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

As a leading enterprise in the domestic large-scale production of the polyether series, 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 intricate interplay of profit elasticity and operational risks inherent in cyclical industries.

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 borrowings, 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, sluggish downstream demand from the furniture and automotive industries, and a historically high price-to-book ratio, Changhua Chemical is making a bold, counter-cyclical expansion gamble.

Under the cycle, revenue declines while net profit surges

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 net 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 declining revenue is primarily due to falling raw material prices, not a genuine improvement in market demand,” said Zhao Zixing, an analyst tracking the chemical industry, in an interview with Jiemian News. “The company’s net profit is expected to decline by 50% in 2024 and rebound significantly in 2025. Such volatility is typical of cyclical characteristics.”

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 2025 net profit attributable to shareholders to be between 89.41 million and 109.28 million yuan, a year-on-year increase of 53.75% to 87.91%; and its net profit after non-recurring items to be between 87.64 million and 107.11 million yuan, up 67.38% to 104.58%.

Product focus and industry landscape

The company’s main business centers on the polyether series, including polyether for flexible foam, CASE (coatings, adhesives, sealants) applications, and specialty polyethers. Among these, polyether for flexible foam is the core product, mainly including POP and PPG series for soft foam. This segment accounts for a significant portion of revenue, with demand closely linked to the home furnishing and automotive industries—two downstream sectors whose cyclical health greatly impacts the company.

In terms of industry competition, the polyether polyol market shows a polarized landscape. According to data from Zhuochuang Consulting, general-purpose soft foam polyether (used mainly in block foams, furniture cushions, mattresses, packaging materials, etc.) remains the most competitive, accounting for 26% of consumption. Demand for POP and high-resilience polyether accounts for 19% and 13%, respectively, benefiting from upgrades in high-end furniture and automotive sectors. The demand for CASE polyether has increased to 12%, driven by developments in waterproofing and coatings.

Industry challenges: supply-demand imbalance under high risk

The polyether industry 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 as one of 15 products with oversupply risks, rated as high risk.

“This warning signals that the industry has entered a phase of overcapacity,” Zhao Zixing told Jiemian News. “The list considers current capacity, output, apparent consumption, imports and exports, planned capacity, and market demand five years ahead. Being classified as high risk indicates that supply-demand contradictions may intensify further.”

The domestic polyether industry is characterized by low concentration. Most companies produce low-value-added products, with fierce price competition, especially in the mid- and low-end markets. As a large-scale producer, Changhua Chemical cannot completely escape the competitive environment.

Downstream demand remains weak, further exacerbating industry pressures. The company’s downstream markets—automotive and soft furniture—are both experiencing sluggish growth.

The soft furniture sector, as a post-real estate industry, is highly correlated with the property market. In 2024, the total sales of building materials and home furnishings in large-scale retail outlets nationwide reached 1.49 trillion yuan, down 3.85%; 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 up to 58%, making it the primary demand driver. “The stagnation of China’s furniture consumption industry in recent years has directly limited the demand expansion for general soft foam polyether,” said industry analyst Liu Minxia. “Slumping new home sales reduce engineering channel orders, and the renovation market has yet to generate enough demand, making explosive growth in polyether procurement unlikely.”

The automotive industry faces similar challenges. Although vehicle production and sales in China increased year-on-year in the first half of 2025, the sector is undergoing a critical transition to electrification and intelligence, with supply chains being reconstructed. Leading automakers are ramping up independent R&D, demanding higher supply chain standards, and continuously squeezing suppliers’ profit margins. Some listed companies have openly stated that “the decline in new energy vehicle customers is common.”

Automotive demand accounts for about 10% of total demand for general soft foam polyether. Price wars and supply chain restructuring may impact procurement volumes and lead to further price pressures, squeezing upstream profitability.

Multiple pressures and industry warnings make recovery challenging

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

Jiemian News contacted the company for insights on how it plans to cope with weak downstream demand, its strategic considerations for counter-cyclical expansion, and how it intends to absorb new capacity. As of press time, no response has been received.

Rising debt and financial strain

Amid a worsening industry environment, Changhua Chemical’s financial health has deteriorated significantly. As of the end of September 2025, the company’s debt-to-asset 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 weakened short-term solvency.

“Doubling the debt ratio in just nine months warrants close attention,” said CPA Wang Li. “The main reason is the addition of 420 million yuan in long-term loans in 2025, which increases financial risk.”

In addition to increased long-term borrowings, the company’s accounts payable to downstream suppliers have become a major funding source. By September 2025, accounts payable and notes payable totaled 622 million yuan, up more than fivefold from 98 million yuan at the same period in 2024; accounts payable alone reached 500 million yuan, a 413% increase.

“This surge in payables may be a passive strategy to extend payment cycles and ease cash flow pressure,” Wang Li explained. “However, it could harm supplier relationships and, in the long run, raise procurement costs, further squeezing profitability.”

Meanwhile, the company’s external guarantees are also notable. 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, market attention has turned to its capital operations. By the end of 2025, Changhua Chemical plans to invest 743 million yuan in a carbon dioxide-based polyether project (Phase I), including a private placement of 155 million yuan.

This specialty polyether project, with certain technological barriers and market potential, may be part of the company’s strategy to optimize product structure and escape low-end price competition. However, given the oversupply situation, the market outlook remains uncertain, and large investments will further strain liquidity.

Notably, major shareholders are reducing their holdings. Xinyu Xiamen and its concerted action partner Ningbo Chuangfeng plan to reduce their 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 round of reduction; in October 2025, they sold 4.17 million shares, accounting for 3% of the total.

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

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

Historically, 3.45 times PB is among the highest since the company’s listing. “Valuations in cyclical industries are usually closely tied to industry prosperity. Currently, the polyether industry faces high risks of oversupply, and Changhua’s high valuation lacks solid fundamentals,” Zhao Zixing commented. “Compared to industry peers, the company’s valuation premium is evident.”

The high valuation also diverges from its earnings performance. Despite significant profit growth in the first three quarters of 2025, revenue remains in decline, and the profit increase heavily depends on cyclical cost benefits rather than sustainable competitive advantages.

In a cyclical context, Changhua Chemical’s bold counter-cyclical expansion faces multiple tests—industry oversupply warnings, downstream growth bottlenecks, mounting financial pressures, and inflated valuation bubbles—making its future path uncertain.