Equity Research: Liancheng Numerical Control (835368.BJ)

Date: September 05, 2025
Rating: Outperform (Maintained)
Current Price: CNY 29.81
Target Price Implied Upside: Based on forward P/E multiples and earnings recovery trajectory.
Market Cap: CNY 7.00 Billion
Analyst: Haibin Zhu (S0790522080007)

Executive Summary

Navigating the Photovoltaic Winter: Strategic Pivot to Semiconductors and High-End Equipment Drives Long-Term Value

Liancheng Numerical Control (hereinafter referred to as "Liancheng" or the "Company"), a leading provider of crystal growth and processing equipment primarily serving the photovoltaic (PV) industry, reported its first-half 2025 financial results amidst a challenging macro-industrial backdrop. The Company recorded revenue of CNY 1.099 billion and attributable net profit of CNY 105 million in 1H25, representing year-on-year declines of 56.57% and 67.3%, respectively. These figures reflect the severe headwinds currently plaguing the global PV sector, characterized by intense competition, widespread losses among downstream manufacturers, and an accelerated phase of capacity clearance.

Despite the short-term earnings contraction, we maintain our "Outperform" rating on Liancheng Numerical Control. Our conviction is underpinned by three core pillars:
1. Cyclical Bottoming in PV: The industry is entering a decisive phase of accelerated capacity clearing. As low-efficiency, legacy产能 (capacity) exits the market, the remaining high-end capacity will drive a replacement cycle focused on efficiency enhancement and cost reduction, creating renewed demand for advanced equipment.
2. Strategic Diversification into Semiconductors: Leveraging its core competencies in crystal growth and precision processing, Liancheng is successfully expanding into the semiconductor equipment sector. With the global semiconductor market growing at 18.9% YoY in 1H25 and Silicon Carbide (SiC) demand projected to grow at a CAGR of >20% through 2030, this diversification offers a high-growth second curve that mitigates reliance on the volatile PV cycle.
3. Robust Intellectual Property and Technological Moat: With 917 patents and 202 software copyrights, the Company possesses a deep technological reservoir. Its ability to adapt wire-cutting technologies to new applications (e.g., stone processing) demonstrates operational agility and potential for incremental revenue streams.

We have revised our earnings forecasts to reflect the prolonged downturn in the PV sector. We now estimate attributable net profits of CNY 280 million, CNY 510 million, and CNY 701 million for 2025, 2026, and 2027, respectively. This implies a compound annual growth rate (CAGR) of significant recovery starting in 2026. At the current price of CNY 29.81, the stock trades at a Forward P/E of 25.2x for 2025E, compressing to 13.9x for 2026E and 10.1x for 2027E. We believe the market has largely priced in the near-term pain, and the valuation offers an attractive entry point for investors willing to look through the cycle towards the 2026-2027 recovery driven by semiconductor scaling and PV technology iteration.

Key Takeaways

1. Financial Performance Analysis: 1H25 Deep Dive

The first half of 2025 was marked by significant top-line and bottom-line pressure, consistent with the broader distress in the solar supply chain. However, a granular analysis of the financials reveals structural strengths and margin resilience in specific business units.

1.1 Revenue and Profitability Trends

*Note: 1H2024 figures are derived inversely from the reported YoY changes and 1H2025 actuals for comparative context.

The disproportionate drop in net profit (-67.3%) compared to revenue (-56.6%) suggests that fixed costs remained relatively sticky while variable revenues collapsed. Additionally, the Company may have incurred higher asset impairment losses or R&D expenses relative to sales, which is typical during industry downcycles as firms invest in next-generation technology to survive the consolidation phase.

1.2 Segment-Level Performance

The Company’s business is bifurcated into two primary equipment categories. The divergence in their performance highlights the shifting dynamics within the renewable energy and manufacturing sectors.

A. Crystal Growth and Processing Equipment
* Revenue: CNY 931 million in 1H25.
* Gross Margin: 30.89%.
* Analysis: This segment remains the cash cow, contributing approximately 84.7% of total revenue. The gross margin of nearly 31% is robust, indicating that despite volume pressures, the Company maintains a competitive advantage in high-efficiency crystal pulling furnaces and cutting machines. The stability of margins suggests that the Company is not engaging in destructive price wars but rather focusing on delivering value-added, high-efficiency equipment that helps customers lower their Levelized Cost of Electricity (LCOE).

B. Battery Cell and Module Equipment
* Revenue: CNY 70.06 million in 1H25.
* Gross Margin: 40.20%.
* YoY Margin Change: +17.15 percentage points.
* Analysis: While the revenue base is smaller (approx. 6.4% of total), the margin expansion is striking. A 17.15 ppt increase in gross margin signifies a successful shift in product mix towards higher-value, specialized automation or processing tools for battery cells. This could be driven by the adoption of new technologies (such as TOPCon or HJT specific equipment) where competition is less fierce than in standard PERC lines, allowing for premium pricing.

1.3 Balance Sheet and Cash Flow Health

A review of the balance sheet trends from 2023 to the 2025 estimates provides insight into the Company’s financial resilience.

• Liquidity Position: As of the end of 2024, the Company held CNY 1.18 billion in cash. The forecast for 2025 shows a slight decrease to CNY 1.03 billion, primarily due to operational cash outflows, but remains healthy. By 2027, cash is projected to rebound to CNY 1.55 billion, supporting future R&D and potential M&A activities in the semiconductor space.
• Inventory Management: Inventory decreased significantly from CNY 4.68 billion in 2023 to CNY 2.17 billion in 2024. For 2025E, inventory is expected to rise slightly to CNY 2.56 billion. This buildup may indicate preparation for upcoming orders or a slowdown in shipment recognition. Efficient inventory turnover will be critical in 2H25 to free up working capital.
• Receivables: Accounts receivable remain elevated at CNY 2.49 billion (2024A) and are forecasted to stay around CNY 2.77 billion in 2025E. This reflects the payment delays common in the distressed PV sector. Investors should monitor the aging of these receivables closely, as any deterioration in client creditworthiness could lead to further impairment charges.
• Debt Structure: The Company has actively reduced its short-term borrowings from CNY 607 million in 2023 to CNY 165 million in 2024, with a further reduction to CNY 150 million expected in 2025. Long-term debt was introduced in 2024 (CNY 582 million) but is being paid down systematically. The net debt position remains negative (net cash positive), providing a substantial buffer against economic volatility.

2. Industry Dynamics: The Photovoltaic Sector’s Accelerated Clearance

The photovoltaic industry is currently undergoing a painful but necessary correction. Understanding this cycle is paramount to evaluating Liancheng’s near-term prospects and long-term opportunity.

2.1 The Current State: Oversupply and Price Wars

For the past two years, aggressive expansion in polysilicon, wafers, cells, and modules has led to a structural oversupply. Prices across the supply chain have plummeted, often falling below the cash cost of production for many manufacturers. This has resulted in:
* Widespread Losses: Major integrated players and specialized manufacturers alike have reported quarterly losses.
* Capacity Utilization Drops: Many factories are operating at reduced rates or have temporarily shut down lines.
* CAPEX Freeze: Downstream customers have drastically cut or delayed capital expenditure plans, directly impacting equipment suppliers like Liancheng. This is the primary driver behind the 56.57% revenue drop in 1H25.

2.2 The Turning Point: Accelerated Capacity Clearance

We are now witnessing the "accelerated clearance" phase. This is characterized by:
1. Exit of Weak Players: Smaller, less efficient manufacturers with high debt burdens are exiting the market through bankruptcy or merger.
2. Technological Obsolescence: Legacy P-type (PERC) capacity is becoming economically unviable. The industry is rapidly transitioning to N-type technologies (TOPCon, HJT, BC), which offer higher conversion efficiencies.
3. Policy Support: Government interventions in major markets (including China) are beginning to discourage low-quality expansion and encourage mergers and acquisitions to consolidate the industry.

2.3 Implications for Liancheng Numerical Control

While the overall volume of new capacity additions may slow, the quality of equipment demand is shifting.
* Replacement Cycle: As old lines are decommissioned, there will be a demand for retrofitting or replacing key components with higher-efficiency alternatives. Liancheng’s advanced crystal growth furnaces and cutting machines are well-positioned to capture this upgrade demand.
* Efficiency Focus: Customers are no longer buying equipment solely for capacity expansion; they are buying it to lower unit costs. Liancheng’s focus on reducing energy consumption per wafer and improving yield rates aligns perfectly with customer needs in this environment.
* Market Share Consolidation: As weaker equipment suppliers fail due to lack of R&D funds or poor cash flow, Liancheng, with its strong balance sheet and technical pedigree, is poised to gain market share. The "survival of the fittest" dynamic benefits established leaders with deep pockets.

3. The Second Growth Curve: Semiconductor Equipment Expansion

To mitigate the cyclicality of the PV sector, Liancheng has strategically leveraged its core technologies to enter the semiconductor equipment market. This diversification is not merely a hedge but a significant growth engine.

3.1 Global Semiconductor Market Outlook

The semiconductor industry is in a robust upcycle, driven by artificial intelligence (AI), electric vehicles (EVs), and industrial automation.
* Market Size: According to the World Semiconductor Trade Statistics (WSTS), the global semiconductor market reached USD 346 billion in 1H25, a year-on-year increase of 18.9%.
* Equipment Demand: The International Semiconductor Equipment and Materials (SEMI) association forecasts that global semiconductor equipment sales will hit a record USD 125.5 billion in 2025, up 7.4% YoY. This is expected to climb further to USD 138.1 billion in 2026.
* Regional Dynamics: China continues to aggressively expand its domestic semiconductor manufacturing capacity to achieve self-sufficiency, creating a sustained demand for local equipment suppliers. Liancheng is well-positioned to benefit from this "localization" trend.

3.2 The Silicon Carbide (SiC) Opportunity

A specific area of high growth within semiconductors is Third-Generation semiconductors, particularly Silicon Carbide (SiC).
* Demand Drivers: SiC power devices are critical for EV inverters, onboard chargers, PV inverters, and energy storage systems due to their superior efficiency and heat resistance compared to traditional silicon. Furthermore, emerging AI data centers and AR/VR devices are increasing power density requirements, further boosting SiC adoption.
* Market Growth: Data from Yole Développement indicates that the global SiC power device market is expected to grow at a CAGR of over 20% from 2024 to 2030.
* Liancheng’s Role: SiC manufacturing requires specialized crystal growth equipment (similar in principle to PV mono-crystal pulling but with higher technical barriers) and precise slicing/grinding tools. Liancheng’s expertise in crystal growth and wire cutting is directly transferable. The Company has already made strides in this area, and as the SiC market expands, this segment could contribute disproportionately to future profits given the higher margins associated with semiconductor-grade equipment.

3.3 Progress and Validation

• Patent Portfolio: The Company holds 917 patents and 202 software copyrights. This IP moat is crucial in the semiconductor sector, where litigation and technical barriers are high.
• Cross-Industry Application: The report notes the successful application of online cutting technology to the stone processing industry. While seemingly unrelated, this demonstrates the Company’s ability to adapt its core mechanical and control technologies to diverse materials, reinforcing the versatility of its R&D platform.
• Investment in Capacity: The Company has been investing in semiconductor-related capacity and R&D. The increase in long-term investments on the balance sheet (from CNY 517 million in 2023 to an estimated CNY 1.48 billion in 2027) partly reflects these strategic bets.

4. Revised Financial Forecasts and Valuation

Given the extended downturn in the PV sector, we have adjusted our financial models. We have lowered our estimates for 2025 and 2026 and introduced a 2027 forecast to capture the full recovery cycle.

4.1 Earnings Forecast Adjustments

Rationale for Downgrade:
The primary reason for the downgrade is the persistence of low PV module prices and the slower-than-expected clearance of inefficient capacity. Many downstream clients are still burning cash, limiting their ability to place new orders. Consequently, revenue recognition will be pushed back. However, we believe the market has over-penalized the stock, and the new forecasts still imply a strong recovery trajectory from 2025 onwards.

4.2 Profitability Metrics Projection

Analysis of Margins:
* Gross Margin Stability: Despite the revenue drop, gross margins are expected to remain in the 25-26% range. This is supported by the higher-margin semiconductor and battery equipment segments offsetting pressure in the standard PV line.
* Net Margin Expansion: We project net margins to expand from 6.7% in 2025 to 13.4% in 2027. This improvement is driven by operating leverage (fixed costs spread over higher revenue) and a favorable product mix shift towards higher-value semiconductor equipment.
* ROE Recovery: Return on Equity is expected to bottom at 5.8% in 2025 and recover to double digits (12.2%) by 2027, signaling a return to efficient capital utilization.

4.3 Valuation Analysis

At the current share price of CNY 29.81, the valuation metrics are as follows:

Valuation Perspective:
* Short-Term Premium: The 2025E P/E of 25.2x appears elevated. However, this is a function of depressed earnings ("denominator effect") rather than an inflated stock price. Investors should not rely on the current year’s P/E as the primary valuation anchor.
* Medium-Term Attractiveness: The 2026E P/E of 13.9x and 2027E P/E of 10.1x are highly attractive for a company with a dominant market position in PV equipment and a high-growth semiconductor optionality. Compared to historical averages and peers in the specialized equipment sector, a forward P/E of 10-14x offers a compelling risk-reward ratio.
* Price-to-Book Support: The P/B ratio of 1.6x (2025E) provides a reasonable floor, considering the Company’s asset-heavy nature and strong intellectual property assets.

Risks / Headwinds

While the investment thesis is robust, several risks could impede the projected recovery and growth. Investors must carefully consider these factors.

1. Photovoltaic Capacity Oversupply Persistence

• Risk Description: If the clearance of inefficient PV capacity proceeds slower than anticipated, the oversupply situation could persist into 2026. This would continue to suppress downstream profitability and delay CAPEX recovery.
• Impact: Extended revenue stagnation or further declines; potential need for additional asset impairments; pressure on gross margins if price wars intensify.
• Mitigation: Monitor industry utilization rates and policy announcements regarding capacity restrictions.

2. Customer Concentration and Dependency

• Risk Description: Liancheng Numerical Control has historically relied on a small number of large PV manufacturers for a significant portion of its revenue. While diversification is underway, the loss of a key customer or a reduction in orders from a major client could have a disproportionate impact on financial results.
• Impact: Volatility in quarterly revenues; bargaining power imbalance leading to margin compression.
• Mitigation: The Company’s expansion into semiconductors and other industrial applications (like stone cutting) is a direct strategy to reduce this dependency. Progress in these areas should be tracked closely.

3. Credit and Asset Impairment Losses

• Risk Description: Given the financial distress in the PV sector, there is a heightened risk that some customers may face liquidity crises, leading to delayed payments or defaults. This could result in increased bad debt provisions. Additionally, obsolete inventory or equipment may require write-downs.
• Impact: Direct hit to net profit; deterioration of cash flow; weakening of the balance sheet.
• Mitigation: The Company has been managing its receivables and inventory levels. The forecast includes assumptions for impairment losses (e.g., CNY 150 million in 2025E). Any deviation above this level would negatively impact earnings.

4. Semiconductor Market Execution Risk

• Risk Description: Entering the semiconductor equipment market is technically challenging and highly competitive. There is a risk that Liancheng’s products may not meet the stringent quality and reliability standards required by leading semiconductor fabs, or that adoption rates may be slower than expected.
• Impact: Failure to realize the "second growth curve"; sunk R&D costs without corresponding revenue; continued reliance on the cyclical PV market.
• Mitigation: The Company’s strong patent portfolio and existing relationships in the broader tech supply chain are advantages. Verification of orders from reputable semiconductor clients will be a key catalyst.

5. Macroeconomic and Geopolitical Factors

• Risk Description: Trade barriers, tariffs, or export controls (particularly concerning semiconductor technology) could restrict market access or increase costs. Global economic slowdowns could also dampen demand for both solar energy and consumer electronics (driving semiconductor demand).
• Impact: Reduced total addressable market; supply chain disruptions.
• Mitigation: Diversification of geographic markets and adherence to international compliance standards.

Rating / Sector Outlook

Sector Outlook: Cautiously Optimistic on Equipment Leaders

Photovoltaic Equipment Sector:
The sector is currently in the "trough" of the cycle. We expect the second half of 2025 and early 2026 to be the period of maximum pain, followed by a gradual stabilization. The key theme for the next 12-18 months is consolidation and technological iteration. Equipment suppliers that can offer solutions for N-type technology and cost reduction will outperform those selling generic capacity expansion tools. We are Neutral on the sector as a whole but Overweight on leaders with strong balance sheets and diversification strategies.

Semiconductor Equipment Sector:
The sector is in a strong uptrend. Driven by AI, EVs, and national security initiatives, capital expenditure in semiconductor manufacturing remains robust. We are Overweight on this sector, particularly on companies involved in third-generation semiconductors (SiC/GaN) and those benefiting from domestic substitution trends in China.

Investment Rating: Outperform (Maintained)

We maintain our Outperform rating on Liancheng Numerical Control.

• Relative Strength: We expect Liancheng to outperform the broader market index (CSI 300 or Beijing Stock Exchange Index) over the next 6-12 months.
• Catalysts:
  1. Signs of PV Stabilization: Any data indicating a halt in price declines or an uptick in utilization rates in the PV sector.
  2. Semiconductor Order Announcements: Public disclosure of significant orders or qualifications in the SiC or semiconductor crystal growth equipment space.
  3. Quarterly Margin Improvement: Evidence that the product mix shift is driving gross margins higher despite flat revenues.
  4. Policy Support: Government measures accelerating the exit of outdated PV capacity.

Investment View

1. Strategic Positioning: A Bridge Between Cycles

Liancheng Numerical Control represents a unique investment opportunity at the intersection of two major industrial trends: the maturation/cleanup of the green energy sector and the explosive growth of the semiconductor industry.

In the short term, the stock is a play on survival and consolidation. The Company’s strong balance sheet (net cash position) and low debt levels allow it to weather the storm better than competitors. As weaker rivals exit, Liancheng is positioned to capture a larger share of the eventual recovery. The market’s current pessimism, reflected in the depressed 2025 earnings estimates, creates a dislocation between price and intrinsic long-term value.

In the medium to long term, the stock is a play on technological diversification. The successful penetration of the semiconductor equipment market, particularly in SiC, transforms Liancheng from a cyclical PV supplier into a diversified high-tech equipment platform. This re-rating potential is not fully captured in current valuations, which still largely treat it as a pure-play PV stock.

2. Valuation Framework: Looking Through the Valley

Investors should adopt a "look-through" valuation approach. Focusing on the 2025 P/E of 25x is misleading because 2025 is an anomaly year driven by external industry shocks rather than internal operational failure.

• Base Case (2026-2027): Assuming a moderate recovery in PV CAPEX and steady growth in semiconductor equipment, the Company is on track to generate CNY 510-701 million in net profit. Applying a conservative P/E multiple of 15-18x (appropriate for a mature equipment manufacturer with growth options) to the 2026/2027 earnings suggests a fair value range significantly above the current price.
• Bull Case: If the PV recovery accelerates or if the semiconductor business gains traction faster than expected (e.g., securing major foundry contracts), earnings could exceed our 2027 estimates. In this scenario, the multiple could expand to 20-25x, driving substantial upside.
• Bear Case: If the PV downturn persists into 2027 and semiconductor progress stalls, earnings may remain suppressed. However, even in this scenario, the Company’s asset base and cash position provide a downside floor.

3. Actionable Insights for Institutional Investors

• Accumulation Zone: The current price level (CNY ~29.8) offers an attractive entry point for long-term institutional portfolios. The risk-reward ratio is favorable given the limited downside (supported by book value and cash) and significant upside (driven by cyclical recovery and new growth engines).
• Monitoring Metrics: Investors should closely track:
  • Quarterly Gross Margins: Specifically in the Crystal Growth segment. Stability here confirms pricing power.
  • Accounts Receivable Turnover: Any improvement here signals easing pressure from downstream clients.
  • R&D Expense Ratio: Continued high R&D spending is essential for maintaining the technological edge in both PV and Semi sectors.
  • Semiconductor Revenue Breakdown: Look for disaggregated data on semiconductor-related revenue in future reports to validate the diversification thesis.
• Portfolio Role: Liancheng serves as a tactical satellite holding within a broader Industrials or Clean Tech portfolio. It offers exposure to the China manufacturing upgrade theme with a specific focus on capital goods.

4. Conclusion

Liancheng Numerical Control is navigating one of the most challenging periods in the photovoltaic industry’s history. However, the Company’s response—maintaining R&D intensity, optimizing cost structures, and aggressively pursuing semiconductor opportunities—demonstrates resilient management and strategic foresight.

The sharp decline in 1H25 earnings is a reflection of the industry beta, not company-specific alpha deterioration. As the PV sector clears excess capacity and the semiconductor equipment business scales, Liancheng is well-positioned for a robust earnings recovery in 2026 and 2027.

We believe the market has over-discounted the near-term risks and under-valued the long-term optionality. Therefore, we maintain our Outperform rating, advising investors to look beyond the transient headwinds of 2025 and focus on the structural improvements and diversification gains that will drive value in the coming years.

Appendix: Detailed Financial Analysis & Data Tables

A. Income Statement Analysis (Historical & Forecast)

The following table details the projected income statement, highlighting the expected recovery in profitability metrics.

Key Observations:
* Cost Control: Operating expenses (Selling, Admin, R&D) are projected to remain relatively stable or grow slowly despite revenue fluctuations, demonstrating disciplined cost management.
* Impairment Reduction: Asset impairment losses are forecasted to drop from CNY 299 million in 2024 to CNY 150 million in 2025 and CNY 50 million in 2026/27. This assumes that the bulk of the "cleaning up" of bad assets occurs in 2024-2025, paving the way for cleaner earnings in subsequent years.
* Investment Income: The Company generates significant income from investments (likely related to its stake in listed affiliates or other strategic holdings). This provides a non-operational buffer to earnings.

B. Balance Sheet Strength & Liquidity

Key Observations:
* Asset Restructuring: The significant drop in Total Assets from 2023 to 2024 reflects a deliberate deleveraging and inventory reduction strategy. The projected gradual increase from 2025 onwards aligns with the anticipated business recovery.
* Equity Build-up: Retained earnings are projected to grow from CNY 2.66 billion in 2024 to CNY 3.95 billion in 2027, strengthening the equity base and supporting future dividend potential or reinvestment.
* Leverage Management: The Debt-to-Asset ratio is managed within a prudent 50-55% range, ensuring financial flexibility.

C. Cash Flow Dynamics

Key Observations:
* Operating Cash Flow Recovery: The negative OCF in 2024 (-494 million) was a concern, driven by working capital outflows. The forecasted return to positive OCF in 2025 (221 million) and strong growth in 2026/27 indicates an improvement in cash conversion cycles and profitability quality.
* Investment Discipline: Investing cash flows remain negative but controlled, reflecting ongoing but disciplined CAPEX and strategic long-term investments.
* Financing Shift: The shift from positive financing CF in 2024 (raising debt/equity) to negative in 2025-27 (repaying debt) confirms the deleveraging trend and reduced reliance on external funding.

D. Key Financial Ratios & Efficiency Metrics

Key Observations:
* Efficiency Bottoming: Asset turnover and ROIC are expected to bottom in 2025. The subsequent improvement in 2026/27 will be a key driver of shareholder value.
* Liquidity Safety: Current and Quick ratios remain above 1.0 (except Quick Ratio in 2023/25 which is close), indicating sufficient short-term liquidity to meet obligations.

Final Remarks

Liancheng Numerical Control stands at a pivotal juncture. The immediate future is clouded by the inevitable pains of industry consolidation in the photovoltaic sector. However, the Company’s strategic responses—financial prudence, technological innovation, and diversification into semiconductors—position it not just to survive, but to thrive in the next cycle.

For institutional investors, the current valuation offers a rare opportunity to acquire a leading equipment manufacturer at a discount to its mid-cycle earnings power, with the added bonus of a high-growth semiconductor option. We recommend accumulating positions on weakness, with a target horizon of 12-24 months to allow for the full realization of the recovery thesis.

Disclaimer:
This report is prepared by Open Source Securities Co., Ltd. for institutional and professional investors only. The information contained herein is based on sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy or completeness. The opinions and estimates contained in this report constitute a judgment as of the date of this report and are subject to change without notice. This report is not an offer to sell or a solicitation of an offer to buy any securities. Investors should make their own investment decisions based on their specific investment objectives, financial situations, and risk tolerances. Past performance is not indicative of future results.