J.P. Morgan: Defu Technology’s HVLP4 shipments accelerate as capacity expansion coincides with cash flow pressure

Why did third-quarter profitability improve, and what will drive fourth-quarter growth?

Defu Technology’s net profit attributable to shareholders in the third quarter of 2026 was 204 million yuan, up 75% quarter on quarter and broadly in line with JPMorgan’s forecast of 200 million yuan. Gross margin rose 2.3 percentage points quarter on quarter to 11.1%, supported by increased shipments of high-value products and higher capacity utilization.
JPMorgan expects net profit to grow 30% quarter on quarter in the fourth quarter, mainly from greater contributions from an improved PCB copper foil product mix and higher lithium battery copper foil processing fees. The pace of HVLP shipments is a key variable for margins.

HVLP4 shipments in October were close to 300 tonnes, up about 60% from approximately 187 tonnes in September, and almost matched the roughly 300 tonnes shipped in the whole third quarter. For comparison, the company’s total electronic-circuit copper foil shipments in the third quarter were less than 6000 tonnes, including approximately 1500 tonnes of HVLP.
Management said average HVLP4 yield was about 68%, with the best-performing workshop reaching 72%. JPMorgan believes maintaining yields as production expands is critical to achieving profit growth.
Management expects HVLP to account for 40%–50% of electronic-circuit copper foil shipments in 2027, with monthly shipments reaching approximately 3000 tonnes in the fourth quarter of 2027.

The company plans to add 50 thousand tonnes of electronic-circuit copper foil capacity in phases during 2027: the first 25 thousand tonnes are expected to begin ramping up in April, with the remaining 25 thousand tonnes to follow in 8–September. Its internally manufactured surface-treatment equipment is already in production, with yields broadly comparable to those of imported equipment. Management expects approximately two-thirds of the equipment for the new project to be developed in-house.
Management said demand for HVLP3/4 still exceeds supply and that it has discussed possible price increases for the first half of 2027 with major customers, while prioritizing long-term customer relationships. JPMorgan sees price increases as additional upside and considers volume and product mix the main growth drivers.

Third-quarter lithium battery copper foil shipments were approximately 39 thousand tonnes. Management said processing fees had risen about 10% since the first quarter of 2026 and expects more benefits from price increases to be reflected in the fourth quarter. Subsequent prices depend on battery makers’ production schedules and industry supply.
While profitability improved, operating cash flow for the first three quarters of 2026 was negative 1.022 billion yuan, net debt at the end of the third quarter was 5.497 billion yuan, and the net gearing ratio rose from 90% at the end of the second quarter to 102%. The company buys raw materials with cash but often receives payment in bank acceptance bills, weighing on operating cash flow.
Management attributed the increase in inventory mainly to more work in progress resulting from production growth. JPMorgan maintained its Overweight rating and price target of 108 yuan per share for December 2027, while monitoring balance sheet pressure during capacity expansion.