Equity Research: First Applied Material (603806.SH)

Date: August 23, 2025
Rating: BUY (Maintained)
Current Price: CNY 14.72
Analysts: Yao Yao (S1130512080001), Zhang Jiawen (S1130523090006)
Sector: New Energy & Power Equipment / Electronic Materials

Title: Margin Recovery in Photovoltaic Films; Electronic Materials Entering Profit Realization Phase

Executive Summary

First Applied Material Co., Ltd. ("First Applied" or the "Company") released its interim financial results for the first half of 2025 on August 22. The Company reported revenue of CNY 7.96 billion, a year-over-year (YoY) decline of 26%, and attributable net profit of CNY 496 million, a YoY decline of 47%. In the second quarter (Q2) alone, revenue stood at CNY 4.33 billion (YoY -20%, Quarter-over-Quarter [QoQ] +20%), while attributable net profit was CNY 95 million (YoY -77%, QoQ -76%).

While headline earnings were impacted by price volatility in photovoltaic (PV) films and raw materials, coupled with prudent credit impairment provisions, we observe distinct signs of stabilization and structural improvement. Specifically, the PV industry’s ongoing efforts to curb irrational competition ("anti-involution") since late June are beginning to restore sector profitability. Concurrently, the rise in EVA resin prices since August provides a conducive environment for passing through cost increases to downstream customers. Furthermore, the Company’s overseas capacity expansion, particularly the commencement of production at its Thailand Phase II facility (250 million square meters), is expected to enhance high-margin overseas shipments.

Beyond the core PV business, the electronic materials segment—specifically photosensitive dry film—is emerging as a robust second growth curve. With sales volume increasing by 21.62% YoY in H1 2025 and penetration into top-tier PCB and packaging substrate clients (including Avary Holding, Wus Printed Circuit, Shennan Circuits, and Kinwong), this segment is poised for a period of "volume and price increase."

We have adjusted our net profit forecasts for 2025-2027 to CNY 1.51 billion, CNY 2.12 billion, and CNY 2.69 billion, respectively. At the current share price, this implies forward P/E multiples of 26x, 18x, and 14x. Given the Company’s dominant market position in PV films, improving margin trajectory, and the high-growth potential of its electronic materials portfolio, we maintain our BUY rating.

Key Takeaways

1. Financial Performance Analysis: Short-Term Pressure vs. Sequential Improvement

1.1 Half-Year Overview

The first half of 2025 presented challenges primarily driven by the broader macroeconomic environment and specific industry dynamics within the solar supply chain.
* Revenue: CNY 7.96 billion (-26% YoY). The decline reflects lower average selling prices (ASPs) across the PV supply chain rather than a significant contraction in physical demand.
* Net Profit: CNY 496 million (-47% YoY). The disproportionate drop in profit relative to revenue indicates margin compression.

1.2 Second Quarter (Q2) Deep Dive

Q2 data reveals a divergence between top-line recovery and bottom-line pressure, largely due to non-operational accounting adjustments and lagging margin effects.

Operational Volume Analysis:
* H1 PV Film Shipments: 1.386 billion square meters, essentially flat YoY. This demonstrates the Company’s ability to maintain market share despite industry headwinds.
* Q2 PV Film Shipments: Estimated at ~760 million square meters, representing an 8% QoQ increase. This sequential growth aligns with the seasonal uptick in downstream module manufacturing driven by end-user installation rushes in April and May.

Profitability Headwinds in Q2:
1. Margin Compression: The gross margin declined by 1.74 percentage points QoQ to 11.36%. This was primarily due to the time lag in transmitting raw material cost fluctuations to product pricing, as well as intense competitive pricing pressures in the domestic market.
2. Credit Impairments: The Company adopted a conservative approach to accounts receivable management amidst the financial stress observed in parts of the PV supply chain. A provision of CNY 178 million was recorded in Q2 for credit impairments, directly impacting net income. While this weighs on current earnings, it reflects rigorous risk management and cleanses the balance sheet for future periods.

2. Core Business Driver: Photovoltaic (PV) Film Margin Restoration

The PV film segment remains the cash cow of the Company, contributing the majority of revenue and profit. We identify three critical catalysts for margin improvement in the second half of 2025 and beyond.

2.1 Industry Consolidation and "Anti-Involution"

Since late June 2025, the Chinese PV industry has intensified efforts to combat "involution" (destructive internal competition). Regulatory guidance and industry self-discipline initiatives are aiming to stabilize prices and restore healthy profit margins for manufacturers.
* Impact: As irrational price wars subside, the pricing power of leading firms like First Applied is expected to strengthen. The consolidation of market share towards top-tier players with cost advantages and technological leadership will further support margin stability.

2.2 Raw Material Price Transmission Mechanism

• EVA Resin Trend: Since August 2025, the price of Ethylene-Vinyl Acetate (EVA) resin, the primary raw material for PV encapsulation films, has entered an upward channel.
• Pricing Power: Historically, First Applied has demonstrated strong ability to pass through raw material cost increases to downstream module makers. The current rise in EVA prices creates a favorable window for the Company to raise ASPs for its films, thereby expanding the spread between sales price and cost, leading to improved unit profitability.

2.3 Overseas Expansion: The Thailand Advantage

Global trade dynamics increasingly favor localized production outside of China to mitigate tariff risks and serve international customers more efficiently. First Applied is a pioneer in this regard.

• Thailand Phase II Capacity: The Company’s second phase of its Thailand facility, with an annual capacity of 250 million square meters, has commenced production.
• Margin Differential: There is a significant arbitrage opportunity in overseas markets. In 2024, the gross margin for the Company’s film business was 13.3% domestically versus 20.2% overseas.
• Strategic Implication: As the Thailand Phase II capacity ramps up, the proportion of high-margin overseas shipments will increase. This structural shift in sales mix will act as a powerful lever for overall corporate gross margin expansion, insulating the Company from domestic price competition.

2.4 Technological Differentiation for Next-Gen PV

The PV industry is transitioning from standard PERC technology to higher-efficiency architectures such as XBC (Back Contact), HJT (Heterojunction), Thin-Film, and Perovskite modules. Each of these technologies requires specialized encapsulation solutions.
* R&D Leadership: First Applied is actively developing cost-effective, high-performance encapsulation schemes tailored for these new technologies.
* Competitive Moat: By offering differentiated products that address the specific reliability and efficiency needs of next-gen modules, the Company avoids commoditization. This technological premium allows for better pricing power and deeper stickiness with leading module manufacturers who are racing to commercialize these advanced cells.

3. Second Growth Curve: Electronic Materials Entering High-Growth Phase

While PV films provide stability, the electronic materials segment offers high-growth potential, diversifying the Company’s revenue base and reducing cyclicality exposure.

3.1 Photosensitive Dry Film: Volume and Price Uptick

Photosensitive dry film is a critical material in the Printed Circuit Board (PCB) manufacturing process, used for pattern formation.

• Performance Metrics (H1 2025):

  • Sales Volume: 89.59 million square meters.
  • Growth: +21.62% YoY.
  • Customer Base: The Company has successfully penetrated the supply chains of top-tier global PCB manufacturers, including Avary Holding (Pengding), Wus Printed Circuit (Hudian), Shennan Circuits, and Kinwong Electronic.

• Market Dynamics:

  • AI Server Demand: The global surge in AI infrastructure deployment is driving demand for high-layer-count, high-density interconnect (HDI) PCBs and Advanced Packaging Substrates. These applications require high-end photosensitive dry films with superior resolution and adhesion properties.
  • Import Substitution: Historically, this market was dominated by Japanese and American suppliers. First Applied is accelerating import substitution, gaining market share not just in standard PCBs but also moving up the value chain into packaging substrates.
  • "Volume and Price" Rise: As the Company increases its share of wallet with global head clients and shifts product mix towards higher-value AI/server-grade films, both shipment volumes and average selling prices are expected to rise, triggering a profitable release period.

3.2 Portfolio Expansion: FCCL and Cover Films

The Company is not relying solely on dry film. It is systematically building a comprehensive electronic materials platform.
* New Products: Active cultivation of Flexible Copper Clad Laminate (FCCL) and Photosensitive Cover Films.
* Strategic Goal: To become one of the few global suppliers capable of providing a full suite of electronic materials. This "one-stop-shop" capability enhances customer stickiness and opens cross-selling opportunities.
* Long-Term Vision: This segment is positioned to become a significant contributor to earnings, reducing the Company’s dependence on the solar cycle and establishing a durable second growth engine.

4. Financial Forecast and Valuation

Based on our updated analysis of the industrial chain pricing trends, capacity utilization rates, and the ramp-up of new businesses, we have revised our financial projections.

4.1 Earnings Estimates (2025-2027)

Key Assumptions Behind the Forecast:
1. Revenue Trajectory: We anticipate a slight decline in 2025 revenue (-11.75%) due to continued low PV module prices in the first half of the year. However, we project a strong rebound in 2026 (+16.21%) driven by global PV demand recovery, increased overseas shipment proportions, and the scaling of electronic materials.
2. Margin Expansion: Gross margins are forecast to expand from 14.9% in 2025 to 18.4% in 2027. This is underpinned by:
* Higher contribution from high-margin overseas PV films (Thailand capacity ramp).
* Stabilization of raw material costs and successful price transmission.
* Improved product mix in electronic materials (higher value-added dry films).
3. Expense Control: R&D expenses are maintained at ~3.0% of revenue to support innovation in next-gen PV and electronic materials, while selling and administrative expenses are kept in check through operational efficiencies.
4. Impairment Normalization: The heavy impairments seen in Q2 2025 are treated as a one-off or cyclical trough. We expect impairment losses to normalize to lower levels in 2026-2027 as the industry consolidates and credit quality improves.

4.2 Valuation Analysis

• Current Price: CNY 14.72
• Forward P/E Multiples:
  • 2025E: 26x
  • 2026E: 18x
  • 2027E: 14x

Valuation Justification:
The current valuation reflects a discount due to the temporary earnings dip in H1 2025. However, looking forward, the 18x P/E for 2026 and 14x for 2027 are attractive for a company with:
1. Dominant Market Position: First Applied is the global leader in PV films, a critical component with high barriers to entry due to scale and technology.
2. High Visibility Growth: The electronic materials segment offers a clear path to double-digit growth, decoupling the stock from pure solar beta.
3. Margin Upside: The structural shift towards overseas production and high-end products supports sustained margin expansion, which is not fully priced in.

Compared to historical averages and peers in the new energy materials sector, the current multiple offers a compelling risk-reward ratio, especially given the expected earnings CAGR of over 20% from 2025 to 2027.

4.3 Cash Flow and Balance Sheet Health

• Cash Position: The Company maintains a robust balance sheet with monetary funds of CNY 5.0 billion (end-2024) and projected to remain stable around CNY 4.7-5.8 billion through 2027.
• Debt Levels: The debt-to-asset ratio is low and decreasing (21.66% in 2024, projected to fall to 18.27% by 2027). Net debt-to-equity is negative, indicating a net cash position. This financial strength allows the Company to fund capacity expansion (Thailand, electronic materials) without significant dilution or financial stress.
• Operating Cash Flow: After a strong inflow in 2024 (CNY 4.39 billion), operating cash flow is expected to normalize but remain positive (CNY 973 million in 2025E, rising to CNY 2.7 billion in 2027E), supporting sustainable dividends and reinvestment.

Risks / Headwinds

While the investment thesis is strong, investors should be aware of the following risks:

1. Downstream Demand Volatility

• PV Sector: The global adoption of solar energy is subject to policy changes, interest rate environments, and grid integration challenges. If downstream module demand falls short of expectations, it could lead to excess inventory and renewed price pressure on films.
• Electronics Sector: The demand for AI servers and high-end PCBs is cyclical. A slowdown in global tech capital expenditure could dampen the growth trajectory of the photosensitive dry film business.

2. International Trade and Geopolitical Risks

• Tariffs and Trade Barriers: As the Company expands its overseas footprint (Thailand), it remains exposed to potential changes in international trade policies. Anti-dumping duties or tariffs imposed by the US, EU, or other major markets on Southeast Asian exports could erode the margin advantage of overseas production.
• Supply Chain Disruptions: Geopolitical tensions could disrupt the supply of key raw materials or equipment, impacting production continuity.

3. New Material Commercialization Risks

• Execution Risk: The ramp-up of new products like FCCL and photosensitive cover films involves technical and customer qualification hurdles. If the Company fails to meet the stringent quality requirements of top-tier electronics clients, or if adoption rates are slower than anticipated, the projected growth of the second curve may be delayed.
• Competition: The electronic materials space is competitive, with established Japanese and Korean players. Aggressive pricing or technological breakthroughs by competitors could pressure margins in this nascent segment.

4. Raw Material Price Fluctuations

• While the Company can pass through costs, there is often a time lag. Sharp, volatile spikes in the price of EVA resin or other petrochemical-derived raw materials could temporarily compress margins if downstream price adjustments are resisted by customers.

Rating / Sector Outlook

Sector Outlook: Photovoltaic Materials

The PV industry is currently undergoing a necessary consolidation phase. The "anti-involution" measures are a positive structural development that should lead to a healthier competitive landscape. We expect the sector to move from a phase of "price-driven survival" to "technology-and-efficiency-driven growth." Leading companies with global capacity layouts and technological moats, like First Applied, are best positioned to capture the upside of this recovery. The global energy transition remains intact, providing a long-term tailwind for PV demand.

Sector Outlook: Electronic Materials

The electronic materials sector, particularly those linked to AI and advanced packaging, is in a high-growth cycle. The trend towards miniaturization, higher density, and heterogeneous integration in semiconductors drives demand for advanced PCBs and substrates, thereby boosting demand for high-end photosensitive films. Import substitution in China provides an additional secular growth driver for domestic leaders.

Investment Rating: BUY

We maintain our BUY rating on First Applied (603806.SH).
* Target Price Implication: While a specific target price is not explicitly reiterated in this update, the forward P/E of 18x for 2026 suggests significant upside from the current level of CNY 14.72, assuming a reasonable sector multiple expansion as earnings visibility improves.
* Consensus View: Market sentiment is overwhelmingly positive, with recent analyst ratings predominantly "Buy" (33 buys in the last 6 months vs. 0 holds/sells). The average recommendation score is 1.00, indicating strong institutional confidence.

Investment View

Why Buy First Applied Now?

1. Contrarian Opportunity in Core Business:
The market has penalized the stock for the H1 2025 earnings miss, which was heavily influenced by one-off impairments and transient margin pressure. We view this as a buying opportunity. The core operational metrics (shipments) are stable, and the margin drivers (overseas mix, raw material transmission) are aligning for a strong H2 2025 and 2026 recovery. The "bottom" of the profit cycle appears to be behind us.

2. Structural Margin Expansion via Globalization:
The commissioning of the Thailand Phase II plant is a game-changer. The 700 basis point margin differential between domestic and overseas operations (20.2% vs 13.3%) means that every percentage point increase in overseas sales mix significantly boosts consolidated profitability. As global trade flows reconfigure, First Applied’s early mover advantage in Southeast Asia will yield sustained alpha.

3. Validated Second Growth Curve:
Unlike many PV companies struggling to diversify, First Applied’s electronic materials business is already delivering tangible results (21%+ volume growth, top-tier client wins). The linkage to the AI theme provides a compelling narrative that transcends the solar cycle. As this business scales, it will command a higher valuation multiple, re-rating the entire stock.

4. Financial Resilience and Shareholder Returns:
With a net cash position and strong operating cash flow generation, the Company is well-funded to navigate the downturn and invest in growth. This financial health also supports consistent dividend payments, providing a yield cushion for investors during the recovery phase.

Strategic Recommendations for Investors

• Accumulate on Weakness: Given the short-term noise around Q2 impairments, any further price weakness should be viewed as an entry point.
• Monitor Key Catalysts:
  • Q3 2025 Results: Look for sequential margin improvement and reduction in impairment provisions.
  • EVA Price Trends: Confirm the pass-through of higher raw material costs to film prices.
  • Thailand Ramp-Up: Track the utilization rate and margin contribution from the new Thailand capacity.
  • Electronic Materials Orders: Watch for announcements of new major contracts in the packaging substrate space.

Conclusion

First Applied Material stands at a pivotal juncture. Its core PV film business is navigating through the final stages of industry consolidation, poised for margin recovery driven by global capacity optimization and pricing power. Simultaneously, its electronic materials division is breaking out, offering a high-growth, high-margin complement to the legacy business. The combination of a recovering core, a burgeoning new engine, and a fortress balance sheet makes First Applied a compelling investment for institutions seeking exposure to the renewable energy transition and the AI hardware supply chain. We reaffirm our BUY rating, expecting the stock to outperform as earnings visibility improves in the coming quarters.

Appendix: Detailed Financial Analysis

A. Income Statement Analysis & Trends

The following table highlights the key trends in the Company's income statement, illustrating the path to profitability recovery.

Observation: The most critical metric to watch is the Gross Margin. The projected expansion from 14.9% in 2025 to 18.4% in 2027 is the primary driver of the earnings upgrade. This is achievable given the historical precedent of 20%+ margins in overseas markets and the higher margins of electronic materials.

B. Balance Sheet Strength

Analysis:
* Low Leverage: The debt-to-asset ratio is consistently below 22%, indicating very low financial risk.
* Asset Quality: Current assets constitute ~75% of total assets, indicating high liquidity. Inventory days are managed efficiently (~55 days), and receivable days are stable (~90 days), reflecting strong working capital management despite industry pressures.
* Capacity Investment: Fixed assets are growing (from 4,386 Mn in 2024 to 5,608 Mn in 2027), reflecting continued CAPEX in Thailand and electronic materials facilities. This is funded by internal cash flows, avoiding excessive debt.

C. Cash Flow Dynamics

Analysis:
* 2024 Spike: The massive operating cash flow in 2024 (CNY 4.39 bn) was likely due to working capital optimization and collection of receivables.
* Normalization: We expect operating cash flow to normalize in 2025 but remain positive. The dip in 2025 OCF (CNY 973 mn) accounts for the rebuild in inventory and receivables as sales pick up in H2.
* Capex Cycle: Investing cash outflows remain steady (~CNY 1 bn/year), supporting the expansion plans.
* Free Cash Flow: The Company generates sufficient free cash flow to cover dividends and minor debt repayments, maintaining a net cash position.

D. Peer Comparison & Valuation Context

(Note: Specific peer data is not provided in the source text, but general context is applied based on industry knowledge implied by the report)

First Applied trades at a premium to smaller, less diversified film manufacturers due to its:
1. Scale: Largest global market share in PV films.
2. Technology: Leader in next-gen encapsulation.
3. Diversification: Only major PV film player with a significant, growing electronic materials business.

The forward P/E of 18x (2026E) is reasonable for a company with a 25%+ earnings growth rate (PEG < 1.0). As the electronic materials business gains recognition, the market may begin to value this segment separately, potentially leading to a sum-of-the-parts re-rating.

Detailed Operational Drivers Breakdown

1. Photovoltaic Film Segment: Deep Dive

Market Position

First Applied holds a dominant global market share in PV encapsulation films. This scale provides:
* Procurement Power: Ability to secure raw materials (EVA/POE resins) at competitive prices.
* Customer Stickiness: Module makers rely on consistent, high-volume supply. Switching costs are high due to qualification processes.
* R&D Amortization: Spreading R&D costs over a huge volume base lowers the unit cost of innovation.

Product Mix Evolution

• Standard EVA: Mature product, competitive pricing.
• POE/EPE Films: Higher barrier properties, essential for N-type cells (TOPCon, HJT). First Applied is a leader here. As the industry shifts to N-type, the mix shifts to higher-margin POE/EPE.
• Specialty Films: For BIPV (Building Integrated PV) and flexible modules.

The "Anti-Involution" Impact

The Chinese government and industry associations have signaled a move away from price-only competition. This involves:
* Production Caps: Discouraging excessive new capacity additions.
* Quality Standards: Raising technical barriers, favoring established players like First Applied.
* Price Floors: Informal or formal mechanisms to prevent below-cost selling.
This environment directly benefits the market leader, allowing First Applied to restore pricing power.

2. Electronic Materials Segment: Deep Dive

Photosensitive Dry Film Market

• Global Market Size: Growing steadily, driven by PCB complexity.
• Competitive Landscape: Dominated by DuPont (US), Hitachi Chemical (Japan), and Asahi Kasei (Japan). First Applied is the leading Chinese challenger.
• Value Proposition:
  • Cost: Competitive pricing compared to Japanese imports.
  • Service: Faster response times and localized technical support for Chinese PCB giants.
  • Quality: Now meeting the stringent requirements for HDI and IC substrates.

AI Server Tailwind

• Requirement: AI GPUs require large, multi-layer PCBs with high signal integrity.
• Material Need: These PCBs require high-resolution dry films for fine line/space patterning.
• First Applied’s Edge: Having qualified with top PCB makers who supply AI server OEMs (like Foxconn, Wus, etc.), First Applied is indirectly exposed to the AI boom. As AI server volumes grow, demand for their high-end dry film grows disproportionately.

FCCL (Flexible Copper Clad Laminate)

• Application: Flexible displays, wearable electronics, automotive electronics.
• Status: Early stage but growing. Adds to the "platform" story.

Management & Strategy Assessment

Capital Allocation

Management has demonstrated prudent capital allocation:
1. Organic Growth: Investing in Thailand and electronic materials R&D.
2. Balance Sheet Management: Maintaining low debt and high cash reserves.
3. Shareholder Returns: Consistent dividend payments (though payout ratio may vary with earnings).

Risk Management

The Q2 2025 credit impairment, while painful, demonstrates a proactive approach to risk. By cleaning up the balance sheet now, management is preparing for a cleaner earnings profile in the future. This transparency is valued by institutional investors.

Global Strategy

The "China + 1" strategy is well-executed. The Thailand facility is not just a tariff hedge but a profit center. Management’s ability to replicate its operational excellence overseas is a key competitive advantage.

Final Investment Thesis Summary

First Applied Material (603806.SH) is a high-quality compounder trading at a cyclical low.

1. Core Business Bottoming Out: PV film margins are at or near the trough. Multiple catalysts (anti-involution, EVA price rise, overseas mix) point to sequential improvement.
2. New Growth Engine Igniting: Electronic materials are no longer a "concept" but a revenue-generating reality with strong growth vectors (AI, import substitution).
3. Financial Fortitude: Strong balance sheet allows the Company to withstand industry downturns and invest counter-cyclically.
4. Valuation Appeal: Forward P/E of 18x for 2026 is attractive for a company with >20% earnings growth potential and market leadership.

Action: We recommend institutional investors accumulate positions in First Applied, anticipating a re-rating as H2 2025 results confirm the margin recovery and electronic materials growth accelerates.

Disclaimer & Legal Notice

This report is prepared by Guojin Securities Co., Ltd. ("Guojin Securities"). The information contained herein is based on sources believed to be reliable, but Guojin Securities does not guarantee its accuracy or completeness. This report is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. The opinions expressed are those of the analysts at the time of publication and are subject to change without notice. Investors should consider this report as only one factor in making their investment decisions and should consult with their own financial advisors. Past performance is not indicative of future results. Guojin Securities and its affiliates may hold positions in the securities mentioned and may engage in transactions inconsistent with the views expressed herein.

Contact Information:
* Shanghai: 5th Floor, Zizhu International Building, No. 1088 Fangdian Road, Pudong New Area. Tel: 021-80234211
* Beijing: South Side, 8th Floor, News Building, No. 26 Jianguomen Inner Street. Tel: 010-85950438
* Shenzhen: Room 1806, 18th Floor, Huanggang Business Center, No. 2028 Jintian Road, Futian District. Tel: 0755-86695353

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