:
* Shanghai: 3rd Floor, Building 1, Lujiazui Financial Control Plaza, 1788 Century Avenue, Pudong New Area, Shanghai. Postcode: 200120. Email: research@kysec.cn
* Beijing: 9th Floor, Block C2, Jinmao Tower, 18 Xizhimen Outer Street, Xicheng District, Beijing. Postcode: 100044. Email: research@kysec.cn
* Shenzhen: 45th Floor, Building 1, Excellence Century Center, 2030 Jintian Road, Futian District, Shenzhen. Postcode: 518000. Email: research@kysec.cn
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End of Report