Equity Research: First Solar Materials (603806.SH)

Date: November 4, 2025
Sector: Power Equipment / Photovoltaic Materials
Analyst: Jiaxiong Wu, Zhen Gu | BOC International (China)

Title: Q3 Earnings Show Sequential Recovery; Long-Term Growth Catalysts in PCB Localization

Executive Summary

First Solar Materials Co., Ltd. ("Foster" or the "Company," 603806.SH) released its third-quarter financial report for 2025 on October 31, 2025. The results indicate a significant sequential improvement in profitability during the third quarter, despite a year-on-year decline in overall performance for the first nine months of the year. As the domestic leader in photosensitive dry film manufacturing, Foster is strategically positioned to capitalize on the accelerating trend of printed circuit board (PCB) localization in China. The Company’s expansion into high-end applications, particularly packaging substrates for AI servers, alongside increasing supply shares among global top-tier PCB clients, suggests a potential trajectory toward simultaneous volume and margin growth.

Based on the Q3 performance and evolving gross margin trends, we have adjusted our earnings forecasts for fiscal years 2025-2027. We maintain our OUTPERFORM rating on the stock. While near-term headwinds in the photovoltaic (PV) sector persist, the diversification into electronic materials provides a compelling long-term valuation re-rating opportunity.

Key Financial Adjustments:
* 2025E EPS: Adjusted down to RMB 0.39 (from RMB 0.68).
* 2026E EPS: Adjusted down to RMB 0.74 (from RMB 0.84).
* 2027E EPS: Adjusted up slightly to RMB 0.99 (from RMB 0.94).
* Current Valuation: The stock trades at approximately 39.8x P/E for 2025E, compressing to 21.2x for 2026E and 15.8x for 2027E, reflecting anticipated earnings recovery.

Key Takeaways

1. Financial Performance Analysis: A Tale of Two Halves

The Company’s financial results for the first three quarters of 2025 reflect the ongoing challenges in the traditional PV encapsulation film market, offset by emerging strengths in operational efficiency and new business segments.

1.1 Nine-Month Overview (Jan–Sep 2025)

For the first nine months of 2025, Foster reported:
* Revenue: RMB 11.79 billion, a year-on-year (YoY) decrease of 22.32%.
* Net Profit Attributable to Shareholders: RMB 688 million, a YoY decrease of 45.34%.
* Deducted Non-Recurring Net Profit: RMB 630 million, a YoY decrease of 48.29%.

The contraction in revenue and profit is primarily attributed to the intense price competition and reduced demand within the global photovoltaic industry, which remains the Company’s core revenue driver. The decline in deducted non-recurring net profit outpaced the decline in headline net profit, indicating that one-off gains or investment income provided slight buffering, though the core operational profitability faced significant pressure.

1.2 Third Quarter Highlights (Jul–Sep 2025): Sequential Turnaround

Despite the weak year-on-year comparison, the third quarter demonstrated a robust sequential recovery, signaling potential stabilization in operations.
* Q3 Net Profit: RMB 192 million.
* YoY Change: -41.79% (reflecting the high base and continued sector weakness compared to 2024).
* QoQ Change: +102.74% (a more than doubling of profits from Q2 2025).

This dramatic quarter-on-quarter improvement suggests that the Company has successfully navigated the trough of the current cycle, potentially through cost optimization, product mix adjustments, or the initial contribution from higher-margin electronic material businesses.

1.3 Profitability Metrics: Margin Dynamics

An analysis of the margin structure reveals a complex picture where gross margins faced pressure, but net margins improved sequentially due to expense control and other operational efficiencies.

• Gross Margin Pressure: The Q3 gross margin of 8.89% represents a sequential decline of 2.47 percentage points. This compression is likely driven by continued pricing pressures in the PV film segment and potentially higher raw material costs or lower capacity utilization rates in legacy lines. The YTD gross margin of 11.09% is significantly lower than the 15.56% recorded in the same period last year, underscoring the structural shift in the PV supply chain economics.
• Net Margin Resilience: Conversely, the net margin improved sequentially by 2.76 percentage points to 4.80%. This divergence between gross and net margin trends indicates effective management of operating expenses (SG&A) and financial costs. Notably, financial expenses turned negative (indicating net interest income or forex gains) in the first nine months, contributing positively to the bottom line.

2. Strategic Pivot: The PCB & Photosensitive Dry Film Opportunity

While the PV business faces cyclical headwinds, Foster’s strategic expansion into electronic materials, specifically photosensitive dry films, represents a critical second growth curve. This segment is poised to benefit from the macro-economic trend of semiconductor and PCB supply chain localization in China.

2.1 Market Position: Domestic Leader

As of June 2025, Foster possesses a designed production capacity of 316 million square meters for photosensitive dry films. This scale establishes the Company as the undisputed leader in the domestic market for this specialized material. Photosensitive dry film is a key consumable in the PCB manufacturing process, used for creating circuit patterns via photolithography. Historically, this market was dominated by Japanese and American suppliers (e.g., DuPont, Hitachi Chemical). Foster’s emergence as a viable, high-volume domestic alternative aligns with national security and supply chain resilience initiatives.

2.2 Customer Penetration and Validation

The Company has successfully penetrated the supply chains of industry-leading PCB manufacturers. Key clients include:
* Shennan Circuits
* Pengding Holdings (Avary Holding)
* Dongshan Precision
* Wus Printed Circuit (Kunshan)
* Kinwong Electronic
* Jingwang Electronics
* Shengyi Electronics
* Nanya Electronics
* Chaoying Electronics

Securing these tier-1 clients is a significant validation of product quality and reliability. In the PCB industry, supplier qualification is rigorous and time-consuming; once approved, switching costs are high, leading to sticky customer relationships.

2.3 Product Evolution: From Standard PCB to Advanced Packaging

Foster is not merely competing in the commoditized standard PCB segment. The Company is actively expanding its product portfolio to address high-end demands, specifically:
* AI Servers: The boom in artificial intelligence infrastructure requires high-layer-count, high-density interconnect (HDI) PCBs and advanced substrates. These applications demand higher-performance photosensitive materials with finer resolution and better thermal stability.
* Packaging Substrates: The Company is extending its technology into the packaging substrate domain, a critical component in advanced semiconductor packaging (e.g., Flip-Chip, SiP). This move elevates Foster from a PCB material supplier to a semiconductor-adjacent material provider, potentially commanding higher margins and reducing cyclicality associated with consumer electronics.

2.4 Growth Trajectory: Volume and Price Expansion

The investment thesis for this segment rests on two pillars:
1. Import Substitution: As Chinese PCB makers increase their share of the global market, they are incentivized to localize upstream materials to reduce lead times and geopolitical risks. Foster is the primary beneficiary of this shift.
2. Share of Wallet Increase: Currently, Foster’s supply share among these global head clients is growing. As trust builds and capacity expands, the Company is expected to capture a larger portion of these clients' total procurement budgets.

We anticipate that this segment will transition into a phase of "volume and profit growth" (quantity and margin expansion). As the mix shifts towards higher-value AI and packaging substrate products, the average selling price (ASP) and gross margins for this division should improve, offsetting the margin compression seen in the PV business.

3. Valuation and Earnings Forecast Revision

In light of the Q3 results and the revised outlook for both the PV and electronic materials segments, we have updated our financial model.

3.1 Revised Earnings Per Share (EPS) Forecasts

• 2025 Downgrade: The significant downward revision for 2025 reflects the weaker-than-expected performance in the first three quarters and the persistent pressure on PV film margins. The sequential recovery in Q3 was not sufficient to offset the H1 shortfall entirely.
• 2026 Moderate Downgrade: The 2026 estimate was also lowered, acknowledging a slower recovery trajectory for the PV sector than previously anticipated. However, the magnitude of the cut is smaller, suggesting confidence in the stabilization of the core business.
• 2027 Upgrade: The slight upward revision for 2027 underscores our conviction in the long-term growth drivers of the PCB/Photosensitive film business. By 2027, we expect the electronic materials segment to contribute meaningfully to overall profits, driving a stronger earnings rebound.

3.2 Valuation Context

At the current market price of RMB 15.70, the stock appears expensive on a trailing and near-term forward basis (39.8x 2025E P/E). However, this multiple compresses rapidly to 21.2x in 2026 and 15.8x in 2027.
* Historical Context: Foster has historically traded at premium valuations due to its dominant market share in PV films. The current premium is justified if investors view the Company as transitioning from a pure-play PV material supplier to a diversified electronic materials platform.
* Peer Comparison: While specific peer multiples are not detailed in the source, a 15-20x P/E for a mature chemical/materials company with high-tech exposure (AI/semiconductor) is generally considered reasonable in the A-share market. The 2027E multiple of 15.8x suggests the stock may be undervalued relative to its long-term growth potential, assuming the execution of the PCB strategy succeeds.

Risks / Headwinds

Investors should carefully consider the following risks, which could materially impact the Company’s financial performance and stock price trajectory.

1. Intensifying Price Competition

• PV Sector: The photovoltaic industry is characterized by overcapacity and fierce price wars. If competitors in the encapsulation film space engage in aggressive pricing to maintain market share, Foster’s gross margins could remain under pressure for longer than anticipated.
• Electronic Materials: As Foster enters the photosensitive dry film market, incumbent international players may lower prices to defend their turf, while new domestic entrants may emerge, eroding the potential margin premium of this new business line.

2. Raw Material Cost Volatility

• The production of both PV films and photosensitive dry films relies on specific petrochemical derivatives and specialized resins. Fluctuations in crude oil prices or supply chain disruptions for key monomers could lead to unexpected cost increases. If the Company cannot pass these costs onto customers due to competitive pressures, profitability will suffer.

3. Execution Risk in Capacity Expansion and New Business

• Capacity Utilization: The Company has significant design capacity (316 million sqm for dry film). Failure to achieve high utilization rates due to slower-than-expected customer adoption or technical qualification delays would result in high fixed costs dragging down earnings.
• Technological Hurdles: Moving into AI server packaging substrates requires extremely high technical precision. Any failure in product yield or performance consistency could damage reputation with key clients like Shennan Circuits or Pengding, delaying revenue recognition from this high-value segment.

4. Photovoltaic Policy Uncertainty

• The global PV market is heavily influenced by government subsidies, trade policies, and energy transition targets. Any adverse changes in solar support policies in key markets (China, Europe, US) could dampen downstream demand for solar modules, indirectly reducing demand for encapsulation films.

5. International Trade and Geopolitical Risks

• Tariffs and Trade Barriers: As a major exporter of PV materials, Foster is exposed to trade remedies such as anti-dumping duties or countervailing duties imposed by the US, EU, or other regions.
• Supply Chain Decoupling: Geopolitical tensions could lead to restrictions on technology transfers or sourcing requirements that disadvantage Chinese suppliers in the global PCB and semiconductor supply chains. Conversely, if global PCB makers decouple from Chinese supply chains, Foster’s export potential for its electronic materials could be limited.

Rating / Sector Outlook

Sector Outlook: Outperform

The broader Power Equipment and Photovoltaic Materials sector is currently navigating a cyclical bottom. While short-term fundamentals remain challenged due to overcapacity, the long-term secular trend towards renewable energy remains intact. Furthermore, the intersection of PV technology with electronic materials (such as in BIPV or advanced module designs) creates synergies. We maintain a "Outperform" rating for the sector, favoring companies with diversified revenue streams and technological moats that can withstand cyclical downturns.

Company Rating: Outperform (Maintained)

We maintain our Outperform rating on Foster (603806.SH).
* Rationale: Despite the near-term earnings downgrade, the Company’s dominant position in the PV film market provides a stable cash flow base. More importantly, the successful penetration of the photosensitive dry film market offers a credible and high-growth second engine. The sequential improvement in Q3 2025 profits suggests the worst of the cyclical downturn may be passing. The valuation, while elevated for 2025, becomes attractive in 2026-2027 as the new business scales.

Investment View

1. Core Investment Logic: Diversification as a Valuation Re-rating Driver

The primary investment thesis for Foster has shifted from a pure beta play on solar installations to an alpha story driven by material science diversification.

• From Cyclical to Structural Growth: Traditional PV film businesses are highly cyclical, tied directly to solar installation volumes and module prices. By establishing a foothold in the PCB/electronic materials sector, Foster is decoupling a portion of its revenue from the solar cycle. The PCB market, particularly the high-end segment driven by AI and data centers, exhibits different cyclicality and higher barriers to entry.
• Import Substitution Alpha: The "localization" narrative is powerful in China’s capital markets. Foster is one of the few domestic companies capable of replacing Japanese/American suppliers in high-end photosensitive films. This strategic importance may attract long-term institutional capital willing to pay a premium for supply chain security assets.

2. Financial Health and Balance Sheet Strength

A review of the balance sheet indicates that Foster is well-positioned to weather the current downturn and fund its expansion.

• Strong Liquidity: As of the end of 2024, the Company held RMB 5.0 billion in monetary funds. Even with projected capex, liquidity remains robust.
• Low Leverage: The asset-liability ratio is low (approx. 20-30% range based on recent data), and the net debt-to-equity ratio is negative (indicating net cash position). This conservative capital structure provides flexibility to invest in R&D and capacity expansion without excessive financial risk.
• Cash Flow Management: Operating cash flow has been volatile but positive in recent annual periods. The focus on working capital management (evidenced by the reduction in inventory and receivables in certain periods) supports sustainability.

3. Operational Efficiency and Cost Control

The sequential improvement in net margin in Q3 2025, despite gross margin pressure, highlights management’s ability to control operating expenses.
* Expense Ratios: Sales, administrative, and R&D expense ratios have remained relatively stable or improved. The R&D expense ratio stands at around 3.5%, indicating a continued commitment to innovation even during downturns. This is crucial for maintaining competitiveness in the high-tech electronic materials segment.
* Financial Income: The negative financial expenses (net income) suggest effective treasury management, possibly benefiting from interest income on cash reserves or favorable foreign exchange movements, given the Company’s export exposure.

4. Future Catalysts to Monitor

Investors should track the following key indicators to validate the investment thesis:

1. Quarterly Gross Margin Trend: Watch for stabilization or expansion in gross margins beyond Q3 2025. A sustained recovery would signal pricing power restoration in PV films or margin accretion from the dry film business.
2. Dry Film Revenue Contribution: Disclosure of the specific revenue and profit contribution from the photosensitive dry film segment. As this grows as a percentage of total revenue, the Company’s valuation multiple should expand.
3. Client Wins in AI/Packaging: Announcements of new qualifications or increased share of supply with key AI server PCB manufacturers or semiconductor packaging firms.
4. PV Industry Inventory Levels: A normalization of inventory levels in the downstream module sector would signal a return to healthy demand dynamics for encapsulation films.

5. Conclusion

Foster stands at a pivotal juncture. While the legacy PV business faces a challenging environment, the Company is successfully leveraging its manufacturing expertise and customer relationships to break into the high-value electronic materials sector. The Q3 2025 results, showing a strong sequential profit recovery, provide early evidence that this transition is gaining traction.

For institutional investors, Foster offers a compelling risk-reward profile:
* Downside Protection: Provided by its market-leading position in PV films and strong balance sheet.
* Upside Potential: Driven by the successful scaling of the photosensitive dry film business and the broader trend of semiconductor/PCB localization in China.

We recommend accumulating positions on weakness, with a medium-to-long-term horizon (12-24 months) to allow the new business narrative to fully reflect in earnings and valuation multiples. The adjusted forecasts for 2025-2027 present a realistic pathway to earnings recovery, with 2027 offering a particularly attractive entry point in terms of valuation (15.8x P/E) for a company with dual-engine growth prospects.

Appendix: Detailed Financial Analysis

A. Income Statement Deep Dive (2023-2027E)

Analysis:
* Revenue Trajectory: The projected dip in 2025 (-2.7%) reflects the current PV downturn. The robust recovery in 2026 (+26.4%) and 2027 (+17.6%) assumes both a PV market rebound and significant contribution from the electronic materials segment.
* Margin Recovery: Gross margins are expected to bottom out in 2025 at 11.5% before recovering to 15.8% by 2027. This recovery is predicated on the higher-margin mix of electronic materials and improved pricing power in PV films as capacity clears.
* Operating Leverage: As revenue grows in 2026-2027, operating margins are projected to expand from 6.3% to 10.6%, demonstrating operating leverage. Fixed costs (depreciation, admin) will be spread over a larger revenue base.

B. Balance Sheet Strength (2023-2027E)

Analysis:
* Asset Quality: The Company maintains a high proportion of current assets, ensuring liquidity. The slight decrease in total assets in 2025E reflects efficient working capital management.
* Liability Management: The projected decrease in total liabilities in 2025E suggests debt repayment or reduction in payables, further strengthening the balance sheet. The low debt-to-asset ratio (<0.25 throughout the forecast period) indicates minimal financial distress risk.
* Equity Growth: Retained earnings will drive steady growth in shareholders' equity, supporting future dividend potential and internal funding for capex.

C. Cash Flow Analysis (2023-2027E)

Analysis:
* Operating Cash Flow (OCF): The volatility in OCF (negative in 2023, strong in 2024, moderate in 2025-2026) reflects changes in working capital cycles. The projected recovery in 2027 (RMB 1.8 billion) aligns with improved profitability.
* Capital Expenditure: Investing cash flows remain negative but manageable (approx. RMB 335-435 million annually), indicating disciplined capex. This is sufficient to maintain and slightly expand capacity without over-leveraging.
* Financing Activities: The Company has been a net repayer of debt/dividends (negative financing CF) in most years, consistent with its low-leverage strategy. The positive financing CF in 2026E may indicate minor borrowing to support working capital during the growth phase.

D. Key Financial Ratios & Valuation Metrics

Analysis:
* Return Metrics: ROE and ROIC are expected to bottom in 2025 (6.1% and 4.5% respectively) before recovering to double digits in 2026-2027. This V-shaped recovery in returns on capital supports the case for a valuation re-rating.
* Valuation Multiples: The high 2025E P/E (39.8x) and EV/EBITDA (33.6x) are artifacts of depressed earnings. Investors should focus on the 2026-2027 multiples. A 2027E P/E of 15.8x and EV/EBITDA of 12.4x are reasonable for a company with >15% earnings growth visibility and a strategic pivot to high-tech materials.
* Dividend: The dividend yield is modest. The Company appears to prioritize reinvestment for growth (PCB capacity) over high payouts, which is appropriate for its current growth stage.

Strategic Implications for Institutional Investors

1. Portfolio Allocation Strategy

• Core Holding vs. Satellite: Given the near-term volatility in the PV sector, Foster may initially serve as a "satellite" holding in a broader renewable energy or materials portfolio. However, as the PCB business gains traction and earnings visibility improves in 2026, it could graduate to a "core" holding for investors seeking exposure to China’s semiconductor supply chain localization.
• Timing: The current price reflects much of the 2025 downside. Accumulation during periods of market pessimism regarding the PV sector could offer an attractive entry point for the 2026-2027 recovery story.

2. Monitoring the "AI Narrative" Connection

• Foster’s connection to AI servers via PCB materials is a potent narrative driver. Institutional investors should closely monitor any announcements linking Foster’s products to major AI chipmakers or server OEMs. Positive verification here could trigger a multiple expansion independent of immediate earnings, as the market assigns higher valuations to AI-supply-chain participants.

3. Risk Hedging

• Investors concerned about PV policy risks can view Foster’s electronic materials business as a natural hedge. While PV demand may fluctuate with policy, the demand for advanced PCBs is driven by secular tech trends (AI, 5G, IoT), providing diversification benefits within a single equity position.

4. Comparative Advantage

• Compared to pure-play PV film competitors, Foster’s diversification offers superior risk-adjusted returns potential.
• Compared to pure-play electronic material firms, Foster’s established scale and cash flow from the PV business provide greater financial stability and R&D funding capability.

Final Remarks

First Solar Materials (603806.SH) is executing a difficult but necessary transformation. The Q3 2025 results, while showing year-on-year declines, reveal a company that is stabilizing its core operations and successfully planting the seeds for future growth in the electronic materials sector. The sequential doubling of Q3 net profit is a encouraging signal that the operational turnaround is underway.

The key to unlocking shareholder value lies in the successful scaling of the photosensitive dry film business. With a design capacity of 316 million square meters and a roster of tier-1 clients, Foster is well-positioned to capture the wave of PCB localization. The projected earnings recovery in 2026 and 2027, coupled with a compressing valuation multiple, presents a compelling investment opportunity for those with a medium-term horizon.

We reiterate our OUTPERFORM rating, advising investors to look through the near-term PV cyclical noise and focus on the structural growth potential of Foster’s emerging electronic materials franchise.

Disclaimer:
This report is prepared by BOC International (China) Co., Ltd. for institutional clients only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities. The information contained herein is believed to be reliable but no representation or warranty, express or implied, is made as to its accuracy or completeness. The opinions expressed are those of the analysts as of the date of the report and are subject to change without notice. Past performance is not indicative of future results. Investors should consult their own financial advisors before making any investment decisions.