Company Reports

Sungrow's fourth-quarter 2023 and first-quarter 2024 results beat expectations as its new-energy investment and development segment got a boost from strong solar installation activity and falling solar module costs. In addition, gross margin for its energy storage system segment also surprised positively on low lithium-ion cell costs. We expect profitability to remain high in 2024, as contracted sales prices should lag the drop in input costs. After raising our gross margin assumption to 31.9% from 25.1%, we increase our net income estimate to CNY 14 billion from CNY 11 billion for 2024. We raise our fair value estimate to CNY 94 from CNY 86. The shares closed 3% above our fair value estimate on April 23, and we think they are fully valued.

Sungrow Power Supply is one of the largest suppliers of solar inverters, with more than 20% global market share in 2022. With an established stronghold in supplying inverters for utility-scale solar, Sungrow is trying to expand its presence in distributed solar. Distributed solar is a more fragmented market than utility-scale solar, and we expect Sungrow to face more competition on this front. Nonetheless, we expect Sungrow’s solar inverter shipment to grow at a 15% CAGR over our projected five-year period given rapid growth in solar installations.

Sungrow’s third-quarter revenue is in line, but net income beat our expectation as gross margin expanded to 34.4%, up 9.2 percentage points year on year. Management attributed the strong gross margin to a higher proportion of overseas sales. We estimate overseas revenue accounted for 59% of total revenue in the third quarter compared with 53% during the same period last year. In addition, we believe lower inputs and shipping costs also helped. After raising our gross margin assumption to 29.4% from 27%, we increase our net income estimate to CNY 9.3 billion from CNY 8.8 billion for 2023, representing a 160% increase year on year. We maintain our assumptions for 2024 and beyond. We expect gross margin to contract to 25.1% in 2024 but net income should still grow by 22% year on year on higher shipments. We keep our fair value estimate at CNY 86. The shares closed 2% below our fair value estimate on Oct. 31. We suggest investors wait for better entry points.

We initiate coverage of Sungrow Power Supply, one of the largest solar inverter and energy storage system suppliers in the world, with a no-moat rating. Although Sungrow is leading peers in both solar inverters and energy storage systems, we do not have high conviction that it can maintain its lead for at least the next 10 years. We think the shares are fairly valued relative to our CNY 86 fair value estimate.

Sungrow Power Supply is one of the largest suppliers of solar inverters with more than 20% global market share in 2022. With an established stronghold in supplying inverters for utility-scale solar, Sungrow is trying to expand its presence in distributed solar. Distributed solar is a more fragmented market than utility-scale solar, and we expect Sungrow to face more competition on this front. Nonetheless, we expect Sungrow’s solar inverter shipment to grow at a 25% CAGR over our projected five-year period given rapid growth in solar installations.