Lee & Man Chemical is a chemical manufacturer transiting from traditional chemicals toward higher-value materials. The company reported a resilient 1H26 performance, with revenue increasing 12% YoY to HK$2.17bn and net profit rising 7% YoY to HK$349mn. Despite ongoing pressure in traditional chemicals, advanced materials growth is reshaping the company’s earnings structure and providing new growth drivers.

Traditional chemicals face cyclical pressure: The traditional chemicals segment, including caustic soda, chloromethane, hydrogen peroxide and sodium hypochlorite, remained the company’s largest segment, generating 63% of total revenue at HK$1.37bn in 1H26, down 6.2% YoY. The decline was mainly driven by lower selling prices of caustic soda and chloromethane, with caustic soda ASP down around 20% YoY amid industry oversupply and soft demand. The segment is expected to remain under cyclical pressure in the near term.  The management expects supply-demand normalization and gradual stabilization from next year. However, Southeast Asia’s industrialization and manufacturing relocation should support long-term chemical demand growth, while the company’s Vietnam expansion provides additional exposure to regional growth opportunities.

Advanced materials are becoming the key earnings driver: Advanced materials, including high-performance polymers, fluorochemicals and lithium battery additives, represent the company’s strategic upgrade toward higher-value products. The segment delivered HK$645mn revenue in 1H26, up 75% YoY, accounting for around 30% of total revenue and becoming an increasingly important earnings contributor.

1). PTFE is a high-performance fluoropolymer widely used in semiconductor equipment, PCB and high-frequency communication cables. In 1H26, PTFE production reached around 6,100 tons, with ASP up around 2% YoY, while growth was mainly driven by higher volume and product mix improvement.

2). HFP is a key intermediate for high-performance fluorochemicals and next-generation refrigerants, sharing upstream TFE feedstock with PTFE. The company flexibly shifts between the production of PTFE and HFP based on profitability. The higher selling price of HEP supported business growth, with ASP increasing around 10% YoY.

3). VC is a key electrolyte additive for lithium batteries. The company’s VC Phase I project commenced production in 1H26, generating around 1,100 tons of output with ASP reaching RMB102k/ton, up 119% YoY. Benefitting from improving demand and tight supply, together with rising demand from high-performance batteries, it supported pricing and rapid business expansion.

Looking ahead, new capacity additions should further support growth. The Changshu VC Phase II project is expected to commence production by end-2026, while the Ruichang high-end fluoropolymer project is expected to complete by early 2027, expanding VC and HFP capacity.

Advanced materials are improving profit mix: 1H26 GPM stood at 35.7%, down 0.6ppt YoY, mainly due to weakness in traditional chemical product pricing, partially offset by strong growth in advanced materials. Operating expenses increased 4.8% YoY, below revenue growth, driving operating expense ratio down 1.1ppt to 15.1%, reflecting improving operating leverage. Net profit increased by 7% YoY to HK$349mn, with NPM declining 0.8ppt to 16.1%. Despite improving core operations, earnings growth was moderated by higher FX losses of around HK$20mn and lower other income.

The company maintained a stable shareholder return policy, declaring an interim dividend of 21 HK cents per share, up 7.7% YoY, representing around a 50% payout ratio. Meanwhile, balance sheet remains healthy, with a net gearing ratio of 8.1%.

Our views: Lee & Man Chemical is gradually shifting from traditional cyclical chemicals toward higher-value materials. Despite revenue pressure from the traditional chemical cycle during 2023-2025, profitability is recovering from the 2023 trough, supported by business mix optimization and increasing contributions from advanced materials.  Traditional chemicals are believed to still be in a bottoming phase after capacity expansion. The company’s integrated production setup, energy advantages and stable raw material supply provide cost competitiveness and earnings resilience through the cycle.

Looking ahead, advanced materials capacity expansion is expected to drive growth, while stabilization of traditional chemicals could gradually reduce earnings drag. The counter is trading at 7x FY26E P/E and 6.6% dividend yield. (Research Department)