Sungrow Power Supply Earnings: Favorable Geographical Mix Boosts Gross Margin

Sungrow’s 300274 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.

Utility-scale solar accounted for 67% of solar inverter shipments for the year to September. This helped mitigate the negative impact of excess channel inventory in Europe’s rooftop solar market. Management expects channel inventory in Europe to normalize by year-end. The high interest-rate environment has not affected Sungrow so far since its solar station customers have locked in the low financing cost. However, if the high interest-rate environment persists, many solar projects may no longer be economically feasible. That would inevitably weigh on Sungrow’s shipment.