Financial Report | A Counter-Cyclical Expansion Gamble: Changhua Chemical Caught in Dual Predicament of Supply-Demand Imbalance and Valuation Bubble

Interface News Reporter | Tao Zhixian

As a leading enterprise in the large-scale production of domestic polyether series products, Changhua Chemical (301018.SZ) stands at the crossroads of cyclical fluctuations and industry transformation. In the first three quarters of 2025, the company’s revenue decreased by 9.31% year-on-year, while net profit attributable to shareholders increased by 128%. Behind this seemingly contradictory performance is the deep intertwining of profit elasticity and operational risks in a cyclical industry.

Changhua Chemical’s main product, polyether polyols, is classified as a “high-risk” product by the Ministry of Industry and Information Technology, warning of oversupply in the market. The company has significantly increased long-term borrowing, with its debt-to-asset ratio doubling within six months, and has invested 743 million yuan in expanding its carbon dioxide-based polyether project. Coupled with continuous shareholder reductions, weak downstream demand from the furniture and automotive industries, and a high price-to-book ratio at a historical high, Changhua Chemical is making a bold, counter-cyclical expansion gamble.

Under the cycle, the contrast between declining revenue and soaring net profit

Changhua Chemical’s performance presents a typical cyclical industry pattern. Last year, in the first three quarters, the company’s revenue was 1.991 billion yuan, down 9.31% year-on-year; net profit attributable to shareholders was 76.07 million yuan, up 128%; and net profit after non-recurring gains and losses was 74.95 million yuan, a substantial increase of 95.6% from the same period last year.

This inverse relationship between revenue and profit is common in cyclical industries. “Profit elasticity in cyclical industries mainly comes from product price spreads and cost control. Changhua Chemical’s sharp increase in net profit despite falling revenue benefits from a decline in raw material prices, rather than a genuine improvement in market demand,” said Zhao Zixing, an analyst who has long followed the chemical industry, to Interface News. “The company’s net profit is expected to decline by 50% in 2024, with a significant rebound in 2025. Such volatility is a typical characteristic of cyclical industries.”

Looking back at historical performance, Changhua Chemical’s profit fluctuations are even clearer. From 2022 to September 2025, the company’s net profits after non-recurring items were 81 million yuan, 114 million yuan, 52 million yuan, and 75 million yuan, respectively, resembling a roller coaster. The company has openly stated that its 2024 performance was affected by raw material price fluctuations, intensified market competition, and slow recovery in downstream consumer demand.

Changhua Chemical forecasts its full-year net profit attributable to shareholders for 2025 to be between 89.41 million and 109.28 million yuan, up 53.75% to 87.91% year-on-year; and its net profit after non-recurring items to be between 87.63 million and 107.11 million yuan, an increase of 67.38% to 104.58%.

Product-wise, Changhua Chemical’s core business focuses on polyether series products, including flexible foam polyethers, CASE polyethers, and specialty polyethers. Among these, flexible foam polyethers are the main product, mainly including POP and PPG series for soft foam. These products constitute a significant portion of the company’s revenue, with demand closely linked to the home furnishing and automotive industries, whose cyclical health significantly impacts the company’s performance.

In terms of industry landscape, the competition in the polyether polyol market is polarized. According to data from Zhuochuang Consulting, general-purpose soft foam polyethers (used mainly in block foam, furniture cushions, mattresses, packaging materials, etc.) are the most competitive traditional products, accounting for 26% of consumption. Demand for POP and high-resilience polyethers accounts for 19% and 13%, benefiting from upgrades in high-end furniture and automotive sectors. As the waterproofing and coating industries develop, demand for CASE polyethers has increased to 12%.

Industry dilemma: supply-demand imbalance under high-risk warning

The polyether industry, where Changhua Chemical operates, faces unprecedented supply-demand imbalance pressures. On February 6, the Ministry of Industry and Information Technology reposted the “List of Products in the Petrochemical and Chemical Industry with Oversupply Risks (2025 Edition),” which includes polyether polyols among 15 products identified as oversupplied, with a high risk level.

“This warning signal warrants close attention, indicating that the industry has entered a stage of capacity excess,” Zhao Zixing told Interface News. “The list explicitly considers current capacity, output, apparent consumption, imports and exports, planned capacity, and market demand five years ahead. The inclusion of polyether polyols as high risk suggests that supply-demand conflicts may intensify further.”

From the industry competition perspective, the low concentration of domestic polyether enterprises is a prominent issue. Most companies produce low-value-added products, with fierce price competition dominating the mid- and low-end markets. As a large-scale producer, Changhua Chemical cannot completely escape the competitive environment.

Weak downstream demand further exacerbates industry pressure. The main downstream sectors for Changhua’s products are the automotive and soft furniture industries, both currently facing sluggish growth.

The soft furniture sector, as a post-real estate industry, is highly tied to the real estate market’s health. In 2024, the total sales of building materials and home furnishing markets above designated size nationwide reached 1.49 trillion yuan, down 3.85% year-on-year; retail sales of building and decoration materials totaled 169.2 billion yuan, down 2%. The industry as a whole is contracting.

In the general soft foam polyether application, soft furniture accounts for as much as 58%, making it the primary demand source. “The stagnation of China’s furniture consumption industry in recent years has directly limited the demand expansion for general soft foam polyethers,” said industry analyst Liu Minxia. “Slumping new home sales reduce engineering channel orders, and the renovation demand from existing homes has yet to reach a level that can support explosive growth in procurement.”

The automotive industry faces similar challenges. Although China’s auto production and sales increased year-on-year in the first half of 2025, the industry is in a critical period of electrification and intelligent transformation, with supply chains undergoing restructuring. Leading automakers are increasing R&D efforts, demanding higher supply chain standards, and continuously squeezing suppliers’ profit margins. Some listed companies openly admit that “the decline in customers in the new energy vehicle sector is common annually.”

Demand for polyethers in the automotive industry accounts for about 10% of total demand for general soft foam polyethers. Price wars and supply chain restructuring may not only impact procurement volumes but also put downward pressure on product prices, further squeezing upstream profitability.

With dual downstream pressures and industry warnings, the path to demand recovery in the polyether industry is fraught with challenges. For Changhua Chemical, the growth bottleneck in downstream markets is an external constraint difficult to overcome in the short term, increasing market risks for its expansion plans.

Interface News contacted the company for comments on how Changhua Chemical plans to cope with weak downstream demand, its strategic considerations for counter-cyclical expansion amid high industry risks, and how it intends to ensure absorption of new capacity. As of press time, no response was received.

Rising debt and strained capital chain

Amid increasingly severe industry conditions, Changhua Chemical’s financial health has deteriorated significantly. As of the end of September 2025, the company’s asset-liability ratio soared to 43.98%, a sharp increase of 24.99 percentage points from 18.99% at the end of 2024; its current ratio declined from 3.12 to 1.11, and quick ratio from 2.73 to 0.92, indicating a weakened short-term debt-paying ability.

“Doubling the asset-liability ratio in just nine months is a matter of high concern,” said CPA Wang Li. “The main reason for the increased debt pressure is the addition of 420 million yuan in long-term loans in 2025, which elevates financial risk.”

In addition to increased long-term borrowing, the company’s accounts payable to downstream suppliers has become a key funding source. By the end of September 2025, accounts payable and notes payable totaled 622 million yuan, up over five times from 98 million yuan at the same period in 2024; among these, accounts payable reached 500 million yuan, a 413% increase.

“Such a sharp rise in accounts payable may be a passive strategy under financial pressure, extending payment cycles to ease cash flow,” Wang Li explained. “However, this could damage supplier relationships and, in the long run, increase procurement costs, further squeezing profitability.”

Meanwhile, the company’s external guarantees are also noteworthy. As of August 2025, Changhua Chemical and its subsidiaries had a total guarantee balance of 368 million yuan, accounting for 25.94% of the company’s latest audited net assets.

Under mounting financial pressure, the company’s capital operations have attracted market attention. By the end of 2025, Changhua Chemical planned to invest 743 million yuan in the construction of a CO2-based polyether project (Phase I), including a private placement of 155 million yuan.

CO2-based polyethers, as a type of specialty polyether, possess certain technical barriers and market potential. The company’s layout in this area may aim to optimize product structure and escape the price competition of mid- and low-end markets. However, in the context of oversupply, the market outlook for new projects remains uncertain, and large investments will further strain capital.

More notably, shareholder reductions continue. Major shareholders Xinyu Xianrui and its concerted action partner Ningbo Chuangfeng plan to reduce holdings by no more than 1.44 million shares, representing less than 1% of the total share capital after excluding repurchased shares. This is the second reduction by this shareholder group; in October 2025, they completed a reduction of 4.17 million shares, accounting for 3% of the total.

Shareholders’ continued reductions during a performance rebound reflect their attitude toward the company’s long-term prospects.

Currently, Changhua Chemical’s valuation has become another market focus. Data shows the current price-to-book ratio is 3.45, higher than peers Longhua New Materials (301149.SZ) at 2.43, Wanhua Chemical (600309.SH) at 2.17, and ST Shenhua (000698.SZ) at 2.02.

Historically, the 3.45 PB ratio is at an absolute high since the company’s listing. “Valuations in cyclical industries are usually closely linked to industry prosperity. Currently, the polyether industry faces high risks of oversupply, and Changhua Chemical’s high valuation lacks sufficient fundamental support,” Zhao Zixing commented. “Compared to industry peers, the company’s valuation also carries a significant premium.”

The high valuation also diverges from the company’s actual profitability. Despite a substantial increase in net profit in the first three quarters of 2025, revenue remains in decline, and performance growth heavily depends on cyclical cost benefits rather than sustainable competitive advantages.

Amid cyclical fluctuations, Changhua Chemical’s bold counter-cyclical expansion faces multiple tests: high-risk industry warnings, downstream growth bottlenecks, increasing financial pressures, and inflated valuation bubbles. Its future path remains uncertain.