Equity Research: Lianhong New Materials (003022.SZ)

Date: August 25, 2025
Sector: Basic Chemicals / Advanced Materials
Rating: BUY (Initiation)
Price Target: N/A (Based on relative valuation multiples provided in report)
Current Price: CNY 20.49 (as of Aug 22, 2025)

Executive Summary

Lianhong New Materials (003022.SZ) is emerging as a pivotal platform enterprise in China’s new materials sector, demonstrating a robust recovery in profitability despite headwinds in top-line revenue. The company’s 1H 2025 financial results reveal a decoupling of revenue and profit trends: while revenue declined by 12.13% year-over-year (YoY) to CNY 2.91 billion due to lower product pricing, net profit attributable to shareholders rose by 14.15% YoY to CNY 161 million. More importantly, core operating profitability, measured by扣非 (deducting non-recurring items) net profit, surged by 43.21% YoY. This performance underscores the effectiveness of the company’s strategic pivot towards high-value-added products, rigorous cost control, and the successful commercialization of new material lines.

We initiate coverage with a BUY rating. Our investment thesis is anchored in three core pillars:
1. Structural Margin Expansion: The company is successfully transitioning its product mix from commodity chemicals to specialized, high-margin materials such as high-VA content EVA, ultra-high molecular weight polyethylene (UHMWPE), and electronic-grade special gases. This shift is driving gross margins higher, reaching 19.64% in 1H 2025 (+2.75 pct YoY).
2. Imminent Capacity Release: A significant pipeline of projects, including 200kt/year EVA, 100kt/year POE, and various battery material additives, is scheduled for completion and ramp-up in 2025. This capacity expansion is expected to drive substantial revenue growth in 2026 and 2027, with consensus estimates projecting revenue CAGR of ~21% over the next two years.
3. R&D Moat and Diversification: Lianhong is not merely a manufacturer but an innovation platform. Its "Self-R&D + Collaborative Development" model has yielded breakthroughs in solid-state battery materials, photoresist components, and high-end polyolefin catalysts, reducing cyclicality and enhancing long-term competitive barriers.

We forecast revenues of CNY 6.99 billion, CNY 8.84 billion, and CNY 10.30 billion for 2025, 2026, and 2027 respectively, representing YoY growth of 11.4%, 26.5%, and 16.5%. Net profits are projected to grow at a faster clip, reaching CNY 368 million, CNY 603 million, and CNY 763 million, implying strong earnings leverage as new high-margin capacities come online. At current levels, the stock trades at approximately 74.3x 2025E P/E, which appears elevated on an absolute basis but is justified by the high growth trajectory and compares favorably against a peer group average of 106.0x for 2025. As the earnings base expands in 2026-2027, the P/E compresses to attractive levels of 45.4x and 35.9x respectively.

Key Takeaways

1. Financial Performance Analysis: Profitability Resilience Amidst Revenue Pressure

The first half of 2025 presented a mixed macroeconomic environment for the chemical sector, characterized by soft demand in certain downstream applications and fluctuating raw material costs. Lianhong New Materials navigated this landscape by prioritizing quality of earnings over volume-driven top-line growth.

1.1 Half-Year Results (1H 2025)

• Revenue: CNY 2.911 billion, down 12.13% YoY.
• Net Profit (Attributable): CNY 161 million, up 14.15% YoY.
• Deducted Non-Recurring Net Profit: CNY 160 million, up 43.21% YoY. This metric is a clearer indicator of operational health, suggesting that the core business fundamentals have strengthened significantly.
• Gross Margin: 19.64%, an improvement of 2.75 percentage points (pct) YoY.
• Net Margin: 5.66%, an improvement of 1.48 pct YoY.

The divergence between declining revenue and rising profits is primarily attributed to two factors:
1. Cost Side: Raw material prices decreased YoY, providing immediate relief to input costs.
2. Product Mix & Efficiency: The contribution from new, higher-margin products (EC, UHMWPE, electronic special gases, PLA) began to materialize. Simultaneously, the company executed over 10 key technical optimization projects, yielding tangible cost savings.

1.2 Second Quarter Dynamics (2Q 2025)

The sequential trend in 2Q 2025 further validates the recovery trajectory.
* Revenue: CNY 1.372 billion, down 24.85% YoY and down 10.82% quarter-over-quarter (QoQ). The QoQ decline reflects seasonal adjustments and ongoing market price pressures.
* Net Profit: CNY 89 million, essentially flat YoY (-0.07%) but up 25.00% QoQ.
* Deducted Non-Recurring Net Profit: CNY 90 million, down 15.45% YoY but up 27.52% QoQ.
* Gross Margin: 20.62%, up 3.24 pct YoY and up 1.85 pct QoQ.
* Net Margin: 6.60%, up 1.88 pct YoY and up 1.77 pct QoQ.

The QoQ improvement in both profit and margins is a critical signal. It indicates that the company’s cost reduction measures and product structure optimizations are gaining momentum, offsetting the negative impact of lower selling prices. The expansion of gross margin by nearly 200 basis points sequentially suggests that the mix shift towards premium products is accelerating.

(Note: 1H 2024 figures derived from reported YoY changes for context)

2. Business Segment Deep Dive: Structural Optimization

Lianhong’s portfolio is strategically divided into Advanced Polymer Materials and Special Fine Chemicals, with supporting roles from Trading and By-products. The performance of each segment highlights the company’s successful transition up the value chain.

2.1 Advanced Polymer Materials

This segment remains the revenue backbone but is undergoing a qualitative transformation.
* Revenue (1H 2025): CNY 765 million (EVA) + CNY 801 million (PP) ≈ CNY 1.566 billion (Combined estimate based on product breakdown).
* Correction based on report data: The report lists specific revenues for EVA, PP, EO derivatives, and Others. Let's align with the report's specific product breakdown which maps to segments.
* EVA (Ethylene-Vinyl Acetate): Revenue CNY 765 million, down 3.92% YoY. Gross Margin 30.98%, down 5.27 pct YoY.
* Analysis: While margins contracted YoY, they remain robust at ~31%. The decline is likely due to the normalization of PV (photovoltaic) film material prices after the highs of previous years. However, the company has firmly positioned itself in the high-VA content niche, serving high-growth sectors like photovoltaic films, cable insulation, and premium footwear. This strategic locking into high-end applications protects margins from the commoditization seen in standard EVA grades.
* Polypropylene (PP) Specialty Grades: Revenue CNY 801 million, down 4.47% YoY. Gross Margin 14.65%, up 0.22 pct YoY.
* Analysis: The slight margin expansion despite revenue decline indicates successful development of new PP grades tailored to specific customer needs, mitigating the impact of general market weakness.

2.2 Special Fine Chemicals (EO Derivatives & Others)

This segment is the primary driver of recent margin expansion.
* EO Derivatives (EOD): Revenue CNY 535 million, up 37.93% YoY. Gross Margin 26.75%, up 10.60 pct YoY.
* Analysis: This is the standout performer. The dramatic margin expansion is driven by a higher proportion of high-margin products, including special surfactants and increased export volumes. The stable supply of carbonate solvents to head customers (likely battery electrolyte manufacturers) provides a reliable cash flow base. The 10-point margin jump suggests a fundamental shift in the product mix towards proprietary, high-barrier chemicals rather than bulk EO derivatives.
* By-products & Others: Revenue CNY 581 million, down 42.72% YoY. Gross Margin 6.71%, up 2.88 pct YoY.
* Analysis: The sharp revenue drop may reflect internal consumption changes or divestment of low-value trading activities, aligning with the strategy to focus on core manufacturing. The margin improvement indicates better efficiency in handling residual streams.

2.3 New Product Commercialization: The "Multi-Bloom" Strategy

The report highlights several new products that have moved from pilot/commissioning to profitable operation in 1H 2025:
1. UHMWPE (Ultra-High Molecular Weight Polyethylene): The plant has been optimized for high-load stable operation. Five new grades have been developed and secured customer orders. UHMWPE is critical for lithium battery separators, bulletproof vests, and high-performance fibers, representing a high-growth, high-margin avenue.
2. Electronic Grade Special Gases: Products have passed verification and entered sales channels. This marks Lianhong’s entry into the semiconductor supply chain, a sector with extremely high entry barriers and sticky customer relationships.
3. PLA (Polylactic Acid): Series products have achieved batch sales. As global regulations tighten on single-use plastics, bio-degradable PLA offers a sustainable growth vector.
4. Carbonate Solvents: Stable supply to leading battery customers continues to underpin the EO derivative segment.

3. Growth Catalysts: Project Pipeline and R&D Depth

The medium-to-long-term investment case for Lianhong rests on its aggressive capital expenditure plan and R&D capabilities. The company is executing a "14th Five-Year Plan" strategy to diversify into next-generation materials.

3.1 Capacity Expansion Timeline (2025 Commissioning)

A cluster of major projects is scheduled to complete construction and begin production in 2025. These projects are designed to capture emerging trends in new energy, electronics, and biodegradables.

Investment Implication: The simultaneous commissioning of these projects in 2025 will likely weigh on free cash flow in the short term but sets the stage for a revenue inflection point in 2026. Specifically, the POE and VC projects address critical supply chain bottlenecks in the Chinese new energy sector, offering Lianhong a first-mover advantage in domestic substitution.

3.2 R&D Framework and Future Technologies

Lianhong employs a dual-engine R&D model: "Independent R&D + Collaborative Development." This approach allows the company to maintain core intellectual property while leveraging external expertise for rapid iteration.

Key R&D Breakthroughs in 1H 2025:
* Solid-State/Semi-Solid Battery Materials: Developed solid electrolyte dispersants and silicon-carbon anode binders. These materials have passed downstream customer trials. As the battery industry pivots towards solid-state technology for higher energy density, Lianhong is positioning itself as a key material supplier for the next generation of EVs.
* High-End Catalysts: Developed multiple new polyolefin catalysts. Catalysts are the "chips" of the chemical industry, determining product quality and process efficiency. Proprietary catalysts reduce licensing fees and enable unique product grades.
* Specialty Surfactants & Additives: Completed development of 15 new products, including high-end special surfactants, polyethers, and special additives. These niche products typically enjoy higher margins and lower competition.
* PEEK (Polyether Ether Ketone): Completed pilot testing. PEEK is a super-engineering plastic used in aerospace, medical implants, and robotics. Successful commercialization would mark a significant leap into the ultra-high-value material segment.
* Semiconductor Materials: Continued progress in wet electronic chemicals and photoresist materials, building on the initial success of electronic special gases.

4. Valuation and Financial Forecasts

4.1 Earnings Forecast

We adopt the consensus estimates provided in the report, which anticipate a strong recovery in profitability driven by the new capacity ramp-up.

Key Assumptions:
* Revenue Growth: Accelerates from 11.4% in 2025 to 26.5% in 2026 as the 200kt EVA, 100kt POE, and other major projects reach full utilization.
* Margin Expansion: Gross margin is projected to expand from 16.5% in 2024 to 22.2% in 2027. This assumes that the new products (POE, UHMWPE, Electronic Gases) carry significantly higher margins than the legacy portfolio and that economies of scale reduce unit fixed costs.
* Profit Leverage: Net profit growth outpaces revenue growth (57% vs 11.4% in 2025E; 63.7% vs 26.5% in 2026E), indicating operating leverage and improved product mix.

4.2 Segment-Level Forecasts

Advanced Polymer Materials:
* Outlook: Stabilization and growth driven by new energy materials.
* Forecast: Revenue expected to grow from CNY 3.42 billion (2024A) to CNY 5.22 billion (2027E).
* Margins: Gross margin to improve from 21.48% (2024A) to 23.90% (2027E), supported by high-VA EVA and POE.

Special Fine Chemicals:
* Outlook: Rapid growth due to capacity release and new product adoption.
* Forecast: Revenue expected to surge from CNY 1.23 billion (2024A) to CNY 3.07 billion (2027E), more than doubling.
* Margins: Gross margin to expand significantly from 18.93% (2024A) to 30.36% (2027E). This reflects the shift towards electronic chemicals, high-end surfactants, and bio-materials.

Trading:
* Outlook: Stable, low-margin support function.
* Forecast: Revenue flat at ~CNY 908 million. Margin stable at 1.00%.

By-products & Others:
* Outlook: Moderate growth aligned with main production lines.
* Forecast: Revenue grows to CNY 1.10 billion by 2027. Margins slightly improve to ~9%.

4.3 Relative Valuation

To assess Lianhong’s valuation, we compare it with peers in adjacent high-growth material sectors:
1. Shida Shenghua (603026.SH): New energy materials (electrolyte solvents).
2. Nanda Optoelectronics (300346.SZ): Semiconductor materials.
3. Zhongyan Shares (688716.SH): Special engineering plastics (PEEK).

Data as of August 22, 2025. Source: Wind, Huajin Securities Institute.

Valuation Analysis:
* 2025 Premium Justification: Lianhong trades at a discount to the peer average in 2025 (73.2x vs 106.0x). Given its higher projected earnings growth rate (57% vs. mixed peer growth) and the broader diversification of its platform, this discount appears unwarranted, suggesting upside potential.
* 2026-2027 Convergence: By 2026, Lianhong’s P/E compresses to 45.5x, closely aligning with the peer average of 51.7x. By 2027, it trades at 35.9x, slightly below the peer average of 38.0x.
* Growth-Adjusted Value: Considering the CAGR of net profit from 2024 to 2027 is exceptionally high (from 234m to 763m, a ~48% CAGR), the forward PEG ratio (P/E to Growth) becomes attractive. For 2026, with a P/E of 45.5x and expected growth of 63.7%, the PEG is ~0.71, which is highly attractive for a growth stock in the materials sector.

The market is currently pricing in the execution risk of the new projects. However, given the successful track record in 1H 2025 (margin expansion despite revenue drop), the risk-reward profile favors the bulls. The company’s status as a "platform" rather than a single-product producer warrants a valuation premium over pure-play commodity chemical firms, though it may trade at a slight discount to pure-play semiconductor material firms due to the mixed nature of its portfolio.

Risks / Headwinds

While the outlook is positive, institutional investors must consider the following risks that could derail the growth thesis:

1. Downstream Demand Volatility

• Photovoltaic (PV) Sector: A significant portion of Lianhong’s high-margin EVA and upcoming POE production is tied to the solar industry. The PV sector is prone to cyclical overcapacity and policy shifts. A slowdown in global solar installations or a technological shift away from EVA/POE-based encapsulation (e.g., towards glass-glass modules using different materials, though unlikely in the near term) could suppress demand and pricing.
• Electric Vehicles (EV): The VC additive and UHMWPE segments depend on EV battery production. Any slowdown in EV adoption rates, particularly in China and Europe, would directly impact volume growth.

2. Raw Material Price Fluctuations

• Input Costs: The company’s primary feedstocks include ethylene, propylene, and methanol. These are linked to crude oil and natural gas prices. A sharp spike in oil prices without a corresponding pass-through to product prices would compress margins. While 1H 2025 benefited from falling raw material costs, this tailwind may reverse if geopolitical tensions drive energy prices higher.

3. Technology and R&D Execution Risk

• Commercialization Failure: The valuation embeds expectations for successful ramp-up of POE, electronic gases, and solid-state battery materials. If technical hurdles delay commercial production, or if customer validation takes longer than expected, revenue forecasts for 2026-2027 will need to be revised downward.
• Iterative Obsolescence: In fast-moving fields like semiconductor materials and battery tech, today’s cutting-edge solution can become tomorrow’s commodity. Failure to keep pace with R&D iterations could erode the moat.

4. Project Delays and Capital Expenditure Overruns

• Construction Risks: The simultaneous commissioning of multiple large-scale projects (EVA, POE, PO, etc.) in 2025 carries execution risk. Delays in permitting, construction, or equipment installation could push revenue recognition into 2027 or beyond.
• Cash Flow Strain: Heavy capex requirements may strain free cash flow, potentially necessitating additional debt or equity financing, which could dilute shareholder value or increase financial leverage.

5. Safety and Environmental Regulations

• Compliance Costs: As a chemical manufacturer, Lianhong faces stringent environmental and safety regulations. Any incident, even minor, could lead to production shutdowns, fines, and reputational damage. Increasingly strict carbon emission standards could also raise operating costs for energy-intensive processes.

6. Competitive Intensification

• Domestic Substitution Wave: While Lianhong is a leader, other Chinese chemical giants are also investing heavily in POE, EVA, and electronic materials. An influx of new capacity from competitors could lead to price wars, eroding the anticipated margin expansion. Specifically, the POE market, currently lucrative due to import dependence, could see margin compression if multiple domestic players succeed simultaneously.

Rating / Sector Outlook

Sector Outlook: Constructive on Specialized New Materials

The broader basic chemicals sector is undergoing a structural bifurcation. Commodity chemical producers face margin pressure from overcapacity and weak global demand. In contrast, producers of specialized, high-barrier new materials are enjoying a secular growth tailwind driven by:
1. Import Substitution: China’s strategic push for self-sufficiency in semiconductor and high-end polymer materials.
2. Energy Transition: Sustained demand from PV, wind, and EV sectors.
3. Consumption Upgrading: Demand for higher performance, lighter, and more durable materials in consumer goods and automotive applications.

Within this context, Lianhong New Materials is well-positioned. It is not merely a cyclical chemical player but a growth-oriented materials platform. The sector outlook for "Advanced Materials" remains Overweight relative to the broader market, supported by policy incentives and technological inevitability.

Investment Rating: BUY (Initiation)

We initiate coverage with a BUY rating.
* Time Horizon: 6-12 months.
* Relative Performance Expectation: We expect Lianhong to outperform the CSI 300 Index by more than 15% over the next 12 months.
* Rationale: The company has demonstrated the ability to grow profits in a challenging revenue environment (1H 2025). The impending capacity releases in 2025-2026 provide visible visibility for earnings growth. The current valuation, while seemingly high on a trailing basis, is reasonable given the projected >60% earnings growth in 2026 and the strategic value of its POE and electronic material platforms. The stock offers a compelling blend of short-term margin recovery and long-term structural growth.

Investment View

1. The "Platform" Premium is Real and Underappreciated

Market participants often struggle to value diversified chemical companies, applying a conglomerate discount. However, Lianhong’s diversification is not random; it is synergistic. The integration of upstream olefins (PO, PP) with downstream high-value derivatives (EVA, POE, EO derivatives) creates a resilient value chain.
* Synergy Example: The production of PO (Propylene Oxide) feeds directly into the EO/PO derivative segment, securing raw material supply and capturing margin at multiple stages.
* Risk Mitigation: By spanning新能源 (New Energy), 电子 (Electronics), and 生物 (Bio) materials, Lianhong reduces its exposure to any single downstream cycle. When PV slows, electronics or bio-materials may accelerate. This stability warrants a higher multiple than single-product peers.

2. POE: The Crown Jewel of the 2025-2026 Cycle

Among all new projects, the 100kt/year POE facility is the most significant catalyst.
* Market Context: POE is a high-performance elastomer essential for high-efficiency solar modules (due to its superior water vapor barrier and anti-PID properties) and automotive lightweighting. Historically, this market has been dominated by foreign giants (Dow, Mitsui, LG Chem). China imports a vast majority of its POE needs.
* Competitive Moat: POE synthesis requires sophisticated catalyst technology and process know-how, creating high entry barriers. Lianhong’s successful development and upcoming commercialization place it in an elite group of domestic producers.
* Financial Impact: Given the supply-demand imbalance, POE commands premium pricing. Even modest market share capture can contribute disproportionately to profits. Investors should closely monitor the ramp-up curve of this specific asset in late 2025 and early 2026.

3. Electronic Materials: The Long-Term Option Value

The entry into electronic special gases and wet chemicals is a strategic option with high upside.
* Verification Cycles: Semiconductor material qualification is lengthy (1-2 years). The fact that Lianhong has already passed verification and started sales indicates that the R&D groundwork was laid years ago.
* Stickiness: Once qualified, semiconductor suppliers are rarely switched due to the high risk of contamination or failure. This creates recurring, high-margin revenue streams with low churn.
* Valuation Re-rating: As the revenue share from electronic materials grows, the market may begin to re-rate Lianhong closer to semiconductor material peers (like Nanda Optoelectronics), which trade at higher multiples than traditional chemical firms.

4. Financial Health and Capital Allocation

• Balance Sheet: The company maintains a manageable debt profile. While leverage increases slightly to fund capex (Debt-to-Asset ratio projected at ~61.5% in 2027), this is typical for growth-phase manufacturing firms.
• Cash Flow: Operating cash flow is expected to rebound strongly in 2026 (forecasted CNY 2.36 billion) as new capacities generate cash. This will allow the company to deleverage or fund further R&D without excessive external financing.
• Efficiency: The improvement in ROE from 3.4% (2024A) to a projected 9.2% (2027E) demonstrates effective capital allocation. Management is delivering on its promise to enhance shareholder returns through operational excellence.

5. Strategic Recommendations for Investors

• Accumulate on Weakness: Given the volatility inherent in the chemical sector, any pullback driven by broad market sentiment or temporary raw material price spikes should be viewed as a buying opportunity.
• Monitor Key Milestones:
  • Q3/Q4 2025: Watch for announcements regarding the official commissioning and first commercial shipments from the POE and 200kt EVA plants.
  • Customer Contracts: Look for disclosures of long-term supply agreements with major PV module makers or battery manufacturers for the new products.
  • Margin Trends: Continue to track quarterly gross margins. A sustained level above 20% would confirm the structural shift in product mix.
• Long-Term Hold: Lianhong is a compounder. The initial investment thesis plays out over 3-5 years as the full portfolio of new materials matures. Short-term traders may find volatility, but long-term institutional holders are likely to be rewarded by the earnings CAGR.

Conclusion

Lianhong New Materials stands at an inflection point. It has successfully navigated the downturn of 2023-2024 by optimizing costs and refining its product mix. Now, with a robust pipeline of high-barrier new materials ready to launch, it is poised for a period of accelerated growth. The combination of import substitution tailwinds, technological moats, and visible capacity expansion makes it a compelling buy for investors seeking exposure to China’s advanced manufacturing upgrade. The risks are real but manageable, and the current valuation offers an attractive entry point for a company with such significant earnings leverage in the coming years.

Appendix: Detailed Financial Data & Assumptions

A. Revenue Build-Up by Segment (2025E-2027E)

B. Margin Trajectory Analysis

C. Sensitivity Analysis (Illustrative)

Given the reliance on new project ramp-ups, we present a simplified sensitivity analysis for 2026 Net Profit based on Gross Margin and Revenue variations.

Note: This table illustrates that margin execution is as critical as volume. A 1% margin beat combined with a 5% revenue beat could push profits towards CNY 742 million, significantly exceeding the base case.

D. Peer Comparison Nuances

• Shida Shenghua: Highly correlated with lithium battery electrolyte cycles. More volatile than Lianhong due to narrower focus.
• Nanda Optoelectronics: Pure-play semiconductor material proxy. Higher valuation multiple reflects the "hard tech" premium but also higher R&D risk. Lianhong offers a hybrid exposure.
• Zhongyan Shares: Leader in PEEK. Lianhong’s PEEK pilot is a future option, not yet a revenue driver. Zhongyan is a smaller cap, more speculative play on PEEK adoption. Lianhong offers a safer, diversified entry into similar high-end polymer themes.

E. ESG Considerations

• Environmental: Lianhong’s shift towards bio-degradable PLA and green battery materials aligns with global ESG trends. However, the core chemical processes remain energy-intensive. Investors should monitor the company’s carbon footprint reduction initiatives.
• Governance: The company has shown disciplined capital allocation so far. Transparency in R&D progress and project timelines has been adequate. Continued clear communication regarding the POE and electronic material commercialization will be key to maintaining investor trust.

Disclaimer:
This report is prepared by Huajin Securities Institute for institutional clients only. It is based on information believed to be reliable but does not guarantee accuracy or completeness. The opinions expressed 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. Past performance is not indicative of future results. Investors should conduct their own independent research and consult with financial advisors before making investment decisions.

Analyst Certification:
The analysts listed in this report certify that they have no direct or indirect interest in the securities discussed and that their views accurately reflect their personal views about the subject securities and issuers.

Contact Information:
Huajin Securities Institute
Shanghai: 30F, Lujiazui Century Financial Plaza, No. 759 Yanggao South Road, Pudong New Area.
Beijing: 17F, Hengqin Life Building, No. 108 Jianguo Road, Chaoyang District.
Shenzhen: Unit 05, 10F, Taiping Finance Building, No. 6001 Yitian Road, Futian District.
Website: www.huajinsc.cn