Equity Research: Lianhong New Materials (003022.SZ)

Date: October 15, 2025
Rating: BUY (Maintained)
Current Price: CNY 21.44
Analysts: Yao Yao, Zhang Jiawen | Guojin Securities

Executive Summary

Lianhong New Materials (003022.SZ) has released its third-quarter financial report for 2025, delivering results that align with market expectations while demonstrating robust underlying profitability improvements. For the first nine months of 2025 (9M25), the company reported total revenue of CNY 4.57 billion, a year-over-year (YoY) decline of 8%, primarily driven by lower average selling prices (ASPs) for certain legacy products. However, net profit attributable to shareholders reached CNY 232 million, representing a significant YoY increase of 30%. This divergence between revenue contraction and profit expansion underscores the effectiveness of the company’s cost optimization strategies and the successful ramp-up of high-margin new materials.

In the third quarter alone (3Q25), revenue stabilized at CNY 1.66 billion (flat YoY, +21% QoQ), while net profit surged 91% YoY to CNY 72 million. Although quarterly profit dipped 20% sequentially due to temporary EVA price weakness in July-August, the subsequent price recovery in September signals a positive trajectory for 4Q25 margins. The core investment thesis remains intact: Lianhong is successfully transitioning from a cyclical commodity producer to a diversified platform for advanced new materials.

Key drivers supporting our BUY rating include:
1. Product Mix Optimization: Significant contribution from high-value-added products such as Ethylene Carbonate (EC), Ultra-High Molecular Weight Polyethylene (UHMWPE), electronic specialty gases, and Polylactic Acid (PLA).
2. Capacity Expansion Milestones: Critical projects, including the New Energy & Biodegradable Materials Integrated Project and the 4,000-ton/year Lithium Battery Additive (VC) project, have completed mechanical completion. The 100,000-ton/year Polyolefin Elastomer (POE) project is on track for completion by year-end 2025.
3. Strategic Forward-Looking Layout: Aggressive entry into next-generation battery technologies (solid-state/sodium-ion via partnerships with Weilan New Energy and Wenzhou Nashu), semiconductor advanced packaging materials (BCB resin via investment in Dagao Te), and high-performance polymers (PEEK/XDI).

We maintain our earnings forecasts for 2025-2027, projecting net profits of CNY 334 million, CNY 599 million, and CNY 771 million, respectively. This implies YoY growth rates of 42%, 80%, and 29%. Given the company’s expanding moat in new materials and the anticipated volume release from new capacities, we reiterate our BUY rating.

Key Takeaways

1. Financial Performance Analysis: Profitability Resilience Amidst Revenue Headwinds

1.1 9M25 Results: Decoupling of Revenue and Profit Trends

The financial data for the first three quarters of 2025 reveals a structural shift in Lianhong’s earnings quality. While top-line revenue contracted by 8% YoY to CNY 4.57 billion, bottom-line performance improved markedly, with net profit rising 30% YoY to CNY 232 million.

• Revenue Decline Drivers: The 8% drop in revenue is largely attributable to the deflationary environment in certain bulk chemical product prices compared to the same period in 2024. This is an industry-wide phenomenon rather than a company-specific loss of market share.
• Profit Growth Drivers: The 30% increase in net profit is driven by two primary factors:
  1. Cost Side: A favorable decline in raw material costs, which expanded gross margins despite lower output prices.
  2. Product Mix: The gradual volume release and profit contribution from new high-margin products, specifically EC, UHMWPE, electronic specialty gases, and PLA. These products carry significantly higher unit economics than traditional EVA or polyolefin commodities.

1.2 3Q25 Deep Dive: Sequential Volatility and Cyclical Recovery

Third-quarter performance highlights the company’s sensitivity to short-term price fluctuations in its core EVA business, but also its resilience.

• Revenue: CNY 1.66 billion. Flat YoY indicates stable demand volumes. The 21% Quarter-on-Quarter (QoQ) increase reflects seasonal demand pickup and higher operating rates.
• Net Profit: CNY 72 million.
  • YoY (+91%): Demonstrates strong operational leverage and the cumulative effect of new product contributions.
  • QoQ (-20%): The sequential decline was primarily caused by depressed EVA prices during July and August. However, management notes that EVA prices began trending upward in September. Given the lag effect of inventory valuation and sales contracts, the full benefit of this price recovery is expected to materialize in 4Q25.
• Gross Margin: Reported at 19.2% in 3Q25, a slight decrease of 1.4 percentage points (PCT) QoQ. This compression aligns with the July-August EVA price trough. As EVA prices recover in September and October, we anticipate margin expansion in the coming quarter.

*Note: 9M24 and 3Q24 figures derived based on reported YoY growth rates for analytical context.

2. Operational Progress: Capacity Expansion on Track

Lianhong’s growth strategy is heavily reliant on its capital expenditure cycle, transitioning from construction to commercial production. The progress in 3Q25 confirms that execution risks are being managed effectively.

2.1 Completed Mechanical Completion (Mid-Handover)

Two major projects achieved "mechanical completion" (Zhongjiao) in the third quarter, marking the transition from construction to commissioning and startup phases:

1. New Energy Materials and Biodegradable Materials Integrated Project: This flagship initiative integrates upstream and downstream capabilities, enhancing supply chain security and cost competitiveness. It positions Lianhong to capture value across the entire lifecycle of new energy materials.
2. 4,000 Ton/Year Lithium Battery Additive VC (Vinylene Carbonate) Project: VC is a critical electrolyte additive for lithium-ion batteries, essential for forming stable Solid Electrolyte Interphase (SEI) layers. With the EV and energy storage markets continuing to grow, albeit at a moderated pace, high-purity VC remains a strategic product. The completion of this project allows Lianhong to enter the high-barrier battery chemicals segment.

2.2 Advanced Installation Phase: POE Project

• Project: 100,000 Ton/Year Thermoplastic Polyolefin Elastomer (POE).
• Status: Entered the comprehensive equipment installation phase in 3Q25.
• Timeline: Scheduled for mechanical completion by the end of 2025.
• Strategic Significance: POE is a high-value polymer currently dominated by foreign giants (e.g., Dow, Mitsui). It is crucial for photovoltaic (PV) encapsulation films (replacing EVA in high-efficiency modules) and automotive lightweighting. Domestic substitution is a key national priority. Lianhong’s entry into this space represents a massive total addressable market (TAM) expansion. Successful commissioning in late 2025 will make 2026 a pivotal year for revenue inflection.

3. Strategic Pivot: Future-Proofing via Emerging Technologies

Beyond immediate capacity expansions, Lianhong is actively cultivating a pipeline of next-generation materials. This "platform" approach mitigates cyclicality by diversifying into high-growth, high-tech sectors.

3.1 Next-Generation Batteries: Solid-State & Sodium-Ion

The battery industry is undergoing a technological paradigm shift. Lianhong is positioning itself not just as a supplier, but as a co-developer.

• Solid-State/Semi-Solid State Batteries:

  • Action: Established a joint venture holding subsidiary with Weilan New Energy, a recognized leader in solid-state battery technology.
  • Focus: Development of key functional materials for solid-state and semi-solid-state batteries. This likely includes solid electrolytes, specialized binders, or interface modifiers.
  • Implication: Partnership with a technology leader de-risks R&D and provides a clear path to commercialization. As solid-state batteries move towards pilot production, Lianhong secures early-mover advantage in material supply.

• Sodium-Ion Batteries:

  • Action: Strategic investment in Wenzhou Nashu.
  • Focus: Development of sodium-ion batteries and related materials.
  • Implication: Sodium-ion offers a cost-effective alternative to lithium-ion for low-speed EVs and stationary storage. Diversifying into sodium chemistry ensures Lianhong remains relevant regardless of which battery chemistry dominates specific market segments.

3.2 Semiconductor Advanced Packaging: BCB Resin

• Action: Strategic investment in Dagao Te, a company specializing in advanced semiconductor packaging.
• Target Product: Synthesis of BCB (Benzocyclobutene), a key raw material for photoresist resins used in advanced packaging (e.g., wafer-level packaging, 2.5D/3D IC integration).
• Strategic Logic: The semiconductor industry’s focus is shifting from pure node shrinking to advanced packaging technologies to boost performance. BCB is a critical dielectric material with high technical barriers and limited domestic supply in China. This move aligns with China’s broader push for semiconductor self-sufficiency.

3.3 High-Performance Polymers: PEEK and XDI

• PEEK (Polyether Ether Ketone):

  • Status: R&D completed; industrialization conditions met. Project construction will be initiated at an opportune time.
  • Application: PEEK is a super-engineering plastic used in aerospace, medical implants, and increasingly in humanoid robots (for lightweight, high-strength components).
  • Outlook: By waiting for optimal market timing, Lianhong avoids overcapacity risks while retaining the optionality to capitalize on the burgeoning humanoid robot supply chain.

• XDI (Special Isocyanate):

  • Status: 4,000 Ton/Year project engineering design and construction preparation underway.
  • Application: XDI is used in high-end optical lenses, adhesives, and coatings. It represents another niche, high-margin specialty chemical segment.

4. Financial Forecast and Valuation

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

4.1 Earnings Predictions (2025-2027)

Source: Company Reports, Guojin Securities Institute Estimates

Analysis of Forecasts:
* 2025E: Moderate revenue growth (11.4%) reflects the partial contribution of new projects (VC, Integrated Project) and the recovery of EVA margins. Profit growth (42.3%) outpaces revenue due to operating leverage and higher-margin product mix.
* 2026E: This is the inflection year. Revenue is projected to jump 60.9% to CNY 11.2 billion, driven primarily by the full-year contribution of the 100,000-ton POE plant and other new capacities coming online in late 2025. Net profit nearly doubles (+79.6%) as these high-value assets reach steady-state operations.
* 2027E: Growth normalizes to double digits (11.2% revenue, 28.7% profit) as the base effect diminishes and the company focuses on efficiency and further product iterations.

4.2 Valuation Metrics

At the current price of CNY 21.44, the valuation multiples are as follows:

• P/E Context: The forward P/E for 2025E appears elevated at 85.8x. However, this is a function of the depressed earnings base in 2024 (CNY 234 million). Investors should look to the 2026E P/E of 47.8x and 2027E P/E of 37.1x.
• Growth-Adjusted Valuation: Considering the projected CAGR of net profit from 2024 to 2027 is substantial, the current valuation discounts the high growth potential of the POE and new material platforms. For a company transitioning into high-barrier specialty chemicals (POE, BCB, Solid-State Materials), a premium multiple is justified relative to traditional commodity chemical peers.
• PEG Ratio: Using the 2026E growth rate of ~80%, the PEG ratio is well below 1.0, suggesting the stock is undervalued relative to its near-term growth trajectory.

4.3 Cash Flow and Balance Sheet Health

• Operating Cash Flow (OCF): Projected to improve significantly from CNY 594 million in 2024 to CNY 914 million in 2025, and further to CNY 1.46 billion in 2026. This indicates strong cash generation capability as new projects start contributing.
• Capital Expenditure (CapEx): Heavy CapEx continues in 2025 (CNY 2.3 billion estimated outflow) but is scheduled to taper in 2026 (CNY 720 million) before rising again in 2027 (CNY 1.42 billion) for subsequent phases. The peak investment period is concluding, which should free up free cash flow in the medium term.
• Leverage: The debt-to-asset ratio is projected to rise slightly to 63.67% in 2025 due to financing for new projects, then stabilize around 65% in 2026-2027. The EBIT interest coverage ratio improves from 1.9x in 2024 to 6.0x in 2026, indicating manageable debt service obligations despite higher absolute debt levels.

Risks / Headwinds

While the investment case is compelling, institutional investors must consider the following risks:

1. Product Price Volatility (Cyclicality Risk)

• EVA Prices: Despite the recent uptick, EVA prices remain susceptible to global oil price fluctuations and supply-demand imbalances. If new capacity from competitors floods the market, prices could retreat, compressing margins.
• Raw Material Costs: The spread between naphtha/coal-based feedstocks and finished goods is critical. An unexpected spike in energy or raw material costs without corresponding pass-through ability would hurt profitability.

2. Execution Risk in Capacity Expansion

• Project Delays: The 100,000-ton POE project is complex. Any delay in mechanical completion or commissioning beyond the end-of-2025 target would push revenue recognition into 2027, missing the 2026 growth inflection point.
• Technical Ramp-Up: Producing high-grade POE or electronic-grade chemicals requires precise process control. Failure to achieve target yield rates or product specifications initially could result in lower-than-expected margins during the ramp-up phase.

3. New Product R&D and Market Acceptance

• Technology Uncertainty: The solid-state battery and semiconductor material sectors are rapidly evolving. There is a risk that the specific technologies Lianhong is betting on (e.g., specific solid electrolyte chemistries) may not become the industry standard, or that competitors may develop superior alternatives.
• Customer Qualification: In semiconductor and automotive supply chains, qualification cycles are long (1-3 years). Even if Lianhong produces qualified BCB or battery materials, slow customer adoption could delay revenue realization.

4. Competitive Landscape

• POE Competition: While domestic substitution is a tailwind, other Chinese chemical giants are also investing in POE capacity. Potential oversupply in the domestic POE market post-2026 could erode the premium pricing power Lianhong expects.
• Battery Material Oversupply: The VC and electrolyte additive sector has seen significant capacity expansion in China. Margin compression in these segments is a persistent risk if demand growth from EVs slows.

5. Macro and Regulatory Risks

• Global Demand Slowdown: A recession in key export markets could reduce demand for plastics, PV modules, and consumer electronics, indirectly impacting Lianhong’s downstream customers.
• Environmental Regulations: Stricter environmental policies in China could increase compliance costs or limit production flexibility.

Rating / Sector Outlook

Sector Outlook: New Materials & Chemicals

The Chinese chemical sector is undergoing a profound structural transformation. The era of broad-based growth driven by simple capacity expansion is over. The future belongs to companies that can:
1. Import Substitute: Break foreign monopolies in high-end materials (e.g., POE, high-end polyolefins, electronic chemicals).
2. Platform Integration: Leverage integrated manufacturing to control costs and ensure supply stability.
3. Innovate: Continuously pivot into emerging downstream applications (EVs, Renewables, Semiconductors).

Lianhong New Materials fits squarely into this "High-Quality Development" narrative. The sector outlook for specialty new materials remains positive, supported by national policy incentives for self-sufficiency and the global energy transition. However, the commodity chemical segment remains neutral-to-negative due to global overcapacity and weak demand. Lianhong’s strategic shift away from pure commodities mitigates sector headwinds.

Analyst Consensus

Market sentiment towards Lianhong has remained consistently positive among sell-side analysts.
* Recent Ratings: Over the past 6 months, 9 out of 9 analyst reports have issued a "Buy" rating.
* Average Score: The market average recommendation score is 1.00 (where 1.00 = Buy), indicating unanimous bullishness among covering analysts.
* Price Target History: While specific target prices were not disclosed in the recent historical table, the consistent "Buy" ratings despite price fluctuations (from CNY 13.27 to CNY 21.44) suggest analysts view the long-term fundamental story as intact regardless of short-term market volatility.

Investment Rating: BUY (Maintained)

We reaffirm our BUY rating. The company has demonstrated its ability to navigate a challenging macro environment by optimizing its product mix and controlling costs. The upcoming catalysts—specifically the commissioning of the POE plant and the initial contributions from battery and semiconductor materials—provide a clear visibility on earnings growth for 2026 and 2027. The current valuation, while appearing high on a trailing basis, is reasonable given the anticipated doubling of profits in 2026.

Investment View

Core Investment Logic

1. The "Platform" Premium: Beyond Cyclical Commodities

Lianhong is no longer just an EVA producer. It is evolving into a comprehensive new materials platform. This transformation commands a valuation re-rating.
* Traditional Business (Cash Cow): EVA and conventional polyolefins provide stable cash flows to fund growth.
* Growth Engines (Star Products): POE, VC, EC, UHMWPE, and PLA are scaling up. These products have higher barriers to entry and better margin profiles.
* Future Options (Call Options): Solid-state battery materials, BCB for semiconductors, and PEEK represent optional upside. Even if only one of these succeeds massively, it could drive significant shareholder value.

Investors should value Lianhong using a Sum-of-the-Parts (SOTP) approach implicitly: assigning a lower multiple to the legacy business and a higher multiple to the high-growth new materials segment. As the proportion of revenue from new materials increases, the blended multiple should expand.

2. The POE Inflection Point: A Game Changer for 2026

The 100,000-ton POE project is the single most important catalyst for the stock in the next 12-18 months.
* Market Gap: China imports a significant portion of its POE demand. Domestic supply is scarce.
* Pricing Power: Initially, domestic POE producers will enjoy strong pricing power due to scarcity.
* Revenue Impact: Based on our forecast, revenue jumps from ~CNY 7 billion in 2025 to ~CNY 11.2 billion in 2026. This ~CNY 4.2 billion increment is largely attributable to new capacities, with POE being the largest contributor.
* Margin Impact: POE margins are historically robust. As this high-margin volume hits the P&L, the overall net margin of the company will structurally improve, moving from the current ~4-5% range towards 6-7%+ (as seen in the 2027E net margin forecast of 6.2%).

3. Strategic Partnerships De-Risk Innovation

Lianhong’s approach to R&D is pragmatic and capital-efficient. Instead of building everything in-house from scratch, it uses Joint Ventures (JVs) and Strategic Investments:
* Weilan New Energy JV: Accesses cutting-edge solid-state IP without bearing the full burden of battery cell development.
* Dagao Te Investment: Gains exposure to the semiconductor supply chain through a specialized partner.
* Wenzhou Nashu Investment: Hedges against lithium dominance by backing sodium-ion technology.

This ecosystem approach allows Lianhong to stay at the forefront of technological trends while focusing its own capital expenditure on manufacturing scale-up, where it has a competitive advantage.

4. Financial Health Supports Aggressive Growth

Despite heavy CapEx, the company’s balance sheet remains manageable.
* Improving Cash Flow: The projected surge in Operating Cash Flow to CNY 1.46 billion in 2026 demonstrates that the new investments will quickly become cash-generative.
* Debt Management: While leverage increases, the interest coverage ratio improves significantly (from 1.9x to 6.0x), indicating that earnings growth will outpace debt servicing costs. This reduces the risk of financial distress during the expansion phase.

Tactical Considerations for Investors

• Entry Point: At CNY 21.44, the stock is trading off recent highs but remains within a reasonable range given the growth outlook. Any pullback driven by short-term EVA price noise or broader market weakness could present an attractive entry opportunity for long-term investors.
• Monitoring Catalysts:
  1. Q4 2025 EVA Prices: Confirm the sustainability of the September price hike.
  2. POE Commissioning News: Look for official announcements regarding the mechanical completion and first production batches of the POE plant in late 2025/early 2026.
  3. VC/EC Customer Contracts: Announcements of long-term supply agreements with major battery manufacturers would validate the commercial viability of the new battery material projects.
  4. Semiconductor Material Qualification: Any news regarding customer qualification for BCB or other electronic chemicals would be a significant positive surprise.

Conclusion

Lianhong New Materials is executing a difficult but highly rewarding transition. It is moving from a cyclical, commodity-dependent business model to a diversified, technology-driven new materials platform. The 3Q25 results confirm that the company can deliver profit growth even in a flat revenue environment, thanks to superior cost control and product mix optimization.

The heavy lifting in terms of CapEx is nearing completion, with the flagship POE project set to unlock massive growth in 2026. Coupled with strategic bets on solid-state batteries and semiconductor materials, Lianhong is well-positioned to capture value in the next generation of industrial technologies.

We believe the market is underestimating the magnitude of the 2026 earnings inflection. Our BUY rating reflects confidence in the company’s execution capabilities, the strength of its strategic partnerships, and the vast potential of its new product pipeline. Institutional investors seeking exposure to China’s advanced manufacturing and material science upgrade should consider Lianhong New Materials a core holding in their portfolio.

Appendix: Detailed Financial Analysis & Data Tables

A. Income Statement Analysis (Historical & Forecast)

The following table details the projected evolution of the income statement, highlighting the operating leverage effect.

Key Observations:
* Margin Expansion: Gross margins are projected to expand from 16.5% in 2024 to 17.9% in 2027. This is driven by the higher value-add of new products (POE, Electronic Chemicals) compared to legacy commodities.
* Operating Leverage: EBIT margins are expected to more than double from 2.6% in 2024 to 7.2% in 2027. This indicates that fixed costs are being spread over a much larger revenue base, and variable costs are being optimized.
* R&D Intensity: R&D expenses remain robust (CNY 314-500 Mn annually), representing ~4-5% of sales. This sustained investment is crucial for maintaining the technological edge in new materials.

B. Cash Flow Statement Analysis

Key Observations:
* Turnaround in Free Cash Flow: In 2023 and 2024, heavy CapEx led to negative net cash flows. In 2025, Operating CF (CNY 914 Mn) begins to cover a larger portion of CapEx (CNY 2,304 Mn), aided by financing. By 2026, Operating CF (CNY 1,463 Mn) significantly exceeds CapEx (CNY 720 Mn), resulting in a massive positive net cash flow of CNY 1,958 Mn. This surplus cash can be used for debt reduction, dividends, or further strategic M&A.
* Financing Strategy: The company relies on debt financing (CNY 2.4B in 2025E) to fund the final stretch of construction. This is a typical pattern for capital-intensive industries nearing the end of a build-out cycle.

C. Balance Sheet Strength

Key Observations:
* Asset Base Growth: Total assets are growing steadily, reflecting the capitalization of new projects. Fixed assets peak in 2025/2026 as projects come online.
* ROE Recovery: Return on Equity bottoms out in 2024 at 3.24% due to low profits and high equity base. It is projected to recover to 7.55% in 2026 and 9.06% in 2027. While not yet at the 12.5% levels of 2022, the trend is clearly upward, signaling improved efficiency and profitability.
* Liquidity: Cash balances are projected to grow to CNY 5.5 billion by 2027, providing a strong buffer against economic shocks.

D. Per Share Metrics

Dividend Policy: The company initiated dividends in 2024 (CNY 0.08/share). The forecast suggests a gradual increase in absolute dividend payments as earnings grow, although the payout ratio may remain modest as the company prioritizes reinvestment for growth.

Final Remarks

Lianhong New Materials stands at a pivotal juncture. The challenges of the past two years—characterized by price wars and margin compression in traditional chemicals—are receding. In their place emerges a clearer vision of a diversified, high-tech materials supplier.

For institutional investors, the key takeaway is timing. The financial pain of the transition is largely behind us (bottomed in 2024). The gains from the transition are just beginning to accrue (starting 2025, accelerating in 2026). The stock offers a rare combination of near-term cyclical recovery (EVA price rebound) and long-term structural growth (POE, Solid-State, Semiconductors).

We advise investors to look through the short-term noise of quarterly margin fluctuations and focus on the strategic milestones: the successful commissioning of the POE plant and the validation of new product pipelines. With a BUY rating and a robust growth forecast, Lianhong New Materials is well-positioned to deliver alpha in the coming years.

Disclaimer:
This report is prepared by Guojin Securities for institutional investors only. It is based on information believed to be reliable, but Guojin Securities does not guarantee its accuracy or completeness. The opinions expressed reflect the judgment of the analysts at the time of publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an offer to buy any securities. Investors should conduct their own independent research and consult with financial advisors before making investment decisions. Past performance is not indicative of future results.