After the Indonesian channel was completely blocked, Hengdian DMEGC surprisingly still made a profit in its third-quarter financial report, and it achieved this result by relying on its sufficiently low cost.

Hengdian Dongmag's Q3 financial report shows that the arbitrage model of photovoltaic products going overseas has failed.

Energy Insight noted that on October 23, Hengdian Dongmag (002056) disclosed its 2026 Q3 financial report. In the first three quarters, its operating revenue reached 18.291 billion yuan, with a slight year-on-year increase of 4.16%, net profit attributable to shareholders stood at 1.332 billion yuan, down 8.24% year on year, and non-recurring profit deducted net profit hit 1.159 billion yuan, down 20.89% year on year. In the single third quarter, the operating revenue reached 5.949 billion yuan, up 5.74% year on year, net profit attributable to shareholders was 384.4 million yuan, down 11.11% year on year, and non-recurring profit deducted net profit was 348.9 million yuan, down 11.71% year on year.

Seen against the overall backdrop of the 2026 photovoltaic industry, the four leading players including LONGi, Tongwei, TCL Zhonghuan and JA Solar recorded a combined expected loss of over 13 billion yuan in the first half of the year, and Hengdian Dongmag is one of the very few companies in the photovoltaic sector that is still making profits. However, the non-recurring profit deducted decline rate is nearly two and a half times the decline rate of net profit attributable to shareholders, and the quality of profits is changing.

A more noteworthy point comes from the company's statement on the interactive platform in September: its overseas photovoltaic production capacity no longer generates direct export revenue to the United States. This Q3 financial report is the first full performance report submitted by Hengdian Dongmag after its access to the US market was closed.

Profits remain, but the way of making money has changed

The main business of Hengdian Dongmag is photovoltaic. In the first half of 2026, the revenue from photovoltaic products reached 7.369 billion yuan, accounting for nearly 60% of the total operating revenue. Magnetic materials ranked second with a proportion of less than 20%, and lithium battery was the third business segment. This structure determines that the deeper the photovoltaic price war goes, the more severely the company's profits will be dragged down.

The net profit attributable to shareholders in the Q3 report only dropped by 8.24%, which is far milder than the losses of billions of yuan incurred by peers in the industry. However, this figure includes the buffer brought by exchange rate hedging.

In the first three quarters, financial expenses changed from -320 million yuan in the same period of the previous year to 299 million yuan, with a difference of 619 million yuan between the two figures. The company explained that this was the exchange loss caused by the appreciation of RMB against the euro and the US dollar. Some of the loss was hedged by forward foreign exchange settlement and sale instruments, so the net profit attributable to shareholders was not completely eroded by exchange rate fluctuations. The non-recurring profit deducted net profit, however, reveals the real operating profit after hedging more thoroughly. The 20.89% decline rate represents the actual pressure that the core photovoltaic business is facing under the current price level.

The source of profits from the photovoltaic business is worth further analysis. In the first half of 2026, the gross profit margin of overseas business was 12.26%, while that of domestic business was 18.77%, with the overseas figure being more than 6 percentage points lower than the domestic one.

In addition, all-black modules in the European distributed market do have a premium, but the premium is not high enough to lift the gross profit margin of overseas business. Hengdian Dongmag's photovoltaic business can maintain positive returns relying on the low-cost Sichuan hydropower at its Yibin base, the preferential income tax policy for the large-scale development of the western region, and the tariff arbitrage profit once obtained by its Indonesian production capacity that shipped products to the US using the rules of origin.

When the access channel from Indonesia to the US is closed, the second source of profit is structurally removed. The profitability of the photovoltaic business can only rely more closely on the cost advantage of the Yibin base and the small local premium in the European distributed market. This is the fundamental reason why the non-recurring profit deducted decline rate in the Q3 report is significantly larger than that of net profit attributable to shareholders.

The company is still making profits, but the way of making money has changed from two pillars of "tariff arbitrage plus cost advantage" to mainly relying on one single pillar.

The factory on Batam Island used to be the most eye-catching highlight on the profit statement

Hengdian Dongmag's Indonesian base is located on Batam Island, which started mass production in August 2024 with a production capacity of 3.8GW cells and 2GW modules.

The core logic for building the Indonesian base is to counter US sanctions. Indonesia is not on the 2025 US anti-dumping and countervailing duty list for Cambodia, Malaysia, Thailand and Vietnam. Chinese-produced silicon wafers and cells are shipped to Batam Island for processing, and then enter the US market with the origin identity of "Made in Indonesia".

In the first quarter of 2025, the Indonesian base shipped about 900MW of cells, contributing excess profits for the US market, with a profit of several cents per watt and a gross profit margin of over 14%. During that period, the Indonesian production capacity was the most profitable highlight on Hengdian Dongmag's photovoltaic segment profit statement.

The escalation of tariffs is much faster than the depreciation of production capacity. On September 11, 2026, the US Department of Commerce issued the final ruling on anti-dumping and countervailing duties against India, Indonesia and Laos, with the highest comprehensive tax rate for Indonesia reaching 268.06%. On October 14, the ITC's final ruling confirmed the existence of "substantial damage", completing the last step of the tariff imposition procedure.

Under Section 232, the US also set the minimum import price at US$0.22 per watt for cells and US$0.38 per watt for modules. Products below this threshold will directly lose market access qualification.

Anti-dumping and countervailing duties are punitive charges superimposed on top of the product price, while the minimum import price sets a floor under the product price. Squeezed by these two rules, the economic logic for Indonesian cells and modules to enter the US market no longer holds.

Hengdian Dongmag responded fairly quickly. Since the first quarter of 2026, the shipments of Indonesian cells have been shifted to markets outside the US, and the company also emphasized that the Indonesian factory "maintains full production". However, full production and profitability are two different things.

For the same production line, the price for products sold to the US market includes the tariff arbitrage premium, while products sold to non-US markets can only accept the local price system. The data that the gross profit margin of overseas business was lower than that of domestic business in the first half of 2026, and the decline rate of overseas gross profit margin was larger than that of domestic gross profit margin, has confirmed the cost of this price shift in the financial statements.

The Indonesian factory has not been shut down and is still in operation, but the way it contributes to profits has changed -- from a "capturer of US tariff price difference" to an ordinary overseas production capacity that survives on non-US market orders and squeezes profits through cost control.

The failure of "Capacity Going Global 1.0" does not mean the inability to find a new factory location, but being "chased" by trade restrictions has become the norm

Putting the Indonesian base in a longer time horizon, its rise and shutdown are not isolated events. In 2025, the US imposed additional anti-dumping and countervailing duties on Cambodia, Malaysia, Thailand and Vietnam, with the highest tax rate reaching 3521%. Chinese-funded production capacity in the four countries could no longer stay there and began to gather in Indonesia and Laos.

The US's response logic is equally clear: it launched an investigation in August 2025, issued the countervailing duty preliminary ruling in February 2026, the anti-dumping preliminary ruling in April, the final ruling in September, and the ITC final ruling in October, completing all procedures within 14 months. Every time the production capacity is relocated, the US will follow up with new restrictions.

After Indonesia, the US's cell procurement for local modules has been shifting to South Korea, the Philippines, as well as African manufacturing centers such as Kenya, Nigeria and Ethiopia, but new trade lawsuits targeting South Korean cell suppliers have already emerged.

This is the real dilemma of the "Capacity Going Global 1.0 model". The sign of its failure is not that people cannot find another country to build factories. As long as there are gaps in the tariff list, production capacity will flow into these gaps. The sign of its failure is that these gaps are being systematically narrowed.

The coverage of US trade remedies has expanded from specific origins to upstream material prices, supply chain traceability, equipment authorization and tax credit eligibility. The minimum import price under Section 232 governs the price bottom line of the entire supply chain, rather than only the export price of a single country.

It has become increasingly difficult to get a meaningful answer to the question of "where is the next factory location". The real question is reversed: for a completed overseas production capacity, after losing the pricing anchor of "detouring to enter the US market", how can it survive in the price system of non-US markets?

Hengdian Dongmag's Q3 report gives the answer: rely on the low-cost power supply in Yibin, rely on the incremental revenue from magnetic material devices and lithium batteries, rely on the small local premium in the European distributed market, and rely on the Indonesian factory to maintain full production while accepting thinner unit profit.

All these factors combined can keep the company profitable, but the quality of earnings is not the same as when the Indonesian market access window was open. The 20.89% decline in non-recurring profit deducted net profit is the digital indicator of this quality transition.

The end of Capacity Going Global 1.0 does not mean that all Chinese photovoltaic overseas production capacity will stop operation collectively. It means that from now on, these production capacities must prove their viability in a price environment without US market premium.

Hengdian Dongmag is already one of the best-performing players in the photovoltaic sector. Even its non-recurring profit deducted performance report shows such a decline, and the production capacities that have no magnetic material business, no Yibin cost advantage and no distributed market channels will face even thinner profit margins.