Company Reports

TCL Zhonghuan’s preliminary 2023 result is disappointing. The CNY 4.2 billion to CNY 4.8 billion net income guidance for the full year translates into a CNY 1.4 billion to CNY 2.0 billion loss in the fourth quarter. Zhonghuan attributed the disappointing result to margin contraction and one-off losses. As such, we lower our 2023 earnings estimate to CNY 4.5 billion from CNY 7.9 billion. We also cut our unit gross profit estimates for solar wafers by 6%-38% from 2024 to 2027 due to lower price assumptions. As a result, we reduce our net income estimates by 16% to 54% from 2024 to 2027, leading to a 23% cut in our fair value estimate to CNY 19.50. Zhonghuan’s shares are trading at a 30% discount to our fair value estimate, but we think investors may stay sidelined until there are signs solar wafer prices are likely to strengthen, which we think is more likely toward mid-2024.

TCL Zhonghuan strives to achieve global leadership in solar silicon wafer production. As of December 2022, Zhonghuan’s solar wafer capacity has overtaken longtime champion Longi Green Energy to become the largest in the world. After years of investment in smart manufacturing, Zhonghuan has built the most automated factories in the industry. This helps increase output and reduce costs.

TCL Zhonghuan strives to achieve global leadership in solar silicon wafer production. As of December 2022, Zhonghuan’s solar wafer capacity has overtaken longtime champion Longi Green Energy to become the largest in the world. After years of investment in smart manufacturing, Zhonghuan has built the most automated factories in the industry. This helps increase output and reduce costs.

TCL Zhonghuan’s third-quarter result missed our expectations. Revenue and net income declined by 24% and 21% year on year, respectively, as shipment growth failed to make up for the falling product price. Solar wafer shipment for the year-to-September was only 70% of our full-year forecast. As we expect sequentially lower shipment in the fourth quarter, we reduce our 2023 solar wafer shipment forecast to 110 gigawatts from 121 GW, which represents 64% growth year on year. We also cut our unit gross profit estimate by 10% to CNY 0.104 per watt of solar wafer, down 28% year on year. As such, we reduce our net income estimate to CNY 7.9 billion from CNY 10.2 billion in 2023. We maintain our solar wafer shipment and gross profit per watt for 2024 and beyond. We forecast solar wafer shipment to grow by 32% but unit gross profit to decline further by 17% year on year in 2024 from our estimated 2023 levels. As a result, we trimmed our fair value estimate to CNY 25.30 from CNY 25.70. The shares closed 26% below our fair value estimate on Oct. 27, but we think the share price will remain subdued with solar wafer prices still trending lower.

TCL Zhonghuan’s first-half result met our expectation. Although revenue in the second quarter declined by 6% year on year due to falling solar wafer prices, net income rose by 42% year on year to CNY 2.3 billion boosted by higher wafer shipments and decent profitability. We increase our 2023 net income estimate to CNY 10.3 billion from CNY 9.8 billion after raising our unit profit assumption for solar wafers. Our fair value estimate remains CNY 25.70. We see Zhonghuan as fairly valued and suggest investors wait for better entry points to allow for some margin of safety.

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.

TCL Zhonghuan strives to achieve global leadership in solar silicon wafer production. As of December 2022, Zhonghuan’s solar wafer capacity has overtaken longtime champion Longi Green Energy to become the largest in the world. After years of investment in smart manufacturing, Zhonghuan has built the most automated factories in the industry. This helps increase output and reduce costs.