Red Avenue New Material Group

All figures are under CAS and in CNY, from the annual reports for each year. FY2021 is the restated basis published in the FY2022 annual report; the originally reported FY2021 revenue was CNY 2,308.4 million.

Income statement

Revenue grew at a compound annual rate of 10.3% from FY2021 to FY2025. Net profit attributable to shareholders grew at 14.6% a year, and adjusted net profit at 21.6% a year.

Commentary. Gross margin has stayed in a narrow 23.5–24.5% band for five years, even though the mix shifted toward electronics. Electronics margins rose from about 26% to about 30%, but tyre-resin pricing follows phenol and biodegradable margins turned sharply negative. Operating margin before investment income is only 8–9%. Heavy R&D (6.6% of revenue in FY2024) and SG&A absorb most of the gross profit. The gap between operating income (CNY 294 million in FY2025) and pre-tax profit (CNY 601 million) is mostly associate income from Zhongce Rubber, plus interest and investment income, net of interest expense.

The FY2025 gap between attributable net profit (+8.9%) and adjusted net profit (+29.6%) reflects a high base: FY2024 included about CNY 98.6 million of investment gains and a CNY 94.8 million asset write-down in non-recurring items. FY2025 non-recurring items totalled only CNY 23.6 million, mainly CNY 39.0 million of government grants. FY2022 was the low point. Pandemic disruption cut tyre-additive volumes, raw-material inflation squeezed spreads, and attributable profit fell 8.7% to CNY 298 million. The recovery since 2023 was driven by electronics growth, tyre-resin volume gains and rising associate income.

Quarterly profile

Q4 2025 profit fell sharply because associate income fell from the previous quarter. In 2026, revenue grew 22.5%, 36.2% and 29.9% year on year in Q1, Q2 and Q3, but Q3 net profit fell 7.1%. Associate income was CNY 87.6 million lower in 9M2026 (CNY 242.0 million against CNY 329.6 million), finance costs rose to CNY 87.6 million from CNY 63.4 million, and gross margin narrowed. For 9M2026 overall, revenue was CNY 3,264.5 million (+29.4%), attributable net profit CNY 522.1 million (+5.7%) and adjusted net profit CNY 489.7 million (+5.0%). EPS was CNY 0.85 and weighted ROE 12.22%, down 2.27 percentage points.

Balance sheet

Post-listing balance sheet (30 September 2026, unaudited, CAS): total assets CNY 12,179.1 million (+32.1% from year-end); cash CNY 3,570.4 million; short-term borrowings CNY 2,088.9 million; long-term borrowings CNY 1,056.1 million; equity attributable CNY 6,810.6 million (+62.7%); current assets CNY 5,907.0 million against current liabilities CNY 3,982.2 million; trade receivables CNY 1,089.0 million, up from CNY 814.0 million; goodwill unchanged at CNY 437.4 million. The H-share proceeds (net HK$2.90 billion, about CNY 2.5 billion) moved the company from net current liabilities of CNY 455 million at 30 June 2026 to positive working capital of about CNY 1.9 billion. They also roughly halved gearing.

Commentary. Debt rose steeply between FY2021 and FY2024, from CNY 2.0 billion to CNY 3.9 billion, to fund the Shanghai photoresist complex, the PBAT plant, the Jintan CMP base and stake purchases. Equity growth lagged because dividends were generous: FY2024 cash dividends were more than 100% of earnings on a cash-paid basis. Converting the convertible bonds in 2025 added about CNY 563 million of equity. The H-share offering then reset the balance sheet. Goodwill (CNY 437 million, mainly from Kempur and BAE) is about 6% of equity and has not been impaired.

Cash flow

The FY2025 stake purchases in Kempur and BAE (about CNY 245 million combined) were transactions with minority shareholders. They are recorded in financing activities, not as acquisitions.

Commentary. Cash conversion is the weakest part of the financial profile. From FY2021 to FY2025, cumulative operating cash flow was CNY 1.21 billion, against cumulative attributable net profit of CNY 2.11 billion: a conversion rate of about 58%. Cumulative free cash flow was negative CNY 588 million, while CNY 1.48 billion went to dividends and interest. There are two structural reasons. First, a large share of profit is non-cash associate income from Zhongce. Cash only arrives as Zhongce dividends. Second, growth in electronics ties up receivables because fab and panel customers have long payment terms. In 9M2026 operating cash flow fell 57.2% to CNY 114.9 million, as receivables rose with new-product sales. In H1 2026, pre-tax profit was CNY 404 million but operating cash flow only CNY 36.5 million under HKFRS (about 9%).

Returns and efficiency ratios

ROA here is attributable net profit divided by average total assets. ROIC uses operating income after an estimated 15% tax over invested capital. Interest cover, measured as operating income before associate income over interest expense, was 2.5x in FY2021 and FY2022, 2.8x in FY2023 and 3.0x in FY2024. Including associate income, cover was about 6–7x. The cash conversion cycle is long and has been lengthening. Receivables (including notes and receivables financing) were about CNY 1.2 billion at end-FY2025, against revenue of CNY 3.4 billion: roughly 125–130 days of sales. Inventory days are about 75–80. Trade payables are not publicly disclosed at a level that allows a precise cycle calculation.

Commentary. The headline ROE of 15–16% is flattered by associate income and by leverage. Operating ROIC of about 4–5% is below a plausible cost of capital. The investment case therefore depends on electronics margins rising as capacity utilisation increases. Semiconductor photoresist utilisation at the Tongcheng Electronics plant was only about 14% in 9M2025, on 141 t of output.

Management guidance

Management gives qualitative guidance only:

• continued strong growth in electronic chemicals, led by ArF, BARC and immersion ArF, KrF, EBR (several thousand tonnes in 2026) and CMP pads (rapid ramp from H2 2026);

• steady growth in tyre chemicals, supported by exports and the Thai base;

• cost control and R&D investment amid volatility in the global tyre and electronics markets.

Consensus expectations

Broker forecasts call for revenue of about CNY 4.4 billion in 2026 (+28%) and net profit of about CNY 0.75 billion (+33%). For 2027 they forecast CNY 5.0 billion and CNY 0.90 billion, and for 2028 CNY 6.0 billion and CNY 1.20 billion. The 9M2026 results (revenue +29.4%, net profit +5.7%) are tracking the revenue forecast but falling short on profit.

Bull case

1. Electronics turns into a profit engine. Segment profit rose about 180% in H1 2026 to CNY 106 million on revenue growth of 57%. As utilisation rises from low levels and ArF, immersion ArF and CMP pads scale, operating leverage could lift group operating margin from 8.6% toward the mid-teens.

2. A policy-backed market structure. As the largest Chinese supplier in both semiconductor (5.8%) and TFT-array (26.2%) resists, Red Avenue is the default domestic partner for fabs seeking supply security. It already supplies most of China's 12-inch lines.

3. A repaired balance sheet funds consolidation. CNY 3.57 billion of cash after the offering allows acquisitions in adjacent wafer materials while the tyre business keeps generating cash. The founder's 55% holding and H-share buying align her interests with minority shareholders.

Bear case

1. Earnings quality. In 9M2026, associate income (CNY 242 million) was still 44% of pre-tax profit, and operating cash flow (CNY 115 million) was only 22% of net profit. Valuation at about 53x trailing earnings depends on profit that is neither core nor cash.

2. The technology gap persists. The global leaders hold about 85% of the market and EUV is out of reach. Domestic rivals such as Dinglong and Nata are attacking the same KrF, ArF and CMP opportunities, which could cap pricing and lengthen the path to returns above the cost of capital (operating ROIC is about 4–5%).

3. Margin squeeze in the legacy business. Rubber-additive prices fell 7.3% in FY2025 and phenol costs rose 10.1% in 9M2026. Group gross margin fell to 23.05% in H1 2026, and biodegradables remain loss-making.

Key catalysts and monitorables (next 12 months)

FY2026 annual results: Timing: Around April 2027; What to watch: Whether net profit approaches the CNY 0.75 billion consensus; segment profit split; the full-year associate contribution

Zhongce Rubber earnings and dividends: Timing: Quarterly; What to watch: Direction of associate income; cash dividends received

Volume ramp of CMP hard pads: Timing: H2 2026 to H1 2027; What to watch: Quarterly pad revenue above the CNY 20 million run-rate of H1 2026

New ArF and immersion ArF qualifications: Timing: Ongoing; What to watch: Number of immersion products in volume; share of 12-inch revenue

Use of H-share proceeds and any acquisition: Timing: Next 12 months; What to watch: Size, target technology and valuation discipline

Controlling-shareholder H-share purchases: Timing: To September 2027; What to watch: Pace toward the 6.5–13.0 million share target

Thai plant progress: Timing: 2027; What to watch: Mechanical completion of 30,000 t; customer qualification

Phenol prices and tyre demand: Timing: Ongoing; What to watch: Resin spreads; export growth

• Japanese or US export-control actions on lithography materials — Timing: Event-driven; What to watch: Supply risk for imported resins, monomers and photo-acid generators

H-share discount to A shares: Timing: Ongoing; What to watch: Discount of about 44%; Stock Connect inclusion

Analyst verdict

Red Avenue New Materials is moving from a niche industrial chemicals leader to a strategic semiconductor-materials platform, and the evidence is clearest in its electronics line. Electronic chemicals rose from under a fifth of revenue in 2023 to almost a third by mid-2026. Semiconductor photoresists have grown more than 50% a year for three years. Volume ArF and immersion ArF supply puts the company among a very small group of Chinese suppliers able to serve advanced nodes. In display resists and G/i-line resists it is already the domestic market leader.

The financial reality is less advanced. In FY2025, the group earned an operating margin of 8.6% before investment income. Cash conversion has averaged under 60% over five years. A single associate, Zhongce Rubber, has provided roughly half of pre-tax profit in recent periods. The fall in associate income in the third quarter of 2026 caused the first year-on-year quarterly profit decline of this cycle, even as revenue grew almost 30%. The investment debate is therefore less about growth than about the quality and timing of earnings. The question is when electronics profit, rather than associate income and tyre resins, carries the group.

The Hong Kong listing has bought time. Net cash is roughly neutral after the offering, short-term liquidity has improved, and there is capital for acquisitions. The tyre-resin franchise, with about 41% of the world market, remains a dependable source of cash and customer access, and the Thai plant extends its reach. On the other side, raw-material dependence on foreign suppliers, low utilisation of new lines, rivals building similar platforms and a valuation above 50x trailing earnings leave little room for execution slippage. The 44% H-share discount to the A shares and the weak trading debut show that international investors are already pricing that risk.

On balance, Red Avenue is a credible, well-positioned beneficiary of Chinese semiconductor localisation with a durable cash-generating base. The share price, however, already assumes a successful transition. Over the next 12 months, the measures that matter most are electronics segment profit, operating cash flow relative to net profit, the scale-up of CMP pads and immersion ArF, and the discipline of any acquisition.