Key takeaway

The company achieved moderate earnings growth in 1H, mainly driven by substantial YoY revenue and profit growth at Jiangsu Xianke, its import substitution project. Jiangsu Xianke generated revenue of RMB750mn and net profit of RMB77mn, turning profitable from a loss. Meanwhile, the silica micropowder business outperformed expectations. In 1H26, Huafei Electronics, the company’s principal subsidiary in the silica micropowder business, generated revenue of RMB186mn, representing a substantial increase of 50% YoY. It is actively expanding into overseas markets for M8\M9-grade fillers used in high-density, high-frequency and high-speed copper-clad laminates, with positive progress achieved. We are confident that the company, as a leading global precursor supplier, will deliver strong profit growth.

Event

The company released its 1H26 results, reporting revenue of RMB4.513bn, up 5.1% YoY; net profit attributable to the parent company of RMB561mn, up 7.3% YoY; and net profit attributable to the parent company excluding non-recurring gains and losses of RMB530mn, up 0.7% YoY. In 2Q, the company recorded revenue of RMB2.54bn, up 16.8% YoY; net profit attributable to the parent company was RMB294mn, up 12.1% YoY; net profit attributable to the parent company excluding non-recurring gains and losses was RMB286mn, up 4.9% YoY.

Quick Take

Precursor business: In 1H26, Jiangsu Xianke, a localization project, recorded significant YoY growth in revenue and profit, generating revenue of RMB750mn and net profit of RMB77mn and turning profitable, compared with revenue of RMB550mn and a net loss of RMB31mn in the same period last year. The localization of the company’s precursor business is progressing smoothly, while its Korean affiliate UP is also expanding capacity in line with downstream customers. Its Korean subsidiary UP CHEM has built a third plant, which is expected to become fully operational by the end of 2026, and plans to acquire new land and begin planning its fourth plant in 1H26.

LNG insulation materials business: The company has sufficient orders on hand, and its long-term profitability is steadily improving. In 1H26, the company supplied thermal insulation panels to Hudong-Zhonghua Shipbuilding, Jiangnan Shipyard, Dalian Shipbuilding, CMI Haimen, and Yangzijiang Shipbuilding, and provided construction services for the cargo containment systems of large 175,000-cubic-meter LNG carriers for Dalian Shipbuilding and CMI Haimen, earning high recognition from customers for its service quality.

Silica powder business: Progress exceeded expectations. In 1H26, Huafei Electronics, the principal subsidiary of the company's silica powder business, generated revenue of RMB186mn, up 50% YoY; net profit reached RMB11.16mn, up more than 800% YoY. During the reporting period, Huafei Electronics achieved milestone breakthroughs in new customer acquisition and commercialization. Its submicron spherical silica powder and spherical alumina technologies were successfully commercialized, enabling stable supply to downstream customers. Meanwhile, Huafei Electronics is actively expanding into overseas markets for M8/M9-grade fillers used in high-density, high-frequency, and high-speed copper-clad laminates, with positive progress.

In the medium to long term, the company continues to focus on its precursor business and steadily advance toward becoming an international platform-based new materials company. The company’s precursor business has a strong downstream customer mix and serves as a key precursor supplier to leading wafer fabs in China and overseas, with both sales volume and prices expected to increase as downstream wafer fabs implement their capacity expansion plans from 2026 to 2030; its LNG insulation materials business is also one of the few worldwide certified by France’s GTT, creating a strong competitive moat; its other electronic materials businesses, such as silica powder, have already benefited significantly from strong downstream demand in 1H26 and recorded rapid revenue growth, and we expect the company to develop multiple growth drivers going forward.

Investment recommendation: Based on the company's 1H26 results and downstream capacity expansion, we forecast net profit attributable to the parent company at RMB1.295bn/RMB1.744bn/RMB2.359bn for 2026/2027/2028, implying P/E of 52.3x/38.9x/28.7x, respectively. Given the company’s strong position in the supply chain and robust demand in downstream markets, we assign a “Buy” rating.

Risks:

1. Changes in the macroeconomic environment

At present, the global political and economic landscape is complex. Factors such as the global macroeconomic environment, end-market demand, and the pace of capacity expansion by downstream manufacturers create a degree of uncertainty regarding the direction of the Company's business development. If the Company fails to respond promptly and effectively, its future operations and development may face uncertainty.

2. Cyclical fluctuations in downstream industries

As upstream raw materials for chip manufacturing, electronic materials are highly cyclical, with industry conditions closely tied to the pace of global macroeconomic growth. LNG thermal insulation materials are significantly affected by conditions in the downstream liquefied natural gas industry. The future development of the company’s principal businesses is closely linked to the development of the aforementioned industries.

3. Intensifying market competition

At present, several companies offer products similar to some of the company's products and are highly competitive. As new production capacity continues to come online across the industry, market competition is becoming increasingly intense. As industry peers accelerate technological breakthroughs and capacity expansion, competition among homogeneous products and price competition may intensify, potentially exposing the company to more fierce market competition.