First Applied Materials (603806.SH): Navigating the Photovoltaic Trough; Electronic Materials Emerge as a High-Growth Engine

Date: August 2025
Analyst: Institutional Research Team
Source: Pacific Securities Research Report Analysis

Executive Summary

First Applied Materials Co., Ltd. ("First Applied" or the "Company"), the global leader in photovoltaic (PV) encapsulation films, has released its semi-annual report for 2025. The results reflect a dichotomy in the Company’s business structure: while the core PV film business faces significant headwinds due to industry-wide price compression and margin erosion, the emerging electronic materials segment continues to demonstrate robust growth, validating the Company’s diversification strategy.

In the first half of 2025 (1H25), First Applied reported total operating revenue of RMB 7.959 billion, representing a year-over-year (YoY) decline of 26.06%. Net profit attributable to shareholders of the parent company stood at RMB 496 million, a substantial YoY decrease of 46.60%. The second quarter (Q2) specifically showed signs of acute pressure, with revenue of RMB 4.334 billion (-20.36% YoY, +19.58% QoQ) and net profit of RMB 95 million (-76.75% YoY, -76.41% QoQ). This sequential decline in profitability underscores the intensifying competitive landscape and the lagging effect of raw material cost dynamics against falling product prices.

Despite the near-term financial contraction in the solar segment, several structural positives remain intact. Firstly, shipment volumes have remained resilient, with PV film shipments reaching approximately 1.386 billion square meters in 1H25, nearly flat compared to the same period in 2024. This indicates that the Company is maintaining its market share despite the "involution" (intense internal competition) characterizing the current PV cycle. Secondly, the Company’s overseas expansion strategy is yielding tangible results, with overseas revenue stabilizing and poised for further growth as the Phase II project in Thailand ramps up capacity. Thirdly, and most critically for long-term valuation re-rating, the electronic materials business—comprising photosensitive dry film, Flexible Copper Clad Laminate (FCCL), and photosensitive cover film—achieved a sales volume growth of 21.62% YoY, driven by broad customer coverage and product portfolio optimization.

We maintain our "Buy" rating on First Applied Materials. While we have downwardly revised our earnings forecasts for 2025-2027 to account for the prolonged trough in the PV supply chain, we believe the Company is well-positioned to benefit from the eventual cyclical recovery. The ongoing industry consolidation ("anti-involution") efforts, coupled with the expected stabilization of main chain product pricing, should allow margins to bottom out and begin a gradual repair process. Furthermore, the high-growth trajectory of the electronic materials segment provides a crucial hedge against solar cyclicality and offers a new vector for value creation. Investors should view the current valuation dip as an entry point to accumulate shares in a dominant player with a strengthening second growth curve, anticipating a return to profitability growth in 2026 and 2027.

Key Takeaways

1. Financial Performance: Revenue Contraction and Margin Compression in 1H25

The financial results for the first half of 2025 highlight the severe impact of the downstream PV industry's downturn on upstream material suppliers. The Company’s top-line and bottom-line figures both experienced significant contractions, reflecting the broader macroeconomic and sector-specific challenges.

Table 1: First Applied Materials – Key Financial Metrics (1H25 vs. 1H24)

Source: Company Reports, Pacific Securities Estimates

The disparity between the revenue decline (-26.06%) and the net profit decline (-46.60%) is indicative of operating leverage working in reverse. As prices fall, fixed costs constitute a larger percentage of revenue, squeezing net margins. The Q2 performance was particularly weak, with net profit dropping by over 76% both year-over-year and quarter-over-quarter. This suggests that the pricing pressure intensified in the second quarter, possibly due to inventory clearance activities by downstream module manufacturers or aggressive pricing strategies by competitors to maintain cash flow.

However, it is important to contextualize these numbers within the industry framework. The PV sector is currently undergoing a painful clearing phase. The fact that First Applied maintained positive profitability, albeit reduced, demonstrates its superior cost control and operational efficiency compared to smaller, less integrated competitors who may be facing existential threats.

2. PV Film Business: Volume Resilience Amidst Price Wars

The core PV encapsulation film business remains the primary revenue driver, accounting for the vast majority of the Company’s turnover. In 1H25, the PV film segment generated RMB 7.215 billion in revenue, a YoY decline of 26.97%. This decline is almost entirely attributable to the reduction in Average Selling Prices (ASPs) rather than a loss of market share.

Shipment Stability as a Competitive Moat
The Company shipped approximately 1.386 billion square meters of PV films in 1H25, a volume virtually identical to that of 1H24. This stability in shipments is a critical data point for institutional investors. It confirms that:
1. Market Leadership is Intact: First Applied is not losing customers to competitors despite the price war. Its scale, quality consistency, and supply chain reliability continue to make it the supplier of choice for major module manufacturers.
2. Demand Elasticity: The "rush installation" phenomenon driven by domestic policy incentives in China helped sustain demand volumes. While this may pull forward some future demand, it effectively supported throughput in H1, allowing the Company to utilize its capacity efficiently.
3. Consolidation Benefit: As smaller players exit the market or reduce production due to unsustainable losses, First Applied’s ability to maintain volume suggests it is capturing the residual market share, even if the immediate financial reward (margin) is suppressed.

Pricing and Profitability Dynamics
The report explicitly notes that "quotation and profitability are under significant pressure" due to the transmission of pressure from the main industrial chain. The PV module sector has been characterized by intense price competition, forcing module makers to squeeze upstream suppliers. Encapsulation films, being a critical but commoditized component, have faced significant downward price adjustments.

However, the analyst view posits that this situation is nearing a inflection point. The narrative of "anti-involution" (a term referring to government and industry association efforts to curb irrational price wars and overcapacity) is gaining traction. As the main chain (silicon, wafers, cells, modules) sees quotations stabilize and potentially rise, the upstream raw material supply-demand balance for EVA/POE resins is expected to improve. This dual effect—stable/rising output prices and stabilized input costs—should allow film margins to bottom out. We anticipate a gradual repair phase in profitability starting late 2025 into 2026.

3. International Expansion: Thailand Phase II as a Growth Catalyst

Geographic diversification is a strategic imperative for Chinese PV suppliers facing trade barriers in Western markets. First Applied’s overseas layout is showing concrete results. In 1H25, overseas revenue amounted to RMB 2.028 billion, representing a slight YoY increase of 0.92%. While the growth rate appears modest, it is noteworthy given the overall 26% decline in total revenue. This implies that the overseas business is growing relative to the domestic business, thereby increasing its share of the total revenue mix.

Strategic Importance of Thailand
The Company’s manufacturing base in Thailand is central to its global strategy. The Phase II project in Thailand is currently ramping up capacity. This expansion is timed to capitalize on:
1. Trade Arbitrage: Avoiding tariffs and trade restrictions imposed on mainland Chinese exports to the US and Europe.
2. Global Customer Demand: International module manufacturers increasingly require non-China supply chains to qualify for certain subsidies (e.g., IRA in the US) or to de-risk their supply chains.
3. Higher Margins: Historically, overseas operations have commanded better pricing power and margins compared to the hyper-competitive domestic market.

As the Thailand Phase II capacity is fully released, we expect the proportion of overseas revenue to rise significantly in the second half of 2025 and throughout 2026. This structural shift in revenue geography will not only boost top-line growth but also enhance the overall gross margin profile of the Company, providing a buffer against domestic price volatility.

4. Electronic Materials: The Second Growth Curve Accelerates

Perhaps the most compelling aspect of First Applied’s investment thesis is the rapid development of its electronic materials business. This segment, which includes photosensitive dry film, FCCL, and photosensitive cover film, is transitioning from a niche contributor to a significant growth engine.

Performance Metrics
* Sales Volume: In 1H25, the sales volume of photosensitive dry film reached approximately 90 million square meters, a robust YoY growth of 21.62%.
* Revenue: The segment generated revenue of RMB 325 million, up 17.93% YoY.

Drivers of Growth
1. Industry Tailwinds: The global PCB (Printed Circuit Board) and flexible electronics industries are experiencing sustained growth, driven by advancements in consumer electronics, automotive electronics, and AI hardware. Photosensitive dry film is a critical consumable in the PCB manufacturing process, and demand is closely correlated with PCB output.
2. Import Substitution: First Applied has successfully penetrated the supply chains of renowned downstream clients, replacing imported products from traditional Japanese and Korean suppliers. This "localization" trend is supported by Chinese manufacturers' desire for supply chain security and cost efficiency.
3. Product Portfolio Optimization: The Company is not just selling volume; it is optimizing its product mix. By expanding into higher-value items like FCCL and cover films, First Applied is improving the average revenue per unit and potentially enhancing margins in this segment.
4. Market Share Gains: The report highlights "comprehensive customer coverage and category development." This suggests that the Company is leveraging its existing relationships in the PV sector (where it dominates) to cross-sell or leverage its reputation for quality in the electronics sector. The consistent double-digit growth in both volume and revenue indicates that the Company is gaining market share in a fragmented industry.

Long-term Potential
The electronic materials business operates in a market with different cyclicality characteristics compared to PV. While still cyclical, it is less prone to the extreme boom-bust cycles seen in solar. Moreover, the technical barriers in high-end electronic materials are significant, providing a wider moat than standard EVA films. As this segment scales, it will contribute to a more balanced revenue structure, reducing the Company’s beta to the solar cycle and commanding a higher valuation multiple akin to specialty chemical or advanced material peers.

5. Revised Financial Forecasts and Valuation

In light of the weaker-than-expected 1H25 results and the persistent pressure on PV film margins, we have adjusted our financial models. The previous optimism regarding a swift V-shaped recovery in solar margins has been tempered to reflect a more gradual U-shaped recovery.

Table 2: Revised Earnings Forecast (2025-2027)

Source: Pacific Securities Estimates

Analysis of Forecasts:
* 2025: We project a slight decline in net profit (-5.15%) to RMB 1.24 billion. This reflects the full-year impact of the H1 margin compression. However, the decline is much smaller than the revenue decline (-9.69%), suggesting that cost-cutting measures and the higher-margin electronic/overseas businesses are providing some offset.
* 2026: We anticipate a turning point, with net profit growing by 30.78% to RMB 1.62 billion. This recovery is predicated on the stabilization of PV film prices, the full contribution of the Thailand Phase II plant, and continued scaling of the electronic materials division.
* 2027: Growth accelerates to 32.17%, reaching RMB 2.14 billion in net profit. By this time, the Company should have fully navigated the current downcycle, with improved industry concentration and a more diversified revenue base.

Valuation Perspective:
At the current market capitalization of approximately RMB 43.175 billion, the stock trades at a Forward PE of ~34.8x for 2025 and ~26.6x for 2026. While the 2025 multiple appears elevated, it is important to note that PE ratios are distorted during the trough of a cycle when earnings are depressed. The 2026 and 2027 multiples of 26.6x and 20.1x, respectively, are more representative of the Company’s normalized earning power. Given First Applied’s dominant market position, strong balance sheet, and successful diversification, a PE of 20-25x in a growth/recovery phase is justified. The current price offers an attractive risk-reward ratio for long-term investors willing to wait for the cyclical upturn.

Risks / Headwinds

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

1. Raw Material Price Volatility

The primary raw materials for PV encapsulation films are EVA (Ethylene-Vinyl Acetate) and POE (Polyolefin Elastomer) resins. These are petrochemical derivatives, and their prices are influenced by crude oil prices, global supply-demand dynamics, and geopolitical factors.
* Risk Scenario: If resin prices rise sharply while the Company is unable to pass these costs onto downstream module manufacturers (due to locked-in contracts or weak bargaining power), gross margins will compress further. Conversely, if resin prices fall rapidly, the Company may face inventory write-downs.
* Mitigation: First Applied has historically managed this risk through strategic procurement and formula-based pricing mechanisms with key customers, but extreme volatility remains a threat.

2. Downstream Demand Uncertainty

The PV industry is heavily dependent on government policies, subsidy schemes, and global energy transition targets.
* Policy Risk: Changes in feed-in tariffs, tax credits (e.g., changes to the US Inflation Reduction Act), or trade policies in key markets (EU, US, India) could dampen demand.
* Grid Integration Issues: As solar penetration increases, grid congestion and curtailment issues in major markets could slow down new installations, leading to an oversupply of modules and further pressure on upstream suppliers.
* Technological Disruption: While unlikely in the short term, any significant shift in module technology that reduces the amount of film required per watt (e.g., double-glass modules using less film, or alternative encapsulation methods) could impact long-term volume growth.

3. Intensifying Market Competition

The "anti-involution" narrative is positive, but the reality of the market remains fiercely competitive.
* Price Wars: Competitors, particularly those with lower cost structures or state-backed support, may engage in predatory pricing to gain market share or survive cash flow crises. This could prolong the margin trough beyond our 2025 estimates.
* New Entrants: Although barriers are high, some large chemical companies may enter the high-end film market, increasing supply and pressuring prices.

4. Geopolitical and Trade Risks

First Applied’s international expansion, particularly in Thailand, is a key growth driver but also exposes the Company to geopolitical risks.
* Trade Barriers: If the US or EU expands tariffs to include products from Southeast Asia (closing the "loophole" of transshipment or regional manufacturing), the competitive advantage of the Thailand plant could be eroded.
* Supply Chain Decoupling: Broader decoupling trends could force customers to source exclusively from non-Chinese owned entities, potentially disadvantaging First Applied despite its overseas manufacturing footprint.

5. Execution Risk in Electronic Materials

While the electronic materials business is growing, it operates in a different competitive landscape with different key success factors.
* Technical Challenges: Maintaining high yields and quality consistency in sensitive electronic materials is difficult. Any quality issues could lead to loss of key customers.
* Customer Concentration: The electronics supply chain can be highly concentrated. Loss of a major PCB manufacturer client could significantly impact this segment’s growth.

Rating / Sector Outlook

Sector Outlook: Photovoltaic Materials

The photovoltaic industry is currently in a bottoming-out phase. After years of rapid expansion, the sector is grappling with overcapacity and profitability crises. However, we maintain a constructive long-term view for the following reasons:
1. Global Energy Transition: The fundamental demand driver—global decarbonization—remains intact. Solar energy continues to be the lowest-cost source of new electricity generation in most parts of the world.
2. Supply Side Clearing: The current pain is necessary for healthy long-term growth. Weak players are exiting, and capacity expansion is slowing. This consolidation will benefit leaders like First Applied with stronger balance sheets and technology advantages.
3. Policy Support: Governments worldwide continue to support renewable energy deployment, providing a floor for demand.

We expect the sector to see a gradual recovery in profitability starting in late 2025, with a more robust upcycle in 2026. Investors should focus on companies with cost leadership, technological innovation, and diversified geographic footprints.

Sector Outlook: Electronic Materials

The electronic materials sector, particularly for PCBs and flexible circuits, is viewed as Neutral to Positive.
1. AI and High-Performance Computing: The boom in AI servers and data centers is driving demand for high-layer-count PCBs and advanced packaging materials, benefiting suppliers of high-end dry films and FCCL.
2. Consumer Electronics Recovery: The smartphone and PC markets are showing signs of stabilization after a prolonged downturn, supporting baseline demand.
3. Localization Trend: In China, the push for self-sufficiency in semiconductor and electronic materials provides a tailwind for domestic leaders like First Applied.

Company Rating: BUY

We maintain a BUY rating on First Applied Materials (603806.SH).

Rationale:
* Dominant Market Position: The Company is the undisputed global leader in PV films, with a market share that provides economies of scale and bargaining power.
* Resilient Business Model: Despite the severe industry downturn, the Company remains profitable and cash-flow positive, demonstrating operational resilience.
* Successful Diversification: The electronic materials business is proving to be a viable second growth curve, reducing reliance on the volatile solar sector.
* Valuation Appeal: The stock is trading at levels that largely price in the near-term negatives. The potential upside from the cyclical recovery in 2026-2027 and the continued growth of the electronics segment offers an attractive risk-reward profile.
* Strong Balance Sheet: The Company maintains a healthy cash position and low debt levels, allowing it to weather the downturn and invest in future growth opportunities (e.g., Thailand expansion, R&D).

Target Price Implication:
Based on our 2026 EPS estimate of RMB 0.62 and applying a target PE multiple of 30x (reflecting a premium for market leadership and growth recovery), we derive a implied target value that supports the Buy rating. The current market price offers a significant discount to this intrinsic value, assuming the recovery thesis plays out.

Investment View

Strategic Analysis: From Cyclical Player to Platform Material Company

First Applied Materials is undergoing a fundamental transformation in the eyes of sophisticated investors. Historically viewed purely as a cyclical play on the solar industry, the Company is evolving into a platform-based advanced materials enterprise. This shift is critical for its long-term valuation re-rating.

1. The "Moat" in Commoditized Markets
Encapsulation films are often perceived as commodities. However, First Applied has demonstrated that even in commodity-like markets, scale, technology, and customer relationships create a durable moat. The Company’s ability to maintain shipment volumes while competitors struggle highlights its cost advantage and supply chain stickiness. For institutional investors, this suggests that First Applied will emerge from the current cycle with an even larger market share, setting the stage for enhanced pricing power in the next upcycle.

2. The Optionality of Electronic Materials
The electronic materials segment should not be viewed merely as a small add-on. It represents significant "optionality." As the Company leverages its polymer expertise into higher-value electronic applications, it unlocks access to markets with higher barriers to entry and potentially higher margins. The 21.62% growth in dry film volume is a leading indicator of this success. If this segment continues to grow at 20%+ CAGR, it could account for a disproportionate share of the Company’s profit growth in the next 3-5 years, justifying a higher multiple.

3. Globalization as a Risk Mitigator
The Thailand Phase II project is not just about capacity; it is about risk mitigation. By establishing a robust non-China manufacturing base, First Applied insulates itself from geopolitical shocks. This globalization strategy makes the Company a more attractive partner for international module giants who are themselves diversifying their supply chains. This strategic alignment ensures long-term demand visibility.

Tactical Investment Recommendations

For Long-Term Institutional Investors:
* Accumulate on Weakness: The current weakness in the stock price, driven by poor H1 earnings, presents a buying opportunity. The market is overly focused on the short-term margin compression and underestimating the long-term structural improvements.
* Monitor Leading Indicators: Watch for signs of stabilization in PV module prices and EVA/POE resin spreads. A stabilization in these metrics will be the first signal of margin recovery. Also, monitor the quarterly contribution of the electronic materials segment; sustained double-digit growth here will validate the diversification thesis.
* Hold Through the Trough: The recovery in 2026 is likely to be gradual. Investors should be prepared for volatile quarterly earnings in the near term but maintain a long-term horizon to capture the full cycle upswing.

For Active Traders:
* Catalyst Watch: Look for catalysts such as announcements of further capacity utilization improvements in Thailand, new major customer wins in the electronic materials sector, or policy announcements supporting the PV industry in China or abroad.
* Technical Levels: The stock has traded between RMB 11.74 and RMB 20.10 in the past 12 months. Current levels near the lower end of this range may offer technical support, provided there is no further negative surprise in earnings.

Conclusion

First Applied Materials stands at a pivotal juncture. The short-term pain in its core PV business is real and reflected in the 1H25 financials. However, the Company’s response—mainting volume, expanding globally, and diversifying into electronics—demonstrates strong management execution and strategic foresight.

We believe the market has over-penalized the stock for the cyclical downturn while underappreciating the structural strengths and growth potential of the electronic materials division. As the PV industry clears excess capacity and margins normalize, First Applied is poised to deliver robust earnings growth in 2026 and 2027. Combined with its emerging status as a key player in electronic materials, the Company offers a compelling investment case for those seeking exposure to the energy transition and advanced manufacturing sectors.

We reaffirm our BUY rating, with a recommendation to accumulate positions during periods of market pessimism, targeting a multi-year hold to benefit from the anticipated cyclical recovery and structural growth.

Appendix: Detailed Financial Analysis & Data Integrity

Balance Sheet Strength

A review of the balance sheet reveals a company in strong financial health, capable of withstanding the current industry downturn.
* Cash Position: The Company holds substantial monetary funds (RMB 5.005 billion in 2024A, projected to grow to RMB 12.163 billion in 2025E). This liquidity buffer is crucial for funding the Thailand expansion and R&D without relying heavily on external debt.
* Debt Levels: Short-term borrowings are minimal (RMB 66 million in 2025E), and long-term debt is manageable (RMB 299 million). The low leverage ratio provides financial flexibility and reduces interest rate risk.
* Asset Quality: Inventory levels have been managed down (from RMB 3.09 billion in 2023A to RMB 1.868 billion in 2024A), indicating efficient working capital management and reduced risk of inventory write-downs in a falling price environment.

Cash Flow Dynamics

• Operating Cash Flow: The projection of strong positive operating cash flow (RMB 8.419 billion in 2025E) suggests that despite lower accounting profits, the Company generates robust cash from operations. This is often due to non-cash charges like depreciation and changes in working capital. Strong OCF is a key indicator of financial sustainability.
• Investing Cash Flow: Continued negative investing cash flow (RMB -666 million in 2025E) reflects ongoing capital expenditure for growth (Thailand plant, electronic materials capacity). This is a positive sign of management’s confidence in future demand.

Sensitivity Analysis

To provide a more nuanced view, we consider the following sensitivity scenarios for our 2026 estimates:

Note: Bull case assumes faster industry consolidation and stronger pricing power. Bear case assumes prolonged price war and slower electronics adoption.

Even in the Bear Case, the Company remains profitable, and the PE multiple, while higher, is supported by the defensive nature of its market position. The Base Case represents our most likely outcome, balancing the gradual recovery of solar with the steady growth of electronics.

Final Disclaimer

This report is based on information available as of August 2025, including the Company’s 2025 Semi-Annual Report and data from Pacific Securities. All financial forecasts are estimates and subject to change based on future market conditions. Investors should conduct their own due diligence and consult with financial advisors before making investment decisions. The views expressed herein are those of the analysts and do not necessarily reflect the views of Pacific Securities or its affiliates.