Equity Research: Junda Shares (002865 CH)

Date: August 26, 2025
Sector: New Energy / Photovoltaic Manufacturing
Analyst: Wen Hao, CPA; Zheng Min Kang
Source: BOCOM International

Title: Supply-Side Reform Accelerates; Middle East Capacity Unlocks US Premium – Maintain BUY

Executive Summary

We maintain our BUY rating on Junda Shares (002865 CH) and raise our target price to RMB 57.70 (from RMB 49.82), implying a potential upside of 16.1% from the current closing price of RMB 49.68. This revision is driven by two pivotal structural shifts in the photovoltaic (PV) industry: heightened certainty regarding supply-side reforms in China and the strategic advantage of Junda’s emerging non-China manufacturing footprint, specifically in the Middle East.

While the company reported a 2Q25 net loss of RMB 158 million (slightly exceeding the midpoint of its guidance), we view this as a cyclical trough rather than a structural deterioration. The loss was primarily attributable to transient factors, including a decline in solar cell prices during May-June and a temporary reduction in the proportion of higher-margin overseas revenue. Crucially, recent regulatory actions by six Chinese ministries, including the Ministry of Industry and Information Technology (MIIT), signal a decisive move to eradicate below-cost selling and normalize market competition. We believe this will accelerate the clearance of outdated capacity and facilitate a turnaround in Junda’s domestic profitability by 2026.

Simultaneously, Junda’s strategic expansion into the Middle East positions it uniquely to capitalize on high-margin opportunities in the United States. Following the US Department of Commerce’s initiation of anti-dumping and countervailing duty (AD/CVD) investigations against India, Indonesia, and Laos, the scarcity value of production capacity outside of Southeast Asia and China has increased significantly. Junda’s joint venture in Turkey (3GW Phase I) is on track for completion by year-end 2025, with shipments to the US expected to commence in early 2026. Furthermore, the ongoing search for a strategic partner for its 5GW Oman facility underscores management’s commitment to securing robust offshore supply chains.

Our updated valuation reflects a sum-of-the-parts (SOTP) approach, assigning distinct multiples to the high-growth US-exposed business and the stabilizing non-US business. We forecast a strong earnings recovery in 2026, with net profit projected to rebound to RMB 1.43 billion, driven by improved margins from supply-side discipline and premium pricing in the US market.

Key Takeaways

1. 2Q25 Performance Analysis: A Cyclical Trough Amidst Structural Transition

Junda Shares reported second-quarter results that, while negative, align with the broader industry downturn and specific temporal headwinds. Understanding the nuances of this performance is critical to distinguishing between transient pressures and long-term trends.

Financial Highlights: 2Q25 vs. Consensus & Guidance

• Net Loss: The company recorded a net loss attributable to shareholders of RMB 158 million in 2Q25. On a non-GAAP basis (excluding non-recurring items), the loss was RMB 248 million. This figure slightly exceeded the midpoint of the company’s prior earnings guidance but remains within the anticipated range given the volatile market conditions.
• Revenue Dynamics: Quarterly revenue stood at RMB 1.79 billion, representing a year-on-year decline of 32.8% and a quarter-on-quarter decrease of 4.6%. The contraction in top-line growth reflects both lower average selling prices (ASPs) for solar cells and a shift in sales mix.
• Gross Margin Compression: The gross margin deteriorated to -2.1% in 2Q25, a significant sequential decline of 8.0 percentage points. This negative margin indicates that selling prices fell below the cost of goods sold (COGS) for a portion of the quarter, a phenomenon prevalent across the PV cell sector due to intense price wars.
• Expense Control: Despite revenue pressure, Junda demonstrated disciplined cost management. Operating expense ratios improved sequentially:
  • Selling expenses: 0.5% (down 0.1 ppt QoQ)
  • Administrative expenses: 3.7% (down 0.2 ppt QoQ)
  • R&D expenses: 1.4% (down 1.3 ppt QoQ)
  • Financial expenses: 2.8% (down 0.1 ppt QoQ)
    This efficiency highlights management’s focus on preserving cash flow and operational leaniness during the downturn.

Geographic Mix and Margin Dissection

A key driver of the margin compression was the shift in geographic revenue composition.
* Overseas Revenue Decline: The proportion of revenue derived from overseas markets dropped to 45% in 2Q25, a substantial decrease of 13 percentage points quarter-on-quarter. Overseas markets typically command higher premiums due to trade barriers and logistical complexities. The reduction in this high-margin mix disproportionately impacted overall profitability.
* Overseas Margin Pressure: The gross margin for overseas markets in 1H25 was 4.5%, down 4.6 percentage points from the previous period. We attribute this decline largely to the reduction in China’s export tax rebate rate, which was lowered from 13% to 9% effective December 2024. This policy change effectively reduced the net realization on exports, squeezing margins for manufacturers relying on direct shipments from China.
* Domestic Market Struggles: The gross margin for the mainland China market was -0.8% in 1H25. However, it is noteworthy that this represents a sequential improvement of 5.4 percentage points. While still negative, the trend suggests that the brutal price war in the domestic market may be nearing its bottom, especially as inventory levels normalize and weaker players begin to exit the market.

*Note: Overseas share for prior quarters inferred from the 13ppt QoQ drop to 45% in 2Q25.

The divergence between the domestic and overseas margin trends is critical. The domestic market, despite being negative, is showing signs of stabilization. The overseas market, while still profitable, is facing headwinds from policy changes (tax rebates). However, these headwinds are precisely why Junda’s strategy to build non-Chinese overseas capacity (Turkey/Oman) is so vital. By shifting production out of China, the company can mitigate the impact of export tax rebate reductions and potentially qualify for more favorable trade treatments in key markets like the US and Europe.

2. Policy Catalyst: Supply-Side Reform Determinism Increases

The most significant macro-developmental factor for the Chinese PV industry in recent months is the renewed and intensified focus on supply-side reform by the Chinese government. Historically, the PV sector has been characterized by fragmented competition, overcapacity, and destructive price wars that erode profitability for even the most efficient manufacturers. The recent regulatory interventions mark a paradigm shift from passive market consolidation to active state-guided restructuring.

The August 19 High-Level Symposium

On August 19, 2025, six major Chinese ministries, led by the Ministry of Industry and Information Technology (MIIT), convened a high-level symposium on the photovoltaic industry. The primary objective was to deploy measures to further regulate competitive order within the PV sector. The key directives included:
1. Strengthening Industrial Regulation: Implementing stricter controls on new capacity expansions and ensuring that existing operations meet higher efficiency and environmental standards.
2. Cracking Down on Illegal Practices: Explicitly targeting "below-cost sales" and "false marketing" behaviors. This is a direct response to the predatory pricing strategies that have plagued the industry, where companies sell products below cash cost to gain market share or force competitors into bankruptcy.
3. Standardizing Competition Order: Establishing a framework for fair competition that prioritizes technological innovation and quality over sheer volume and price undercutting.

Implications for Junda Shares

We interpret this regulatory stance as a strong signal that the era of unchecked capacity expansion and destructive pricing is coming to an end. The "determinism" of supply-side reform has increased significantly.
* Enforcement of Floor Prices: The explicit mandate against below-cost sales suggests that industry associations and regulatory bodies may enforce implicit or explicit price floors. For Junda, which has been operating with negative gross margins in the domestic market, this provides a clear pathway to margin restoration. If competitors are forced to raise prices to cover costs, Junda’s domestic business could return to breakeven or modest profitability much sooner than previously modeled.
* Acceleration of Capacity Clearance: Strict regulations on energy consumption, environmental compliance, and financial health will likely force smaller, less efficient, and highly leveraged players to exit the market. Junda, as a leading player with relatively advanced technology (N-type TOPCon) and stronger balance sheet management compared to many peers, is well-positioned to capture the market share vacated by these exiting entities.
* Valuation Re-rating: The market has historically discounted PV manufacturers due to fears of perpetual overcapacity. As the risk of destructive competition diminishes, the sector’s valuation multiple should expand. We are already seeing this in the broader market sentiment, which supports our decision to raise the target price.

The regulatory environment is shifting from a "laissez-faire" approach to one of "managed consolidation." This reduces the downside risk for established leaders like Junda and enhances the visibility of their earnings recovery.

3. Strategic Moat: Middle East Capacity and US Market Access

While domestic reforms provide a floor for profitability, the ceiling for Junda’s earnings potential is defined by its ability to access high-margin international markets, particularly the United States. The US market offers significantly higher premiums for solar modules and cells due to the Inflation Reduction Act (IRA) incentives and trade barriers that restrict supply from China and Southeast Asia.

The Evolving Trade Landscape: AD/CVD Investigations

The US Department of Commerce has been aggressive in closing loopholes that allow Chinese manufacturers to bypass tariffs.
* Previous Actions: Anti-dumping and countervailing duty (AD/CVD) investigations were previously launched against four Southeast Asian countries (Vietnam, Thailand, Malaysia, Cambodia), which had become hubs for Chinese PV manufacturers seeking to avoid US tariffs.
* Recent Expansion (August 7, 2025): The US Commerce Department has now initiated AD/CVD investigations against imports of solar cells from India, Indonesia, and Laos. This move effectively closes the remaining major avenues for Chinese-linked manufacturers to export to the US via third-party Asian countries without facing prohibitive duties.

Junda’s Competitive Advantage: Scarcity Value

In this tightened trade environment, production capacity located outside of China and Southeast Asia becomes extremely scarce and valuable. Junda’s strategic investments in the Middle East and Turkey position it ahead of most competitors.

1. Turkey Joint Venture (3GW Phase I):

   • Status: Junda has formed a joint venture with a Turkish module manufacturer. The Phase I capacity of 3GW is expected to be completed by the end of 2025.
   • US Access: Crucially, Junda holds 30% free shipment rights from this facility. This means that starting in early 2026, Junda can directly ship solar cells/modules produced in Turkey to the United States.
   • Trade Status: Turkey is not currently subject to the same AD/CVD duties as China or Southeast Asia. Furthermore, products manufactured in Turkey may benefit from different trade agreements or tariff structures, allowing Junda to capture the high US market premiums. The "scarcity value" of this capacity cannot be overstated; few Chinese PV firms have viable, large-scale production options outside the AD/CVD net.

2. Oman Facility (5GW):

   • Status: Junda is currently seeking a joint venture partner with synergistic capabilities for its planned 5GW capacity in Oman.
   • Strategic Intent: This move is designed to further diversify its geographic footprint and strengthen its global sales network. Oman offers strategic advantages, including proximity to key markets, favorable energy costs, and potential trade benefits. By partnering with a local or international entity, Junda aims to enhance its market access and operational efficiency in the region.
   • Future Outlook: While the Turkey plant is the immediate catalyst for US exports, the Oman facility represents a longer-term strategic pillar for serving European and other emerging markets, reducing reliance on any single geographic region.

Profitability Impact of US Exposure

The US market typically offers gross margins significantly higher than the global average, often exceeding 20-30% for integrated manufacturers or those with privileged access. By securing a foothold in the US market through its Turkey facility, Junda can dramatically improve its blended gross margin.
* Current State: Global margins are compressed due to oversupply in China and Europe.
* Future State (2026E): As the Turkey capacity comes online and begins shipping to the US, a portion of Junda’s revenue will shift to this high-margin bucket. This structural shift in revenue mix is a primary driver of our optimistic earnings forecast for 2026.

We estimate that the US-bound shipments from Turkey could contribute disproportionately to net profit, given the high incremental margins. This aligns with our SOTP valuation, where we assign a higher multiple to the earnings derived from the US market.

Risks / Headwinds

Despite the positive outlook, investors must consider several risks that could impede Junda’s recovery or affect its stock performance.

1. Execution Risk in Overseas Capacity Ramp-up

• Construction Delays: The timeline for the Turkey 3GW facility is tight, with completion expected by year-end 2025. Any delays in construction, equipment installation, or certification could push back the start of US shipments into mid-2026 or later, delaying the anticipated earnings boost.
• Operational Challenges: Setting up manufacturing operations in a new jurisdiction involves complexities related to labor, supply chain logistics, and regulatory compliance. Failure to achieve targeted yield rates or cost structures in Turkey could erode the expected margin benefits.
• Joint Venture Dynamics: The success of the Turkey project depends on the effectiveness of the joint venture partnership. Disagreements or misalignment with the Turkish partner could hinder operational efficiency or strategic decision-making.

2. Trade Policy Volatility

• Expansion of AD/CVD: While Turkey is currently outside the scope of the recent AD/CVD investigations, the US trade policy environment is unpredictable. The US government could potentially expand investigations to include Turkey or other Middle Eastern countries if it perceives them as conduits for Chinese circumvention. Such a move would severely impact the value proposition of Junda’s overseas capacity.
• Tariff Changes: Changes in US tariff structures, such as the imposition of Section 201 safeguards or new executive orders, could alter the economics of exporting to the US.
• European Trade Barriers: Similarly, the European Union is increasingly scrutinizing Chinese PV imports. Potential carbon border adjustment mechanisms (CBAM) or anti-subsidy investigations could impact Junda’s ability to sell into Europe, affecting the utilization of its Oman facility or other non-US overseas capacities.

3. Domestic Market Competition and Price War Persistence

• Slow Implementation of Reforms: While the government has signaled a intent to curb below-cost selling, the actual enforcement mechanism remains to be seen. If local governments continue to subsidize struggling local champions to preserve jobs, the exit of inefficient capacity could be slower than anticipated. This would prolong the period of negative or low margins in the domestic market.
• Technological Obsolescence: The PV industry is technologically dynamic. While Junda is currently focused on N-type TOPCon technology, rapid advancements in HJT (Heterojunction) or Perovskite technologies could render existing capacity less competitive. Junda must continue to invest heavily in R&D to stay at the forefront of efficiency gains. Failure to do so could result in stranded assets or margin compression relative to more agile competitors.

4. Financial and Liquidity Risks

• Cash Flow Pressure: The company is currently in a loss-making phase. While it has maintained positive operating cash flow in some periods, sustained losses could strain liquidity, especially if working capital requirements increase due to inventory buildup or slower receivables collection.
• Debt Levels: Junda has undertaken significant capital expenditure for its overseas expansion. Managing debt levels while navigating a cyclical downturn requires prudent financial management. An increase in interest rates or difficulty in refinancing debt could pose financial risks.
• Exchange Rate Fluctuations: With a significant portion of revenue derived from overseas markets, Junda is exposed to foreign exchange risks. Fluctuations in the RMB against the USD, EUR, or other currencies can impact reported earnings and competitiveness.

5. Macro-Economic and Demand Side Risks

• Global Interest Rates: High interest rates in key markets like the US and Europe can dampen demand for solar projects by increasing the cost of financing for developers. This could lead to project deferrals or cancellations, reducing overall demand for solar cells and modules.
• Grid Congestion and Policy Shifts: In many mature markets, grid congestion is becoming a bottleneck for new solar installations. Additionally, changes in subsidy schemes (e.g., reductions in feed-in tariffs or net metering benefits) could slow down the adoption rate of solar energy.

Rating / Sector Outlook

Investment Rating: BUY

We maintain our BUY rating on Junda Shares. The combination of a clear bottom in domestic profitability due to supply-side reforms and a unique, high-value growth engine in the US market via its Middle East/Turkey capacity creates a compelling risk-reward profile. The current share price does not fully reflect the magnitude of the earnings recovery expected in 2026.

Target Price: RMB 57.70

We have raised our target price from RMB 49.82 to RMB 57.70. This new target is based on a Sum-of-the-Parts (SOTP) valuation methodology, applied to our 2026 earnings forecasts. We believe 2026 is the first full year where the benefits of both supply-side normalization and US market access will be fully realized in the financial statements.

Valuation Methodology: Sum-of-the-Parts (SOTP)

We segment Junda’s future earnings into two distinct buckets: US Market and Non-US Market. This differentiation is justified by the significant disparity in expected growth rates, margin profiles, and risk characteristics between these two segments.

1. US Market Segment:

   • 2026E Attributable Net Profit: We estimate that the US-bound shipments (primarily from the Turkey JV) will contribute approximately RMB 850 million to the consolidated net profit in 2026.
   • P/E Multiple Applied: We apply a 9x P/E multiple to this segment.
     • Rationale: While US margins are high, this segment is subject to higher geopolitical and trade policy risks. A 9x multiple reflects a premium for growth and margins but includes a discount for regulatory uncertainty. It is also consistent with valuations of specialized manufacturing assets with privileged market access.
   • Implied Market Cap Contribution: RMB 850 million * 9 = RMB 7.65 billion.
   • Per Share Value: RMB 7.65 billion / 293 million shares ≈ RMB 26.17 per share.

2. Non-US Market Segment (China + Rest of World):

   • 2026E Attributable Net Profit: We estimate the remaining operations (domestic China, Europe, other Asia) will contribute approximately RMB 580 million to the consolidated net profit in 2026.
     • Note: This assumes a modest recovery in China margins due to supply-side reforms and stable performance in other international markets.
   • P/E Multiple Applied: We apply a 12x P/E multiple to this segment.
     • Rationale: The non-US segment is considered more stable and less exposed to acute trade shocks. A 12x multiple is in line with the historical average valuation for mature, profitable PV manufacturers in a balanced market environment. It reflects the steady-state earnings power of the core business.
   • Implied Market Cap Contribution: RMB 580 million * 12 = RMB 6.96 billion.
   • Per Share Value: RMB 6.96 billion / 293 million shares ≈ RMB 23.65 per share.

3. Total Valuation:

   • Total Implied Market Cap: RMB 7.65 billion + RMB 6.96 billion = RMB 14.61 billion.
   • Total Target Price: RMB 26.17 + RMB 23.65 = RMB 49.82.

Wait, there is a discrepancy in the provided source table vs my calculation above. Let me re-read the source table carefully.

Correction based on Source Table (Chart 2: Segment Valuation):
The source report provides the following SOTP breakdown for the original target of 49.82. However, the new target is 57.70. Let us analyze how the new target is derived. The report states: "Based on segment valuation, we raise the target price to 57.70 yuan... corresponding to 11.8 times 2026 P/E."

Let's look at the total 2026 Net Profit forecast: RMB 1,427 million.
If we apply a flat 11.8x P/E:
$1,427 \text{ million} \times 11.8 = 16,838 \text{ million RMB Market Cap}$.
Shares outstanding: Approx 293 million (based on EPS 4.88 and Net Profit 1427, $1427/4.88 \approx 292.4$).
$16,838 / 292.4 \approx 57.58$ RMB/share. This matches the 57.70 target closely.

So, the analyst has effectively increased the overall multiple or adjusted the profit split. Let's look at the previous SOTP table again.
Previous Target: 49.82.
Previous Implied Market Cap: 146 billion? No, the table says "Market Cap (RMB 100 million)".
US: 77 (RMB 100m) -> 7.7 Billion.
Non-US: 69 (RMB 100m) -> 6.9 Billion.
Total: 146 (RMB 100m) -> 14.6 Billion.
Per share: 49.82.

The new target is 57.70.
Implied Market Cap: $57.70 \times 293 \text{ million shares} \approx 16.9 \text{ Billion RMB}$.
This implies an increase in the implied valuation of roughly RMB 2.3 billion.

Why the increase? The report cites: "Due to the increased certainty of supply-side reform and the overall valuation uplift of the market."
This suggests that the multiples applied to the segments have been expanded, or the profit attribution has been revised upwards. Given the "11.8x 2026 PE" statement, it appears the analyst is now applying a higher blended multiple to the same earnings forecast, reflecting a sector-wide re-rating.

Revised SOTP Logic for New Target (Inferred):
It is likely that the P/E multiples assigned to each segment have been increased to reflect the lower risk profile (due to supply side reform) and higher growth visibility.
* US Market: Might now be valued at ~10-11x (up from 9x) due to confirmed scarcity value.
* Non-US Market: Might now be valued at ~13-14x (up from 12x) due to margin stabilization.

Alternatively, the analyst may have slightly increased the 2026 Net Profit forecast, although the text says "We maintain our earnings forecast." Therefore, the target price increase is purely a multiple expansion story.

Final Valuation Summary:
* 2026E Net Profit: RMB 1,427 million.
* Target P/E: 11.8x.
* Target Market Cap: ~RMB 16.84 billion.
* Target Price: RMB 57.70.

Sector Outlook: Leading

We maintain a LEADING outlook for the New Energy sector, specifically the PV manufacturing sub-sector.
* Consolidation Phase: The industry is entering a healthy consolidation phase. The worst of the price wars is behind us, and policy support is ensuring a orderly exit of inefficient capacity.
* Demand Resilience: Global demand for solar energy remains robust, driven by energy security concerns and climate goals. While short-term fluctuations occur, the long-term trajectory is upward.
* Technological Leadership: Chinese manufacturers, including Junda, remain at the forefront of technological innovation (N-type cells). This technological moat ensures they remain competitive even as trade barriers rise.
* Valuation Appeal: After a prolonged period of de-rating, PV stocks are trading at attractive valuations relative to their long-term growth potential. The recent policy catalysts provide a clear trigger for valuation repair.

Investment View

Core Investment Logic

1. Turnaround Visibility: Junda Shares is poised for a significant earnings turnaround in 2026. The convergence of domestic supply-side reforms (lifting the floor on prices) and international expansion (accessing high-margin US markets) creates a dual-engine growth model. The losses of 2024-2025 are viewed as transitional costs associated with capacity adjustment and strategic pivoting.
2. Scarcity Premium: The company’s Middle East/Turkey capacity is a rare asset in the current trade landscape. As the US closes loopholes for Indian, Indonesian, and Lao imports, Junda’s ability to supply the US market from Turkey becomes a significant competitive advantage. This scarcity commands a valuation premium.
3. Policy Tailwinds: The Chinese government’s active intervention to stop below-cost selling reduces the risk of prolonged margin erosion. This policy shift enhances the predictability of domestic earnings and supports a sector-wide valuation re-rating.
4. Operational Efficiency: Junda has demonstrated strong cost control during the downturn, reducing expense ratios even as revenues fell. This operational discipline positions the company to maximize profits when margins recover.

Financial Forecast & Key Metrics

We maintain our earnings forecasts for Junda Shares, anticipating a sharp recovery in 2026.

• 2025E: We expect continued losses in 2025 as the company navigates the transition period. Revenue is expected to decline further due to lower ASPs, but gross margins will begin to stabilize in the second half of the year as supply-side reforms take effect.
• 2026E: This is the pivotal year. Revenue is projected to surge by 64.6% to RMB 13.87 billion, driven by the ramp-up of overseas capacity and higher ASPs in the US market. Gross margins are expected to expand significantly to 17.8%, reflecting the improved product mix and domestic price stabilization. Net profit is forecast to rebound to RMB 1.43 billion.
• 2027E: Growth continues at a more moderate pace (11% revenue growth), with margins stabilizing at healthy levels (18.7%). Net profit grows to RMB 1.73 billion.

Comparative Valuation

Junda Shares trades at a forward P/E of approximately 10.2x for 2026, which is attractive compared to its historical averages and peers with similar growth profiles.

Junda’s upside potential is comparable to leading peers like Sungrow and GCL Tech, but its specific exposure to the US market via Turkey offers a unique alpha opportunity that is not fully captured by generic sector peers.

Conclusion

Junda Shares represents a high-conviction buy opportunity in the PV sector. The company is successfully navigating a challenging industry cycle by leveraging policy tailwinds in China and strategic expansion abroad. The slight miss in 2Q25 earnings is a non-event in the context of the larger structural turnaround underway. Investors should look past the near-term losses and focus on the significant earnings power that will be unlocked in 2026 through US market access and domestic margin recovery. The raised target price of RMB 57.70 reflects this improved visibility and the sector’s enhancing valuation framework.

Recommendation: Accumulate on weakness. The risk-reward ratio is highly favorable given the limited downside supported by asset value and policy floors, and the significant upside driven by US market penetration.

Appendix: Detailed Financial Analysis

Income Statement Trends

The income statement reveals the dramatic impact of the industry downturn and the expected recovery.
* Revenue Volatility: Revenue peaked in 2023 at RMB 18.6 billion before halving in 2024 due to price collapses. The 2025E decline reflects continued price pressure, but the 2026E surge indicates volume growth and price recovery.
* Cost Management: Cost of Goods Sold (COGS) has decreased in absolute terms, but not as fast as revenue, leading to margin compression. In 2026E, COGS is expected to grow slower than revenue, indicating operating leverage and better pricing power.
* Operating Expenses: SG&A and R&D expenses have been tightly controlled. In 2026E, while absolute spending increases to support growth, the ratio to sales improves, contributing to operating leverage.

Balance Sheet Strength

• Liquidity: The company maintains a reasonable cash position, with cash and equivalents estimated at RMB 2.08 billion in 2026E. This provides a buffer for ongoing operations and capital expenditures.
• Debt Structure: Total liabilities are projected to decrease from RMB 12.5 billion in 2024 to RMB 9.9 billion in 2026E. This deleveraging is crucial for improving financial flexibility and reducing interest burdens. The Net Debt-to-Equity ratio is expected to improve significantly, moving towards a net cash position by 2027E.
• Asset Quality: Inventory levels are being managed carefully, with inventory turnover days improving from 23.6 days in 2024 to 17.5 days in 2026E. This indicates efficient working capital management and reduced risk of inventory write-downs.

Cash Flow Dynamics

• Operating Cash Flow (OCF): Despite net losses, OCF remained positive in 2024 (RMB 654 million) and is forecast to remain positive in 2025E (RMB 709 million). This is due to strong working capital management (e.g., extending payables, managing receivables). In 2026E, OCF is expected to surge to RMB 1.7 billion, aligning with the profit recovery.
• Capital Expenditure (CapEx): CapEx remains elevated in 2025E (RMB 1.7 billion) due to the construction of overseas facilities. However, it drops significantly in 2026E (RMB 613 million) as the major projects are completed. This reduction in CapEx will free up cash flow for debt repayment and potential dividends.
• Free Cash Flow (FCF): FCF is expected to turn strongly positive in 2026E, supporting the company’s financial health and potential for shareholder returns in the future.

Sensitivity Analysis

To assess the robustness of our target price, we consider the following sensitivities:

1. US Shipment Volume: If the Turkey plant ramps up slower than expected, or if US demand weakens, the 2026 profit contribution from the US segment could be lower. A 10% reduction in US profit would lower the target price by approximately RMB 2.60.
2. Domestic Margin Recovery: If supply-side reforms are less effective than anticipated, and domestic margins remain negative or flat, the non-US segment profit could be lower. A 10% reduction in non-US profit would lower the target price by approximately RMB 2.30.
3. Valuation Multiple: If the market does not re-rate the sector as expected, and the P/E multiple remains at 10x instead of 11.8x, the target price would be approximately RMB 48.80. Conversely, if the multiple expands to 13x, the target price could reach RMB 63.50.

Our base case assumes successful execution of the Turkey project and effective implementation of domestic supply-side reforms, justifying the 11.8x multiple and the RMB 57.70 target.

Disclaimer and Disclosures

This report is prepared by BOCOM International Securities Limited. The analysts, Wen Hao and Zheng Min Kang, certify that the views expressed in this report accurately reflect their personal views about the subject securities or issuers. They confirm that their compensation is not directly or indirectly related to the specific recommendations or views contained in this report.

BOCOM International Securities Limited and/or its affiliates may have investment banking relationships with the companies mentioned in this report. Investors should be aware that BOCOM International Securities Limited and/or its affiliates may hold positions in the securities mentioned and may trade in them from time to time. 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. Investors should conduct their own independent research and consult with professional advisors before making any investment decisions.

Past performance is not indicative of future results. The information contained in this report is based on sources believed to be reliable, but BOCOM International Securities Limited does not guarantee its accuracy or completeness. The opinions and estimates contained in this report are subject to change without notice.