Equity Research: Lianhong New Materials (003022.SZ)

Date: November 4, 2025
Sector: Basic Chemicals / Advanced Materials
Rating: BUY (Maintained)
Current Price: CNY 19.30
Target Price: Implied Upside via Earnings Growth (PE Multiple Compression Expected)

Executive Summary

Lianhong New Materials (003022.SZ) has demonstrated a robust turnaround in profitability during the third quarter of 2025, driven by the successful commercialization of high-value-added new products and effective cost management. The company reported a 90.90% year-over-year (YoY) increase in net profit attributable to shareholders in 3Q25, significantly outpacing revenue growth. This performance underscores the efficacy of its strategic pivot towards advanced polymer materials and specialty fine chemicals, mitigating the impact of cyclical price declines in traditional commodity segments.

Our analysis highlights three core pillars supporting our BUY rating:
1. Product Mix Optimization: The transition from volume-driven growth to value-driven growth is evident. High-margin products such as Ethylene Carbonate (EC), Ultra-High Molecular Weight Polyethylene (UHMWPE), electronic specialty gases, and Polylactic Acid (PLA) are now contributing meaningfully to the bottom line.
2. Capacity Expansion Cycle: The company is entering a critical phase of capacity release. Major projects under construction—including 200kt/year EVA, 100kt/year POE, and lithium battery additive VC—are scheduled for completion and commissioning in late 2025 and throughout 2026. This provides a clear visibility on future revenue streams.
3. Operational Efficiency: Despite top-line pressure from lower average selling prices (ASPs) in certain legacy categories, the company has successfully reduced period expense ratios through stringent cost controls and the absorption merger of its subsidiary, Lianhong Chemical, enhancing overall management efficiency.

We maintain our earnings forecasts, projecting net profits of CNY 368 million, CNY 603 million, and CNY 763 million for 2025, 2026, and 2027, respectively. This represents a compound annual growth rate (CAGR) of approximately 41% in net profit over the forecast period. At the current valuation of 70.0x 2025E PE, the stock appears priced for growth; however, we anticipate multiple compression to 42.8x in 2026E and 33.8x in 2027E as earnings scale, offering an attractive risk-reward profile for long-term institutional investors seeking exposure to China’s new material supply chain upgrades.

Key Takeaways

1. Financial Performance Analysis: Profitability Decoupling from Revenue

The third-quarter financial results reveal a significant divergence between revenue stability and profit expansion, indicative of improving operational leverage and margin enhancement.

1.1 Third Quarter 2025 Highlights

• Revenue: CNY 1.657 billion, representing a marginal YoY increase of 0.21% and a substantial Quarter-on-Quarter (QoQ) increase of 20.73%. The sequential growth suggests a recovery in demand or increased shipment volumes in the latter half of the year.
• Net Profit (Attributable): CNY 72 million, surging 90.90% YoY.
• Deducted Non-Recurring Net Profit: CNY 73 million, up 89.92% YoY. The close alignment between net profit and deducted non-recurring profit indicates that the earnings quality is high and driven by core operating activities rather than one-off gains or accounting adjustments.

1.2 Nine-Month 2025 Cumulative Performance

• Total Revenue: CNY 4.568 billion, a decline of 8.02% YoY.
  • Driver of Decline: The primary factor behind the revenue contraction was the year-over-year decrease in selling prices for certain mainstream products. This reflects broader deflationary pressures in the basic chemical sector but also highlights the company's resilience in maintaining volume despite price headwinds.
• Net Profit: CNY 239 million, an increase of 37.18% YoY.
• Net Profit (Attributable): CNY 232 million, up 30.32% YoY.
• Deducted Non-Recurring Net Profit: CNY 233 million, up 55.14% YoY.

Analyst Comment: The ability to grow profits by ~30-55% while revenues contracted by ~8% is a testament to the structural improvement in the company’s business model. The "scissors difference" between revenue and profit growth is primarily attributed to:
1. Lower Raw Material Costs: Input costs decreased YoY, expanding gross margins.
2. New Product Contribution: Higher-margin new products (EC, UHMWPE, etc.) are replacing lower-margin legacy volumes.
3. Expense Control: Effective management of sales, administrative, and R&D expenses relative to the revenue base.

1.3 Expense Structure and Operational Efficiency

The company has demonstrated disciplined cost management during the 9M25 period. The period expense ratios are as follows:

Note: While administrative and financial expense ratios saw slight increases, the overall control over sales and R&D efficiencies, combined with gross margin expansion, has resulted in net profit growth.

2. Business Segment Drivers: Structural Upgrade in Product Portfolio

Lianhong New Materials is strategically consolidating its leadership in advanced polymer materials and specialty fine chemicals. The company is actively optimizing its product structure to align with high-growth downstream sectors such as photovoltaics (PV), new energy vehicles (NEVs), and consumer electronics.

2.1 EVA (Ethylene Vinyl Acetate): Maintaining Premium Positioning

The EVA business remains a cornerstone of the company’s revenue, but the strategic focus has shifted entirely to high-value segments.
* Product Strategy: The company has locked its production capacity into high VA (Vinyl Acetate) content products. High VA EVA is critical for:
* Photovoltaic Modules: Used in encapsulation films (POE/EVA co-extrusion or pure EVA films) for high-efficiency solar panels.
* High-Voltage Cables: Insulation materials requiring superior dielectric properties.
* Premium Footwear: High-end shoe soles requiring lightweight and resilient materials.
* Market Position: By focusing exclusively on the high-end camp, Lianhong avoids the fierce price competition prevalent in the low-to-mid VA generic EVA market. This positioning protects margins even when industry-wide ASPs decline.

2.2 EOD (Ethylene Oxide Derivatives): Margin Enhancement

The EOD segment is experiencing steady growth, characterized by an improving product mix.
* High-Margin Shift: The proportion of high-gross-margin products within the EOD portfolio is increasing.
* Specialty Surfactants: Export volumes of specialty surfactants have grown, indicating successful penetration into international markets and diversification away from domestic cyclicality.
* Carbonate Solvents: The company has secured stable supply contracts with head-tier customers (likely major battery electrolyte manufacturers), ensuring consistent cash flow from this segment.

2.3 New Products: The Growth Engine

The most significant catalyst for the 3Q25 profit surge is the contribution from newly commissioned or ramped-up facilities. These products represent the company’s second growth curve.

• UHMWPE (Ultra-High Molecular Weight Polyethylene):
  • Status: The production unit has undergone optimization and is now running stably at high load.
  • Commercialization: Developed 5 distinct grades of UHMWPE, securing customer orders. UHMWPE is a critical material for lithium battery separators, ballistic armor, and high-performance fibers. Successful certification and order intake validate the company’s technical capability in this high-barrier segment.
• Electronic Specialty Gases:
  • Status: The facility has developed relevant products which have passed customer validation and commenced sales.
  • Significance: Electronic gases are essential for semiconductor manufacturing. Entry into this supply chain requires rigorous qualification processes (often 1-2 years). Passing validation marks a significant milestone, opening access to the high-margin semiconductor material market.
• PLA (Polylactic Acid):
  • Status: The PLA unit has developed a series of products and achieved batch sales.
  • Context: As global regulations on single-use plastics tighten, biodegradable plastics like PLA are seeing structural demand growth. Achieving batch sales indicates the resolution of initial technical hurdles and market acceptance.

3. Capital Expenditure and Project Pipeline: Visibility on Future Growth

Lianhong New Materials is executing an aggressive capacity expansion plan under its "14th Five-Year Plan" strategy. The pipeline is heavily skewed towards new energy materials and biodegradable materials, aligning with national strategic priorities.

3.1 Project Status Update (as of Q3 2025)

3.2 Strategic Implications of the Pipeline

1. Vertical Integration: The addition of 300kt/year PO capacity will provide upstream feedstock security for the existing and expanded PPG and EOD lines, reducing exposure to volatile propylene oxide spot prices.
2. Import Substitution (POE): The 100kt/year POE project is particularly noteworthy. POE technology has historically been monopolized by a few international giants (e.g., Dow, Mitsui). Domestic breakthroughs in POE production are highly valued by the market due to the potential for significant cost advantages and supply security for China’s PV industry.
3. Timing of Revenue Recognition: With multiple major projects reaching "Intermediate Handover" (a stage where construction is substantially complete and pre-commissioning begins) in Q3/Q4 2025, we expect a step-change in revenue and asset turnover in 2026. This aligns with our forecast of 26.5% revenue growth in 2026.

3.3 Corporate Restructuring: Merger with Lianhong Chemical

The company announced the absorption and merger of its wholly-owned subsidiary, Lianhong Chemical.
* Objective: To integrate resources, optimize cost structures, and improve management efficiency.
* Impact: This simplifies the corporate structure, reduces administrative redundancies, and allows for more centralized decision-making regarding production and sales. It is a positive governance move that should marginally improve net margins over time.

4. Valuation and Financial Forecasts

We maintain our earnings estimates, which reflect the gradual ramp-up of new capacities and the stabilization of product margins.

4.1 Income Statement Forecast (2025-2027)

Key Assumptions:
* Revenue Growth: The 11.4% growth in 2025 is conservative, reflecting the partial year contribution of new projects. The acceleration to 26.5% in 2026 assumes full-year contribution from the 200kt EVA, 100kt POE, and other 2025 completions.
* Margin Expansion: Gross margins are projected to expand from 16.5% in 2024 to 22.2% in 2027. This is driven by:
1. Higher proportion of high-margin new materials (POE, UHMWPE, Electronic Gases).
2. Economies of scale from larger integrated facilities.
3. Upstream integration (PO project) lowering input costs.
* Net Margin: Net margin is expected to recover from 3.7% (2024) to 7.4% (2027), reflecting operating leverage and improved product mix.

4.2 Valuation Metrics

Valuation Commentary:
* Current Valuation: At 70.0x 2025E PE, the stock trades at a premium to the broader chemical sector. This premium is justified by the company’s high growth trajectory (57% profit growth in 2025E) and its positioning in scarce, high-barrier segments (POE, Electronic Gases).
* Forward Looking: The P/E ratio drops rapidly to 42.8x in 2026E and 33.8x in 2027E as earnings double from 2024 levels. For a company with a projected 3-year profit CAGR of >40%, a forward PE of ~34x is reasonable, especially considering the scarcity value of its POE and electronic material capabilities in the A-share market.
* PEG Ratio: Using the 2026E growth rate of 63.7%, the PEG ratio for 2026E is approximately 0.67 (42.8 / 63.7), suggesting the stock is undervalued relative to its growth potential.

Risks / Headwinds

While the investment thesis is strong, institutional investors must consider the following risks which could impact the company’s financial performance and stock valuation.

1. Raw Material Price Volatility

• Risk Description: The company’s primary raw materials include ethylene, propylene, and methanol. These are commodity chemicals linked to crude oil and natural gas prices.
• Impact: A sharp increase in crude oil prices would raise input costs. If the company cannot pass these costs downstream due to weak demand or intense competition, gross margins will compress.
• Mitigation: The upcoming 300kt/year PO project aims to mitigate some upstream volatility, but exposure to ethylene/propylene remains significant.

2. New Product R&D and Commercialization Risks

• Risk Description: The growth story relies heavily on the success of new products like POE, UHMWPE, and electronic gases. These are technologically complex fields.
• Impact:
  • Technical Failure: Inability to achieve stable, high-yield production.
  • Customer Validation Delays: Especially for electronic gases and automotive-grade materials, certification cycles can be prolonged. Delays in passing customer audits will defer revenue recognition.
  • Performance Gap: If the new products do not meet the quality standards of international competitors, they may be relegated to low-end applications, eroding expected margins.

3. Capacity Construction and Commissioning Delays

• Risk Description: The company has a dense schedule of project completions in 2025-2026.
• Impact: Any delays in construction, equipment installation, or regulatory approvals (environmental, safety) will push back the revenue contribution timeline. This would result in missed earnings estimates for 2025/2026 and potentially trigger a de-rating of the stock.
• Specific Concern: The POE project is in the "full equipment installation" phase. Any supply chain bottlenecks for specialized equipment could delay the end-of-2025 target.

4. Market Competition and Price Wars

• Risk Description: The Chinese chemical industry is prone to overcapacity in popular segments.
• Impact:
  • EVA: While Lianhong focuses on high-end, an influx of new domestic EVA capacity could eventually spill over into higher VA grades, pressuring prices.
  • PLA/Biodegradables: As more players enter the biodegradable plastics space, price competition could intensify, limiting the margin upside of the PLA project.
  • VC Additives: The lithium battery additive sector has seen significant capacity expansion recently, leading to price declines. Lianhong’s 4kt VC project may face a tougher pricing environment than anticipated.

5. Macroeconomic and Downstream Demand Fluctuations

• Risk Description: Demand for Lianhong’s products is tied to the health of the PV, NEV, and consumer electronics sectors.
• Impact:
  • PV Sector: Policy changes or trade barriers (e.g., tariffs on Chinese solar modules in the US/EU) could dampen demand for EVA/POE encapsulants.
  • NEV Sector: A slowdown in electric vehicle sales growth would reduce demand for battery materials (VC, UHMWPE separators) and lightweight automotive plastics (POE).

Rating / Sector Outlook

Sector Outlook: Basic Chemicals & New Materials

The broader basic chemicals sector in China is undergoing a structural transformation. Traditional bulk commodities are facing margin pressure due to overcapacity and environmental regulations. However, the New Materials sub-sector—specifically those enabling the energy transition (PV, Batteries) and technological self-sufficiency (Semiconductors)—remains a high-priority area for policy support and capital investment.

• Supply Side: The industry is shifting from "scale expansion" to "quality and differentiation." Companies with proprietary technology (like POE synthesis) are gaining a competitive moat.
• Demand Side: Long-term demand drivers remain intact. The global energy transition ensures sustained growth for PV materials and battery chemicals. The localization of semiconductor supply chains in China provides a tailwind for electronic specialty gases.

Company Rating: BUY (Maintained)

We maintain our BUY rating on Lianhong New Materials.

• Relative Value: Compared to peers in the advanced polymer space, Lianhong offers a unique combination of established cash flows (from EVA/EOD) and high-optionality growth (from POE/New Materials).
• Catalysts:
  1. Q4 2025 / Q1 2026: Official commissioning and first commercial sales from the POE and VC projects.
  2. 2026 Full Year: Realization of full-year earnings from the 2025 capacity additions, leading to the projected 63.7% profit growth.
  3. Margin Expansion: Quarterly evidence of gross margin improvement as the product mix shifts towards high-value items.

Investment View

Core Investment Logic

1. The "Platform" Advantage in New Materials
Lianhong New Materials is evolving from a single-product leader (EVA) into a diversified new materials platform. This platform approach reduces single-product cyclicality and allows the company to cross-sell to key customers in the PV and battery industries. The integration of upstream (PO) and downstream (PPG, EOD, POE) creates a synergistic ecosystem that enhances cost competitiveness and supply chain reliability. Institutional investors should view Lianhong not just as a chemical producer, but as a critical supplier to China’s strategic emerging industries.

2. Scarcity Value of POE Technology
The 100kt/year POE project is the crown jewel of the current expansion cycle. POE (Polyolefin Elastomer) is a high-barrier material currently dominated by foreign firms. Domestic production capacity is limited.
* Investment Implication: Successful commercialization of POE will re-rate the company’s valuation multiple. POE commands significantly higher prices and margins than standard EVA. As Lianhong becomes one of the few domestic suppliers capable of mass-producing high-quality POE, it will capture a disproportionate share of the value created by the next generation of high-efficiency solar modules (which increasingly use POE-based encapsulation for better durability and efficiency).

3. Turnaround in Profit Quality
The 3Q25 results confirm that the company has successfully navigated the trough of the chemical cycle. The decoupling of profit growth from revenue decline is a classic signal of operational turning points.
* Investment Implication: Investors should focus on profit margins and cash flow rather than just top-line revenue in the near term. The improvement in deducted non-recurring net profit (+55% YoY in 9M25) confirms that the core business is generating real economic value. The reduction in R&D expense ratio while maintaining absolute R&D spend suggests maturing innovation efficiency.

4. Clear Visibility on Earnings Growth
Unlike many growth stocks where future earnings are speculative, Lianhong’s growth is backed by tangible assets under construction.
* Investment Implication: The completion of intermediate handovers for major projects in Q3 2025 provides a high degree of confidence in the 2026-2027 earnings forecasts. The projected jump in net profit from CNY 368m (2025E) to CNY 603m (2026E) is supported by physical capacity coming online. This visibility reduces execution risk and supports a higher valuation floor.

Strategic Recommendations for Investors

• Accumulate on Weakness: Given the long-term growth trajectory, short-term volatility related to broader market sentiment or temporary raw material price spikes should be viewed as buying opportunities.
• Monitor Key Milestones: Investors should closely track the official announcement of POE production start-up and first customer contracts for electronic gases. These events will serve as immediate catalysts for stock price appreciation.
• Long-Term Hold: The investment horizon should be aligned with the 2025-2027 capacity release cycle. The full benefits of vertical integration and product mix optimization will materialize over this period.

Conclusion

Lianhong New Materials stands at an inflection point. The company has successfully weathered the recent downturn in the chemical sector by pivoting towards high-value, high-barrier new materials. The strong 3Q25 performance validates this strategy, demonstrating that the company can grow profits even in a challenging pricing environment. With a robust pipeline of projects set to commission in the near term, particularly the strategically vital POE facility, Lianhong is well-positioned for sustained earnings growth over the next three years.

We believe the market has not yet fully priced in the margin expansion potential and the scarcity value of its new product portfolio. Therefore, we maintain our BUY rating, targeting a re-rating of the stock as earnings visibility improves and new capacities contribute to the bottom line in 2026.

Appendix: Detailed Financial Data & Assumptions

A. Balance Sheet Strengths and Liquidity

• Cash Position: As of the latest reporting period, the company maintains a healthy cash balance (CNY 2.096 billion estimated for 2025E), providing sufficient liquidity to fund the final stages of construction without excessive dilutive financing.
• Debt Structure: The increase in short-term and long-term borrowings is aligned with the capital expenditure cycle. The debt-to-asset ratio is projected to stabilize around 61.5% in 2027, which is manageable for a capital-intensive chemical manufacturer with strong cash flow generation potential.
• Working Capital: Inventory levels are projected to rise slightly (CNY 1.003 billion in 2027E) to support higher sales volumes, but inventory turnover remains efficient.

B. Cash Flow Analysis

• Operating Cash Flow (OCF): After a brief dip in 2025E (due to working capital buildup for new launches), OCF is projected to surge to CNY 2.357 billion in 2026E. This robust cash generation will support debt repayment and potential future dividends or reinvestment.
• Investing Cash Flow: Significant outflows continue in 2025-2026 (CNY -997m and -2.64b respectively) reflecting the final capex push. This is expected to normalize post-2026 as major projects complete.

C. Sensitivity Analysis (Illustrative)

Note: The Bull Case assumes that the POE product achieves immediate market acceptance at import-parity pricing, which would significantly boost gross margins beyond the 20.8% forecast.

D. Comparative Peer Analysis (General Context)

While specific peer data is not provided in the source report, generally, companies with proprietary technology in new materials (such as POE or electronic chemicals) trade at higher multiples than commodity chemical producers. Lianhong’s transition into this space justifies its premium valuation relative to the broader CSI Basic Chemicals Index. Its integrated model (Upstream PO -> Downstream POE/PPG) offers better margin stability than pure-play processors.

Disclaimer:
This report is based on information available as of November 4, 2025, including the company’s 2025 Third Quarter Report and public announcements. The forecasts and ratings are subject to change based on future developments. Investors should conduct their own due diligence and consult with financial advisors before making investment decisions. The views expressed herein are those of the analyst and do not necessarily reflect the views of Huajin Securities.

Analyst Contact:
* He Zhaohui (SAC: S0910525030003) - hezhaohui@huajinsc.cn
* Zhou Tao (SAC: S0910523050001) - zhoutao@huajinsc.cn
* Luo Hongyong (SAC: S0910523100001) - luohongyong@huajinsc.cn

Huajin Securities Institute
Shanghai | Beijing | Shenzhen