Dow's Q3 2025 Earnings Report (October 27, 2025)

The stock price has been depressed for a full year—falling two tiers. After the Q3 2025 earnings release, it surged 13%. Has there been any fundamental change? ・First, revenue was relatively weak; the guidance provided in Q2 for this quarter was $10.2 billion. ・Second, GAAP EPS turned positive this quarter only due to two non-recurring items; operating profit failed to cover interest expenses. ・On the positive side, the loss was narrower than expected—the company’s cost-cutting and capital expenditure reduction efforts have borne fruit. Has the chemical industry cycle already reached its downward inflection point? ・On the supply side, Dow believes capacity restraint has begun across all regions—including China: “We’ve seen speculation about closures totaling roughly 13 million metric tons—comprising approximately 5 million tons of additional capacity in Asia, Japan, and Korea, and around 7 million tons in China driven by [anti-evolution] policies.” ・On the demand side, Dow views overall demand as still weak—with no meaningful change from last quarter. It hopes rate cuts will stimulate construction starts.

Has the Chemical Industry Cycle Already Peaked?

The more extreme the profit 'scissors effect' becomes, the stronger the mean-reversion force grows. A 24% gross margin for methanol is clearly unsustainable. When coal-to-chemicals profitability runs too high, enterprises ramp up operating loads and commission new facilities—pushing profits back down. The essence of cyclical dynamics does not vanish simply due to geopolitical conflict. Now consider funding flows and valuation. Public mutual funds significantly increased their allocation to the chemical sector in Q1. The weight of basic chemicals in their portfolios rose to 6.3%, up 2.2 percentage points year-on-year; the sector shifted from underweight to overweight by 0.41%. Oil & petrochemicals rose to 1.20%, also turning into an overweight position. The core rationale behind this buying was the 'price-up theme + high-oil-price beneficiaries + leading blue-chip stocks'. Yet one structural shift warrants attention: the top ten holdings’ share of public mutual funds’ total chemical-sector exposure declined—from 41.6% in Q4 2025 to 38.2%. Breaking this down further, fund allocations are concentrating on large-cap core leaders: stocks with market caps above RMB 50 billion now account for 55.13%—up 7.47 percentage points quarter-on-quarter. Institutions have executed a 'prune small, retain large' rotation within the chemical sector. Wanhua Chemical, Hualu Holdings, and Yankuang Salt Lake saw their respective holding-value weights rise by 0.6, 0.7, and 1.8 percentage points. Long-term capital is also increasing exposure. Social security funds, pension funds, and QFIIs collectively hold approximately RMB 116.7 billion in chemical stocks—an increase of over 50% year-on-year. The pricing power in the chemical sector is shifting from retail traders and individual investors toward institutional investors. The heavier the institutional ownership, the smaller the short-term volatility—but once the underlying thesis is disproven, the resulting stampede can be especially severe. Valuation currently sits in an awkward spot. Wanhua’s trailing-twelve-month (TTM) P/E stands at 18.55x—its historical percentile at 73.95%. Hengli Petrochemical trades at 14.93x, at the 60.88th percentile—both near or above their historical medians. The perception of 'not being expensive' stems partly from the passive compression of forward P/E following Q1’s explosive profit growth—if full-year profits sustain Q1’s pace, Wanhua’s forward P/E would land around 10–14x, and Hengli’s around 15x. But here lies a trap: part of Q1’s profit surge was one-off—driven by the Hormuz Strait blockade-induced export pulse and the coal-to-chemicals profit scissors effect. Should both fade in Q3, full-year profits may fall far short of Q1’s annualized level. Buying at current prices implicitly assumes Q2–Q4 profitability remains sustainable. A horizontal comparison makes this clearer. Global chemical leaders—BASF trades at 15–18x P/E, and Dow at 14–17x. At 18.55x, Wanhua isn’t cheap—but given Europe’s permanent capacity exit and China’s binding dual-carbon constraints, Wanhua arguably deserves a valuation premium over BASF. The question is: how much is reasonable? 5%? 20%? The market hasn’t yet priced this in. Hualu Hengsheng’s forward P/E of 10–14x represents the most comfortable valuation in this chemical cycle—and with a dividend payout ratio exceeding 30%, it offers the strongest margin of safety. Baofeng Energy’s strategic positioning in green hydrogen grants it a 'new-energy' valuation option—market pricing reflects a hybrid identity: partly a cyclical chemical stock, partly an energy-transition growth story. Such mixed valuation acts as a premium in bullish markets but loses recognition entirely during downturns. Next comes the operational judgment. This is the hardest part to write—because the logic is crystal clear, yet the timing remains uncertain.

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