Equity Research: First Solar Materials (603806.SH)

3Q25 Earnings Review: Resilient Market Share in Encapsulants; Electronic Materials Drive Structural Growth

Date: October 31, 2025
Rating: BUY (Maintained)
Current Price: CNY 15.61
Target Price: Implied Upside based on 2026E Valuation
Analysts: Zeng Donghong, Guo Yanan, Xu Chengrong
Source: Soochow Securities Institute

Executive Summary

First Solar Materials Co., Ltd. ("First Solar" or the "Company"), the global leader in photovoltaic (PV) encapsulation films, released its third-quarter 2025 financial results on October 31, 2025. The report reflects a period of transitional pressure characterized by intense industry competition and raw material price volatility, yet underscores the Company’s enduring competitive moat through stable market share gains and successful diversification into high-value electronic materials.

Key Financial Highlights for 9M25 and 3Q25:
* Revenue Pressure: For the first nine months of 2025 (9M25), total revenue reached CNY 11.79 billion, representing a year-over-year (YoY) decline of 22.3%. In the third quarter alone (3Q25), revenue stood at CNY 3.83 billion, down 13.2% YoY and 11.6% quarter-over-quarter (QoQ). This contraction is primarily attributed to lower average selling prices (ASPs) in the PV supply chain and temporary demand fluctuations.
* Profitability Compression: Net profit attributable to shareholders (Net Profit) for 9M25 was CNY 690 million, a significant YoY decline of 45.3%. Deducted non-recurring net profit fell 48.3% YoY to CNY 630 million. Gross margin compressed to 11.1% in 9M25 (down 4.5 percentage points YoY), while the net profit margin settled at 5.8% (down 2.5 percentage points YoY).
* Sequential Recovery Signals: Despite the YoY declines, 3Q25 demonstrated clear sequential improvement. Q3 Net Profit was CNY 190 million, surging 102.7% QoQ. Deducted non-recurring net profit jumped 154.5% QoQ to CNY 180 million. The net profit margin improved by 2.8 percentage points QoQ to 5.0%, signaling that cost control measures and operational efficiencies are beginning to offset top-line pressures.
* Operational Resilience: The Company maintained its dominant position in the PV encapsulant market, with shipments remaining robust. Crucially, the electronic materials segment, specifically photosensitive dry film, continued its growth trajectory, benefiting from the AI and consumer electronics boom.

Investment Thesis & Rating Maintenance:
We maintain our BUY rating on First Solar Materials. While we have revised our earnings forecasts downward for 2025-2027 to reflect the current hyper-competitive landscape and short-term margin compression, the long-term investment logic remains intact. The Company’s leadership in PV encapsulants (global market share >50%) provides a stable cash flow foundation, while its overseas capacity expansion (Thailand/Vietnam) mitigates geopolitical trade risks. Furthermore, the second growth curve in electronic materials is gaining momentum, with product mix optimization driving higher margins.

The recent price hikes in encapsulant films (three rounds in September-October 2025) driven by upstream particle cost pass-throughs are expected to improve profitability in 4Q25 and beyond. At current valuation levels, the stock offers an attractive entry point for long-term investors seeking exposure to the renewable energy infrastructure backbone and advanced electronic materials sectors.

Key Takeaways

1. Core Business Analysis: PV Encapsulation Films

Market Share Stability Amidst Volume Fluctuations
The PV encapsulation film business remains the cornerstone of First Solar’s operations. In 9M25, the Company shipped approximately 2.109 billion square meters of encapsulant film, representing a slight YoY increase. This volume resilience is notable given the broader slowdown in global PV module installations and the destocking cycles experienced by downstream clients.

In 3Q25 specifically, shipments amounted to 722 million square meters, a modest QoQ decline of approximately 5%. While the volume dip contributed to the revenue contraction, the more critical metric is profitability per unit. We estimate the net profit per square meter to be in the range of CNY 0.20 – 0.30. Although this represents a compression from historical highs, it significantly outperforms industry peers, highlighting First Solar’s superior cost structure, scale advantages, and technological premium.

Pricing Dynamics and Margin Outlook
The gross margin for the encapsulant segment faced headwinds in 3Q25, recorded at 8.9% (down 3.9 ppt YoY and 2.5 ppt QoQ). This compression was driven by two main factors:
1. Lag in Price Pass-Through: Initially, the rise in raw material costs (specifically EVA/POE particles) was not fully passed on to customers due to intense competition among film manufacturers.
2. Product Mix Shift: A temporary shift towards standard products rather than high-margin premium grades during the destocking phase.

However, the outlook for 4Q25 is markedly brighter. In September and October 2025, the Company successfully implemented three consecutive price increases for its encapsulant films. These hikes were necessitated by rising particle costs but were accepted by the market due to First Solar’s dominant supply position and the urgent need for reliable supply chains among tier-1 module makers. We anticipate that these price adjustments will fully reflect in the 4Q25 financials, leading to a tangible improvement in both gross and net margins.

Global Capacity Expansion: The Overseas Advantage
A pivotal strategic development is the ramp-up of overseas production capabilities. The Company’s Phase II capacity in Thailand was released in May 2025. Combined with existing facilities in Thailand and Vietnam, the total overseas capacity has reached 600 million square meters, entering full production status in 3Q25.

• Strategic Importance: This overseas footprint is crucial for serving international clients who are increasingly demanding supply chain diversification away from China-centric manufacturing due to geopolitical tensions and trade barriers (e.g., U.S. tariffs, EU investigations).
• Forecast: For full-year 2025, we project total encapsulant shipments to approach 3 billion square meters, representing a YoY growth of over 10%. More importantly, the proportion of overseas shipments is expected to rise to over 20% of total volume.
• Market Dominance: First Solar continues to hold a global market share of over 50% in PV encapsulants. In the overseas market specifically, its share exceeds 60%, reinforcing its status as the indispensable partner for global module giants like JinkoSolar, Longi, and Trina Solar.

2. Second Growth Curve: Electronic Materials (Photosensitive Dry Film)

Robust Growth Trajectory
While the PV sector faces cyclical headwinds, the electronic materials segment is emerging as a powerful growth engine. In 9M25, the Company shipped 140 million square meters of photosensitive dry film. In 3Q25 alone, shipments reached 50 million square meters, holding flat QoQ but demonstrating strong YoY growth.

Photosensitive dry film is a critical material in the Printed Circuit Board (PCB) manufacturing process, used for imaging circuit patterns. The sustained growth in this segment is decoupled from the PV cycle and is instead driven by the secular trends in consumer electronics and artificial intelligence infrastructure.

Structural Optimization: AI and High-End PCBs
The key driver for margin expansion in this segment is the shifting product mix. The global surge in demand for AI computing power and high-performance consumer electronics (smartphones, wearables) has increased the requirement for High-Density Interconnect (HDI) PCBs and IC substrates. These advanced PCBs require higher-specification photosensitive dry films with finer resolution and better adhesion properties.

• Premiumization: First Solar has been successfully penetrating the mid-to-high-end market segment. As the proportion of these premium products increases, the Average Selling Price (ASP) and gross margin of the electronic materials division are expected to rise progressively.
• Import Substitution: Historically, this market was dominated by Japanese and American firms (e.g., Hitachi, DuPont). First Solar’s ability to offer comparable quality at a competitive price point is accelerating import substitution in China, providing a substantial Total Addressable Market (TAM) expansion opportunity.

We view this segment not just as a revenue contributor, but as a valuation re-rating catalyst. As the revenue share of electronic materials grows, the market may begin to value First Solar less as a commoditized chemical manufacturer and more as a specialized electronic materials tech firm, potentially commanding a higher P/E multiple.

3. Financial Health: Cost Control and Cash Flow Management

Expense Discipline
One of the most impressive aspects of the 3Q25 report is the Company’s rigorous cost control.
* Period Expenses: For 9M25, total period expenses (selling, administrative, R&D, and financial) amounted to CNY 630 million, a YoY decrease of 29.1%. The expense ratio improved to 5.4%, down 0.5 percentage points YoY.
* Q3 Specifics: In 3Q25, period expenses were CNY 210 million, down 43.5% YoY and 8.6% QoQ. The expense ratio for the quarter was 5.4%, a significant improvement of 2.9 percentage points YoY. This reduction was achieved through optimized management structures, reduced sales commissions due to lower volumes, and efficient R&D spending allocation.

Cash Flow Volatility and Recovery
Operating cash flow showed significant volatility in 9M25, totaling only CNY 10 million, a stark 99.5% YoY decline. This was largely due to working capital movements, including increased inventory buildup and changes in receivables/payables timing. However, the trend reversed sharply in 3Q25:
* Q3 Operating Cash Flow: Generated CNY 900 million, a massive QoQ increase of 299.2%. Although this was still down 52.1% YoY, the sequential recovery indicates improved collection efficiency and better management of supplier payments.
* Implication: The strong Q3 cash generation suggests that the working capital drag seen in H1 2025 is temporary and that the core business continues to generate robust cash, supporting future capex and dividend payments.

Capital Expenditure and Inventory
* Capex: 9M25 capital expenditure was CNY 310 million (down 46.9% YoY), reflecting a more cautious approach to expansion amidst uncertain demand. However, Q3 capex rose to CNY 130 million (up 13.2% YoY and 39.6% QoQ), indicating renewed investment in the Thailand/Vietnam facilities and electronic materials production lines.
* Inventory: As of the end of 3Q25, inventory stood at CNY 1.96 billion, a modest 5.1% increase from the beginning of the year. Given the revenue decline, this absolute increase suggests some inventory accumulation, but the ratio remains manageable. The stability in inventory levels, combined with the recent price hikes, reduces the risk of significant inventory write-downs in 4Q25.

4. Revised Financial Forecasts

Based on the 3Q25 results and the evolving industry landscape, we have adjusted our financial models. The primary adjustments reflect lower-than-expected margins in H1 2025 and a conservative assumption on the speed of margin recovery in 2025, while maintaining confidence in the 2026-2027 rebound.

Note: Previous estimates for 2025-2027 Net Profit were CNY 1.6B / 2.2B / 3.0B. The downward revision for 2025 reflects the prolonged price war in the PV sector. However, the projected 58% growth in 2026 assumes a normalization of margins and full contribution from overseas high-margin sales.

Valuation Context:
At the current price of CNY 15.61, the stock trades at:
* 40.7x 2025E P/E
* 25.7x 2026E P/E
* 18.9x 2027E P/E

While the 2025 P/E appears elevated, this is a function of depressed earnings (the denominator effect). Looking forward to 2026, a P/E of ~26x is reasonable for a market leader with dual growth engines (PV + Electronics) and a strong balance sheet. The P/B ratio of 2.56x also reflects the high quality of assets and strong ROE potential once margins recover.

Risks / Headwinds

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

1. Intensifying Industry Competition

The PV encapsulant film industry has seen an influx of new capacity from competitors seeking to capitalize on the previous years' high margins. This has led to a price war, particularly in the standard EVA film segment.
* Risk: If competitors engage in aggressive below-cost pricing to gain market share, First Solar may be forced to further cut prices, delaying the anticipated margin recovery in 4Q25 and 2026.
* Mitigation: First Solar’s scale, vertical integration, and brand loyalty among tier-1 clients provide a defensive moat. However, margin pressure may persist longer than expected.

2. Raw Material Price Volatility

The primary raw materials for encapsulant films are EVA (Ethylene-Vinyl Acetate) and POE (Polyolefin Elastomer) resins, which are linked to crude oil and natural gas prices.
* Risk: A sharp spike in resin prices without a corresponding ability to pass these costs to customers would severely compress gross margins. Conversely, a rapid drop in resin prices could lead to inventory write-downs if the Company holds high-cost stock.
* Current Status: The recent price hikes in Sep-Oct 2025 were a response to rising particle costs. The risk lies in the lag between cost increases and price adjustments.

3. Geopolitical and Trade Policy Uncertainty

First Solar’s overseas expansion (Thailand/Vietnam) is a strategic hedge against trade barriers. However, the geopolitical landscape is dynamic.
* Risk: The U.S. or EU could impose new tariffs or restrictions on solar components originating from Southeast Asia, citing circumvention of Chinese tariffs. Changes in trade policy could disrupt the supply chain and reduce the profitability of overseas operations.
* Mitigation: The Company’s diversified global footprint and strong relationships with international module makers help mitigate single-market dependency.

4. Downstream PV Demand Slowdown

The growth of the PV industry is dependent on government subsidies, interest rates, and grid infrastructure capabilities.
* Risk: If global PV installation growth slows down significantly due to macroeconomic recession, high interest rates, or grid congestion issues, demand for encapsulant films will stagnate. This would lead to overcapacity and further price erosion.
* Outlook: Long-term global energy transition trends remain positive, but short-term cyclical dips are possible.

5. Electronic Materials Execution Risk

While the photosensitive dry film segment is growing, it operates in a highly technical market dominated by established Japanese and Western players.
* Risk: Failure to meet the stringent quality requirements of high-end PCB manufacturers or slower-than-expected customer certification processes could hinder the growth of this segment. Additionally, rapid technological changes in PCB manufacturing (e.g., shift to substrate-like PCBs) require continuous R&D investment.

Rating / Sector Outlook

Sector Outlook: Photovoltaic Materials

The PV materials sector is currently in a "clearing" phase. After years of explosive growth, the industry is grappling with overcapacity and margin compression. However, this phase is essential for the long-term health of the sector.
* Consolidation Trend: We expect smaller, less efficient players to exit the market or operate at losses, leading to eventual supply-demand rebalancing.
* Leader Advantage: In such environments, market leaders like First Solar benefit from "flight to quality." Customers prioritize supply security and product consistency over marginal price differences, especially for large-scale utility projects.
* Technological Shift: The industry is transitioning from standard EVA to POE and EPE (EVA-POE-EVA) films, which offer better durability for bifacial modules and N-type cells. First Solar is well-positioned in this premium segment, which commands higher margins.

Sector Outlook: Electronic Materials

The electronic materials sector, particularly for PCBs, is experiencing a structural upcycle driven by:
* AI Infrastructure: The build-out of AI data centers requires high-layer-count, high-frequency PCBs, driving demand for advanced dry films.
* Consumer Electronics Refresh: The anticipated replacement cycle for smartphones and PCs, coupled with the integration of AI features, supports steady demand.
* Domestic Substitution: In China, the push for supply chain autonomy favors domestic leaders like First Solar, providing a tailwind for market share gains against foreign incumbents.

Investment Rating: BUY (Maintained)

We reaffirm our BUY rating. The current stock price largely reflects the near-term earnings trough. Our analysis suggests that the worst of the margin compression is behind us, evidenced by the sequential profit recovery in 3Q25 and the recent price hikes.

• Short-Term Catalyst: 4Q25 earnings beat driven by price pass-through.
• Medium-Term Catalyst: Full utilization of Thailand/Vietnam capacity and higher contribution from high-margin overseas sales in 2026.
• Long-Term Catalyst: Successful scaling of the electronic materials business, leading to a diversified revenue base and potential valuation re-rating.

For institutional investors, First Solar offers a compelling risk-reward profile. It combines the defensive characteristics of a market-leading utility supplier with the offensive potential of a growing electronic materials tech player.

Investment View

1. The "Moat" Remains Wide

First Solar’s dominance in the PV encapsulant market is not merely a function of size, but of integrated competitiveness.
* Cost Leadership: The Company’s proprietary equipment design and large-scale procurement power allow it to maintain positive unit economics even when competitors are bleeding cash. The estimated net profit of CNY 0.2-0.3 per square meter in 3Q25, while lower than peak levels, is still a testament to this efficiency.
* Customer Stickiness: Module manufacturers are reluctant to switch suppliers for critical materials like encapsulants due to the high cost of qualification and the risk of delamination failures. First Solar’s long track record creates high switching costs for customers.

2. The Overseas Arbitrage

The strategic pivot to overseas production is a key differentiator.
* Margin Premium: Overseas sales typically command higher prices and margins due to the added value of supply chain security and tariff avoidance for clients.
* Volume Growth: With overseas capacity reaching 600 million sqm and running at full load, the mix shift towards overseas sales will structurally lift the Company’s blended gross margin in 2026 and 2027. We project overseas shipment share to exceed 20% in 2025, with further upside in subsequent years.

3. Electronic Materials: The Hidden Gem

The market often undervalues First Solar’s electronic materials business, viewing it as a small adjunct to the PV empire. We believe this is a mispricing.
* High Barrier to Entry: Photosensitive dry film requires precise chemical formulation and coating technology. First Solar’s success in breaking the monopoly of Japanese firms demonstrates strong R&D capability.
* AI Tailwind: The correlation between AI server growth and high-end PCB demand is direct. As AI capex continues to surge globally, First Solar is uniquely positioned to capture this demand in the Chinese supply chain.
* Valuation Disconnect: Pure-play electronic material companies often trade at higher multiples (30x-40x P/E) than PV material companies (15x-20x P/E). As the electronic materials segment grows to become a more significant portion of profits, the conglomerate discount should narrow.

4. Financial Prudence and Shareholder Returns

Despite the earnings dip, the Company’s balance sheet remains robust.
* Low Leverage: The asset-liability ratio is a healthy ~20%, providing ample room for debt financing if needed for further expansion.
* Cash Generation: The strong Q3 operating cash flow (CNY 900 million) demonstrates the underlying cash-generating power of the business. This supports the Company’s ability to sustain dividends and fund R&D without excessive external financing.

5. Strategic Recommendation for Institutions

• Accumulate on Weakness: The current valuation offers a favorable entry point for long-term holders. The 2025 earnings dip is cyclical, not structural.
• Monitor 4Q25 Margins: Investors should closely watch the 4Q25 gross margin trajectory. A return to double-digit gross margins would confirm the success of the recent price hikes and validate our 2026 recovery thesis.
• Track Electronic Materials Mix: Keep an eye on the revenue contribution and margin profile of the electronic materials segment. Accelerating growth here could trigger a re-rating of the stock.

Detailed Financial Analysis & Model Assumptions

To provide greater transparency for institutional modeling, we detail the key assumptions underpinning our revised forecasts:

Revenue Assumptions:
* PV Encapsulants: We assume 2025 total shipments of ~3 billion sqm. For 2026-2027, we model conservative volume growth of 5-8% annually, aligned with global PV installation forecasts. ASPs are assumed to stabilize in 2026 after the 2025 correction.
* Electronic Materials: We model aggressive volume growth of 15-20% annually for photosensitive dry film, driven by AI/PCB demand. ASPs are assumed to increase slightly due to product mix premiumization.

Margin Assumptions:
* Gross Margin: We project a trough in 2025 (11.75% blended). For 2026, we forecast a recovery to 13.77%, driven by:
1. Full year impact of 4Q25 price hikes.
2. Higher proportion of overseas sales (higher margin).
3. Higher proportion of electronic materials (higher margin).
4. Economies of scale in the new Thailand/Vietnam plants.
* Operating Expenses: We assume operating leverage kicks in as revenue grows in 2026-2027, keeping the expense ratio stable or slightly declining despite increased R&D spend.

Balance Sheet & Cash Flow:
* Capex: We model sustained capex of ~CNY 900 million annually to support overseas expansion and electronic materials capacity.
* Working Capital: We assume a normalization of working capital cycles in 2026, leading to improved operating cash flow conversion.

Conclusion

First Solar Materials stands at a critical inflection point. The short-term pain of industry consolidation and margin compression is evident in the 3Q25 results. However, the Company’s strategic responses—price adjustments, overseas capacity ramp-up, and electronic materials diversification—are yielding early signs of success, particularly in the sequential profit recovery of Q3.

For institutional investors, the narrative is shifting from "cyclical downturn" to "structural recovery and diversification." The Company’s dominant market position, robust balance sheet, and promising second growth curve make it a resilient hold and a compelling buy for those with a 12-24 month investment horizon. We maintain our BUY rating, targeting a recovery in earnings power that will drive significant multiple expansion in 2026.

Appendix: Key Financial Tables

Income Statement Summary (CNY Million)

Balance Sheet Highlights (CNY Million)

Cash Flow Statement Summary (CNY Million)

Valuation Metrics

Disclaimer and Important Disclosures

This report is prepared by Soochow Securities Institute for institutional clients only. It is based on information believed to be reliable, but Soochow Securities does not guarantee its accuracy or completeness. The opinions expressed herein are subject to change without notice.

Analyst Certification: The analysts named in this report certify that they have accurately represented their personal, objective views about the subject company or companies and the underlying securities. The analysts' compensation is not directly or indirectly related to the specific recommendations or views expressed in this report.

Regulatory Disclosures: Soochow Securities and its affiliates may have positions in the securities mentioned in this report and may from time to time add to or dispose of any such securities. Soochow Securities may have investment banking relationships with the companies mentioned.

Risk Warning: The stock market involves risks. Investors should make independent judgments based on their own risk tolerance and investment objectives. Past performance is not indicative of future results.

Contact Information:
Soochow Securities Institute
No. 5 Xingyang Street, Suzhou Industrial Park, Suzhou, Jiangsu Province, 215021, China
Website: http://www.dwzq.com.cn

(End of Report)