Supcon's 4Q25 results under pressure, but Industrial AI lifts long-term growth expectations

Overview

This report evaluates Zhejiang Supcon Technology's 4Q25 results, 2026 PA market pressure, Industrial AI business expansion, and valuation changes. The company's 4Q25 revenue was broadly in line with the preannouncement, but gross margin and operating profit came under significant pressure, reflecting weakness in downstream cycles such as chemicals and petrochemicals. BofA believes short-term performance remains affected by the PA market downturn, but Industrial AI, UCS, software subscriptions, robotics, and overseas markets provide support for long-term growth.

Core views

The core view is that short-term pressure coexists with long-term optionality. In the short term, China's PA market already posted negative YoY growth in 2025 and is still expected to decline by 0.6% in 2026, while slower capex in the chemical, petrochemical, and metallurgy industries will continue to weigh on the company's revenue and profit. Over the long term, the company's Industrial AI solutions have been deployed in chemicals, petrochemicals, oil & gas, and mining projects, and TPT and UCS are expected to promote autonomous operating factories and generate recurring cash flow through a subscription model. Based on raised long-term growth expectations, BofA lifts the target price, but maintains Neutral because short-term pressure in the PA industry remains.

Analysis framework

The report combines earnings review, industry demand assessment, segment-level revenue forecasting, and valuation reassessment. The earnings section focuses on comparing 4Q25 revenue, gross margin, operating profit, and net profit; the industry section analyzes China's PA market and downstream demand in chemicals, petrochemicals, metallurgy, and other sectors; the growth section estimates Industrial AI's revenue contribution from 2025 to 2028; and the valuation section uses both DCF and P/E methods, averaging them to derive the RMB71 target price.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  DCF fair value is RMB73, assuming an FCF terminal growth rate of 3% and WACC of 12.4%, to reflect the company's ability to sustain earnings growth and manage cash flow.

• Valuation methodsP/E

  Price-to-earnings valuation

  P/E fair value is RMB68, based on an average 2026/27E P/E of 45x, below the historical average of 52x since listing, to reflect the medium- to long-term earnings growth brought by Industrial AI while retaining a discount for short-term pressure in the PA industry.

• Business qualityiQmethod

  BofA Global Research standard metrics framework

  The report uses metrics such as ROE, operating margin, cash realization ratio, and net debt-to-equity ratio to assess operating performance, earnings quality, and valuation comparability.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhejiang Supcon Technology (A) / 688777.SS

  Company covered in the report

  Strengths

  45% market share in China's DCS market, ranking No.1; Industrial AI has already been deployed in chemicals, petrochemicals, oil & gas, and mining projects; TPT, UCS, software subscriptions, and overseas business provide long-term growth options.

  Weaknesses

  Revenue exposure to the chemical and petrochemical industries is close to 55%; the PA market downturn is pressuring short-term revenue and margins; 4Q25 net profit declined sharply YoY.

  Comparison

  The target P/E of 45x is slightly below the historical average forward P/E of 52x since listing; DCF and P/E valuations imply RMB73 and RMB68, respectively.

  Risks

  Weaker-than-expected downstream demand, intensifying competition from emerging domestic players, margin deterioration caused by rising costs and falling ASP, and shortages of key instruments and components.

• China PA market

  Core downstream demand environment

  Strengths

  Demand from nuclear power, oil & gas exploration and development, coal chemicals, and upgrade/replacement of installed capacity can still partly offset weakness in chemicals and petrochemicals.

  Weaknesses

  Expected to decline 0.6% YoY in 2026, with industries such as chemicals, petrochemicals, and metallurgy affected by overcapacity, upstream costs, and slower capex.

  Comparison

  Chemicals were the largest end-market in China's PA market in 2025, accounting for 25%; municipal and utilities accounted for 22%, power for 11%, petrochemicals for 9%, and metallurgy for 7%.

  Risks

  If profitability in chemicals and petrochemicals remains weak, orders and revenue recognition may continue to be delayed.

• Industrial AI / TPT / UCS

  Long-term growth driver

  Strengths

  Capable of executing simulation, control, optimization, forecasting, and evaluation tasks; aimed at building autonomous operating factories; the subscription model charges about RMB1mn per project annually and could generate recurring cash flow.

  Weaknesses

  The current revenue base is still small, at about RMB200mn in 2025, and long-term contribution depends on customer implementation pace and commercialization capability.

  Comparison

  Industrial AI revenue is expected to reach RMB3bn in 2028, accounting for 22% of total revenue, with gross margin of 60-65%, higher than the company's blended gross margin.

  Risks

  Industrial AI business development slower than expected, customer adoption slower than expected, or subscription model rollout falling short of expectations.

Key data

• 4Q25 revenueRMB2.4bnDown 14% YoY and up 33% QoQ, broadly in line with the preannouncement.
• 4Q25 gross margin29.7%Down 6.5 percentage points YoY and 1.7 percentage points QoQ, below BofA's estimate of 35.0%.
• 4Q25 net profitRMB10mnDown 98% YoY and 87% QoQ.
• China DCS market share45%MIR Databank data show the company's 2025 share increased to 45% from 40% in 2024.
• 2026 China PA market forecast-0.6% YoYBofA expects weak chemical and petrochemical demand to continue weighing on the PA market.
• Industrial AI revenueabout RMB200mn in 2025; RMB3bn in 2028EExpected to account for 22% of total revenue in 2028.
• Industrial AI gross margin60-65%Higher than the company's overall gross margin level of 30-35%.
• Target price adjustmentraised from RMB54 to RMB71Mainly driven by higher long-term growth expectations supported by Industrial AI.
• 2026/27E earnings revision-27% / -13%Reflects weaker margin forecasts under the PA downcycle.
• 2028E EPS2.58 CNYEPS for 2024A, 2025A, 2026E, 2027E, and 2028E is 1.41, 0.558, 1.22, 1.80, and 2.58, respectively.

Impact & implications

The investment implication is that Zhejiang Supcon Technology's short-term earnings elasticity is constrained by PA industry conditions, chemical and petrochemical capex, and margin pressure, so the current rating remains Neutral; however, if Industrial AI scales as expected, it could lift revenue growth, improve the gross margin mix, and raise the valuation center. The higher target price does not imply a strong short-term buy signal, but rather reflects a balance between improved long-term growth assumptions and near-term industry pressure.

Risks

• Downside risk: downstream demand is weaker than expected, especially if capex in the chemical and petrochemical industries remains weak.
• Downside risk: intensifying competition from emerging domestic players may depress ASP or weaken market share gains.
• Downside risk: rising costs and falling prices lead to further margin deterioration.
• Downside risk: shortages of key instruments and other components affect deliveries.
• Upside risk: penetration of process industry automation is faster than expected.
• Upside risk: progress in taking market share from international vendors is better than expected.
• Upside risk: new businesses such as software, UCS, and robotics develop faster than expected.

What to watch

• Whether China's PA market declines by 0.6% in 2026 as expected, and whether demand in chemicals, petrochemicals, and metallurgy bottoms out.
• Whether the company can continue to maintain or expand its leading 45% share in the DCS market.
• The pace at which Industrial AI revenue grows from about RMB200mn in 2025 toward RMB3bn in 2028.
• Customer adoption of the TPT subscription model and autonomous operating factory projects.
• Whether overseas orders recover as tensions in the Middle East ease, and whether overseas revenue can reach RMB2.1bn by 2028, accounting for 16% of total revenue.
• Whether gross margin stabilizes from 29.7% in 4Q25, and whether high-margin Industrial AI business can improve the overall gross margin mix.