Key takeaway

In 1Q26, the company achieved synchronized revenue and profit growth, with the recovery in its core dye and intermediate businesses remaining the key support for earnings improvement. However, foreign exchange losses caused financing expense to swing from -RMB66mn in 1Q25 to RMB252mn, placing some pressure on the release of recurring net profit. Recurring net profit rose 4.74% YoY, significantly underperforming the 35.67% growth in net profit attributable to shareholders of the parent company. Over the medium to long term, the company's complete product lines of dyes, auxiliaries, and intermediates, along with Dystar's global presence, integrated supporting facilities, and cost optimization capabilities, will remain important pillars of operational quality. More importantly, given the high industry concentration in disperse dyes, the company, as the industry leader, is poised to regain pricing power amid China's campaign against cutthroat competition.

Event

In 1Q26, the company achieved operating revenue of RMB3.618bn, up 11.83% YoY; net profit attributable to shareholders of the parent company of RMB537mn, up 35.67% YoY; recurring net profit attributable to shareholders of the parent company of RMB306mn, up 4.74% YoY; and net cash flow from operating activities of RMB403mn, down 83.95% YoY.

The company also disclosed a provisional shareholder proposal. Shareholder Ruan Weixiang, holding a 13.09% stake, proposed that the company implement a profit distribution for 1Q26, with a planned cash dividend of RMB3.50 (tax inclusive) per 10 shares. If approved by the subsequent shareholders' meeting, this is expected to further strengthen the company's shareholder return expectations.

Quick Take

The company's overall performance continued to improve in 1Q26. Gross margin improvement was the main driver of the operational recovery. The company's 1Q26 operating revenue increased 11.83% YoY, while its overall gross margin improved from 28.61% in 1Q25 to 33.85%, driving a 32.30% YoY increase in gross profit. From an expense perspective, selling expense, administrative expense, and R&D expense all declined YoY in 1Q26. However, foreign exchange losses caused financing expense to swing from -RMB66mn in 1Q25 to RMB252mn, placing some pressure on the release of net profit. As a result, the company's 1Q26 recurring net profit attributable to shareholders of the parent company only grew 4.74% YoY, lagging the revenue growth rate. However, the company's 1Q26 net profit attributable to shareholders of the parent company increased 35.67% YoY, mainly boosted by RMB156mn in asset disposal gains.

Dye business shows significant resilience, with continued cyclical recovery. Dyes remain the core revenue source. The company possesses a relatively complete industrial chain in dyes and key intermediates, and this chain synergy helps smooth price fluctuations of individual products while providing revenue and gross profit elasticity during demand recovery. In 1Q26, dye sales volume reached 68,900 tons, generating revenue of RMB2.071bn; intermediate sales volume reached 29,700 tons, generating revenue of RMB771mn; and auxiliary sales volume reached 14,900 tons, generating revenue of RMB228mn. Compared with 4Q25, dye revenue rose from RMB1.863bn to RMB2.071bn, and intermediate revenue rose from RMB732mn to RMB771mn, reflecting a further QoQ recovery in core business sentiment.

The disperse dye industry is highly concentrated, and the company is poised to regain pricing power. The disperse dye industrial chain faces significant environmental pressure and hazardous processes, particularly upstream reducing agents involving nitration and other explosive-prone processes. This creates high barriers to entry, resulting in few industry participants and high concentration. Driven by the domestic anti-involution wave, the disperse dye industry is expected to end years of price competition, with leading enterprises poised to regain pricing power and achieve a sustainable increase in profit margins. In 1Q26, the average market price of disperse dyes was approximately RMB21.91/kg, up 29.65% YoY. Prices continued to rise entering the second quarter, reaching RMB23.00/kg as of May 12, 2026. Driven by the domestic anti-involution wave, the disperse dye industry is expected to end years of price competition, with leading enterprises likely to see a recovery in pricing power and profit margins. Although short-term downstream demand has been slightly disrupted by the US-Iran war, the company's medium-to-long-term trend of rising profit margins remains intact.

Shareholders proposed a 1Q26 profit distribution plan, further clarifying the return orientation. The company plans to distribute a cash dividend of RMB1.00 per 10 shares for 2025. Combined with the mid-2025 interim dividend of RMB2.00 per 10 shares, the full-year cash dividend stance is already relatively proactive. Meanwhile, the annual shareholders' meeting on May 8, 2026, also added a review of the 1Q26 profit distribution plan, with the provisional proposal being a cash dividend of RMB3.50 per 10 shares. The dividend pace has clearly been brought forward, indicating that beyond the core business recovery, the company is also strengthening shareholder returns, asset revitalization, and cash utilization efficiency. If the main business continues to improve and global expansion and capital returns advance in tandem, the foundation for the company's valuation recovery could be further solidified.

Investment recommendation: We estimate the company's 2026-28 revenue will beRMB18.3/21.0/22.2bn, net profit attributable to shareholders of the parent company will beRMB2.9/3.3/3.6bn, and corresponding EPS will beRMB0.90/1.02/1.09. Considering the company isa leading integrated enterprise in the domestic dye industry,with strong earnings resilience, andis gradually regaining pricing power in the disperse dye sector, we assign a 2026 target PE of19x, corresponding to a target price ofRMB17.1, and give a Buy rating.

Risks:

1. Product price recovery falls short of expectations. The profit improvement in 1Q26 has already benefited from price increases for some products. If core products such as dyes and intermediates weaken again or downstream textile printing and dyeing demand recovery is insufficient, the pace of main business earnings recovery may slow.

2. Risk of non-recurring income volatility. In 1Q26, net profit attributable to shareholders of the parent company grew significantly faster than recurring net profit, with asset disposal gains and fair value changes making a substantial contribution to profit. If such income support is absent going forward, profit performance may revert to the pace of main business recovery.

3. Risk of operating cash flow volatility. Net operating cash flow in 1Q26 fell 83.95% YoY, mainly due to the high base from receiving substantial pre-sale payments for commercial properties in the same period last year. If property-related collections and operating cash flow become more volatile going forward, it could af fect the market's assessment of profit quality.

4. Risks from overseas operations and industry cyclicality. The company's business spans dyes, auxiliaries, intermediates, and the global operations of Dystar. If overseas demand, exchange rate conditions, trade policies, or the industry competitive landscape shift, both main business revenue quality and earnings flexibility could be disrupted.