Fair-Value Report — Red Avenue New Materials Group (9607.HK)

Insider Signal

This is not a placing/subscription artifact: the average purchase price (HK$40.0453) sits below the IPO offer price (HK$44.00) and close to the day-1 closing price (HK$39.98) — i.e., Zhang Ning bought on the open market as the stock fell on its trading debut, rather than receiving shares at the IPO price. It is also not a pledge, control-default, intra-group reshuffle, or ESOP artifact. This reads as a controlling shareholder/founder stepping in to support the stock during IPO-debut weakness — a genuine, if modest, insider buy. Context that tempers the signal: HK$29.4 million is roughly 0.07% of the company's total blended market cap, and Zhang Ning (through Red Avenue Investment, Virgin Holdings, and personal holdings) already controls approximately 54.89% of total issued shares — this purchase is best read as "founder confidence / debut-day price support," not a large incremental conviction bet.

Verified Snapshot

A-shares trade at roughly an 81% premium to H-shares for the identical economic claim (¥62.30 × FX ≈ HK$72.9 vs HK$40.32) — a structural A-H segmentation discount, common for dual-listed mainland names, not a fundamental difference. FX used: 1 CNY ≈ 1.1703 HKD (4-Oct-2026).

Business

Red Avenue operates three segments. Rubber additives (phenolic resin for tires and other rubber products) is the core, legacy business — Frost & Sullivan ranks Red Avenue #1 globally (41.4% share) and in China (45.9% share) for FY2025, and it contributed 67.9% of FY2025 revenue (¥2,321M). Electronic materials (mainly photoresist for displays and semiconductors — KrF photoresist holds over 40% domestic share and Red Avenue is among the few Chinese producers with mass-production ArF capability) is the growth engine, up from ¥146M (2021) to ¥1,051M (2025, 28.8% of revenue) on China's semiconductor-materials domestic-substitution push. Fully biodegradable materials (PBAT, for food packaging) is the smallest segment (3.3% of FY2025 revenue) and an optionality call on China's plastics-substitution policy. The H-share listing (29-Sep-2026) raised HK$2.98B gross / ≈HK$2.90B net, primarily earmarked for R&D (32.8%), production upgrades (21.0%), M&A (20.0%), overseas expansion (6.2%), working capital (10.0%), and bank-loan repayment (10.0%).

Valuation

Method: Profitable, diversified operating company → three-scenario probability-weighted DCF (primary) + peer multiple cross-check + reverse DCF sanity check. Modeled in RMB (operating currency), converted to HKD for the traded H-share instrument. WACC built via CAPM: China 10Y risk-free 1.70%, specialty-chemicals industry beta 0.95 (Damodaran, relevered to the company's own leverage), mature-market ERP 4.17% + China country risk premium 0.93% (total ERP 5.10%, Damodaran 2026), pre-tax cost of debt 4.50%, target capital structure 80% equity / 20% debt post-IPO → WACC = 6.04%. Tax rate assumption of 15% reflects the company's actual effective rate (2025 income-tax expense of just ¥23.7M against pretax profit of ≈¥587M, i.e. ~4% effective — driven by High-New-Tech Enterprise status and R&D super-deductions); 15% is used as a conservative mid-point rather than extrapolating the unusually low 2025 actual. Net debt used is the pro-forma post-IPO figure (≈¥551M: H1 2026 total debt ¥4.089B − cash ¥1.060B − ≈¥2.48B net IPO proceeds).

Reverse DCF — what the price implies

At the current H-share price, holding base-case margins/WACC/terminal growth fixed, the market is pricing in a flat 12.3% revenue CAGR for 10 years — below H1 2026's actual 29.1% growth and above the modeled base case's long-run fade (which averages roughly 8-9% over the decade), but not an outlandish ask given the semiconductor-materials tailwind. Holding the growth path fixed instead, the price implies a flat 19.8% operating margin — squarely inside the 18-21% base-case range. Neither reverse-DCF check demands heroics; the embedded expectations look achievable rather than priced-for-perfection or priced-for-disaster.

Peer Table (median-anchored)

*Pro-forma P/B using post-IPO book value (≈¥11.19/share); pre-IPO BVPS was ¥6.85.

Target (H-share) trades at a 21% premium to peer median on P/E but a 94% premium on P/B, which is only partly justified by superior fundamentals — Red Avenue's ROE (16.0%) and revenue growth (+16.8%) both lead every peer in this set, but the P/B gap is wide even adjusting for quality. Peer comparisons here are a secondary check, not the primary anchor: the set spans a commodity-chemical maker (Sunsine), a margin-collapsing rubber-additive peer (Yanggu Huatai), and a richly-rated semiconductor-materials specialist (Feikai) — genuinely heterogeneous businesses. The DCF is the more reliable anchor for this name.

Conclusion

Rating: Moderate Buy (H-shares, 9607.HK). The insider signal is genuine — not a placing, pledge, or related-party artifact — but it is modest in size relative to Zhang Ning's existing 54.89% stake and best read as founder-confidence debut-day support rather than a large fresh conviction bet. On the fundamentals: the probability-weighted DCF shows +17% upside (HK$47.2 fair value vs HK$40.32), and both reverse-DCF checks show the market is pricing in achievable, not heroic, growth/margin assumptions. The business itself is high quality — global #1 in its core rubber-additives niche with a genuinely fast-growing, higher-margin semiconductor-materials arm riding China's domestic-substitution push — and the H-share specifically offers access to that business at a meaningful discount to the economically-identical A-share. Weighing against a full "Buy": real near-term balance-sheet strain (sub-1x current ratio, cash-flow conversion that deteriorated sharply in H1 2026), only about a week of H-share trading history with zero analyst coverage and a thin 68.12M-share H-float, and a wide bull/bear DCF spread (HK$18.6–HK$85.1) reflecting genuine uncertainty. Position sizing should respect the newness and float thinness of the listing.

Key Risks

• Liquidity/working-capital: current ratio 0.88, H1 2026 operating cash flow down 71.9% YoY on rising receivables; IPO cash helps but FY2026 full-year conversion needs to be watched.
• Fresh-listing risk: ~1 week of H-share trading history, zero analyst coverage (TipRanks), thin free float (68.12M H-shares) — expect volatility and wide spreads.
• Persistent A-H discount: the H-share may never "catch up" to the A-share's valuation even if fundamentally warranted, given capital-control-driven market segmentation.
• Tax-rate normalization: the ~4-15% effective tax rate depends on High-New-Tech Enterprise status (periodic renewal) and R&D super-deductions; reversion toward the 25% statutory rate would directly compress free cash flow.
• Segment competitive risk: peer Yanggu Huatai's net margin collapse (-55% YoY) shows real pricing pressure in the broader rubber-chemicals space; Red Avenue's scale provides insulation, not immunity. Photoresist domestic substitution is a real tailwind but subject to competitive and policy risk (state-backed rivals, customer qualification cycles).
• Insider-signal strength: HK$29.4M purchase is ~0.07% of total company market cap — a supportive but not outsized signal.

Sources

Primary/Chinese-language: CNINFO interim report PDF (static.cninfo.com.cn, filed 20-Aug-2026); Sina Finance, Sohu, 10jqka, Eastmoney, 腾讯新闻 (company FY2025 annual report and 2026 interim data, income-tax and R&D-expense detail, Yanggu Huatai and Feikai Materials financials). English-language cross-checks: TipRanks (9607.HK price/market cap, 2-Oct-2026), stockanalysis.com (603650.SS TTM financials), Futunn (DI filing relay for Zhang Ning's purchase), CaproAsia and Bamboo Works (IPO pricing and trading-debut), Minichart.com.sg (IPO allocation/use-of-proceeds), TrendForce (photoresist market position), Yahoo Finance/TipRanks (China Sunsine). WACC inputs: Damodaran NYU Stern (industry beta, equity risk premium, country risk premium, 2026 data); Trading Economics / MacroMicro (China 10Y government bond yield, ~1.70-1.70%, late-Sep/early-Oct 2026). FX: OFX/MTFX (USD/CNY/HKD, early-Oct 2026). Note: the original HKEXnews DI filing PDF returned HTTP 404 on direct fetch; the filing's figures were corroborated via a financial-news relay whose reported share count, price, and HK$ value match the screener's candidate data exactly.

This report is for informational purposes only and does not constitute investment advice. It was produced by an automated research process verifying publicly available data as of the dates stated; figures may change materially as the company reports FY2026 results and as H-share trading history lengthens. The author holds no position in 9607.HK, 603650.SH, or any peer named above.