Company Reports

We see little impact on LONGi, Tongwei, and Zhonghuan from the US action to double the tariff rate on China-made solar cells (including those assembled into modules) to 50% from 25% in 2024 under Section 301. Currently, China-made solar cells and modules are already subject to US antidumping and countervailing duties, the Section 201 tariff, and the Section 301 tariff, which could add up to over 100% tariff rate. As a result, China’s direct export of solar cells and modules to the US is minimal, accounting for less than 0.1% of its total solar cells and modules export in 2023.

We cut our fair value estimate for Tongwei to CNY 25.60 from CNY 35.90 after incorporating lower polysilicon and solar cell prices. While the losses in fourth-quarter 2023 and first-quarter 2024 are disappointing, the market reaction was contained as the prices appear to be bottoming. Tongwei currently trades at a 14% discount to our fair value estimate, but we prefer TCL Zhonghuan for greater upside potential.

Tongwei positions itself as the global leader in polysilicon production, making about 27% of domestic supplies in 2023. Tongwei benefitted from the shortage in supplies in 2021 and 2022, but this has now led to excess capacity in the industry. Despite the overcapacity, Tongwei is pressing on with its capacity expansion plan to defend its market share. We think Tongwei will remain profitable given its cost advantage, but returns on investment and profit margins will be dampened.

We maintain our earnings estimates following Tongwei’s in-line third-quarter results. Revenue and net income declined by 11% and 68% year on year in the quarter, respectively, due to a large year-on-year decline in the polysilicon price. With significant overcapacity, we expect polysilicon prices to remain subdued for a prolonged period. This drives our forecast for net income to decline by 28% to CNY 18.6 billion in 2023 and a further 31% to CNY 12.8 billion in 2024. The shares closed 23% lower than our CNY 35.90 fair value estimate on Oct. 30, but we think sluggish polysilicon prices should continue to weigh on share prices.

Tongwei’s interim revenue of CNY 74.1 billion and net income of CNY 13.3 billion translate to CNY 40.8 billion revenue and CNY 4.7 billion net income in the second quarter. The 34% year-on-year and 46% sequential decline in net income in the quarter were well expected given the polysilicon price freefall. The plan to invest CNY 20 billion to add 32 GW integrated capacity covering ingot, wafer, and cell production, however, surprised us. We acknowledge that internalizing wafer supply should help reduce cost, but we are slightly concerned about dilution risk. To recap, Tongwei just announced a private share placement of CNY 16 billion in April to fund its polysilicon projects. As of June 2023, Tongwei had about CNY 40 billion cash and equivalents and CNY 34 billion long-term debt, and it plans to fund the integrated capacity with cash in hand and additional borrowings. While we do not see debt risk in the near term, we reason that an overly stretched balance sheet might necessitate a potentially dilutive fund raising in the future. Regardless, the planned move will make overcapacity worse in the solar wafer market. This is not good news for solar wafer suppliers such as LONGi and TCL Zhonghuan.

Tongwei positions itself as the global leader in polysilicon production, making about 27% of global supplies in 2022. Tongwei benefitted from the shortage in supplies in 2021 and 2022, but this has now led to excess capacity in the industry. Despite the overcapacity, Tongwei plans to more than triple its polysilicon capacity by 2024 from the 2022 level to defend its market share. We think Tongwei will remain profitable given its cost advantage, but returns on investment and profit margins will be dampened.

We initiate coverage on three Chinese solar companies, Zhonghuan Renewable Energy, the world’s largest solar wafer company by external shipments, LONGi Green Energy Technology, the world’s largest integrated solar company, and Tongwei, the world’s largest polysilicon and solar cell producer. We assign a no moat rating to all three due to overcapacity and intense competition in the solar industry. Our fair value estimates are CNY 25.70 for Zhonghuan, CNY 31.40 for LONGi, and CNY 35.90 for Tongwei.