Initiating on Three Chinese Solar Stocks: Zhonghuan Expensive; LONGi and Tongwei Are Fairly Valued

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 600438, 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.

We think Zhonghuan is overvalued, trading at 29% above our fair value estimate while LONGi and Tongwei are fairly valued. We believe the market is paying a premium for Zhonghuan due to its leading products and manufacturing capabilities. However, we think Zhonghuan will not be immune to overcapacity in the near term and we are not convinced that Zhonghuan can maintain its leading position in the long term.

As the largest players in the solar industry, the three companies will benefit from exponential growth in new solar installations. This will be reflected in their 20%-40% shipments CAGR across different segments from 2022 to 2027, based on our forecast. However, the average selling price is set to fall as the polysilicon price plunges. As a result, we forecast revenue to only grow at 14% CAGR for Zhonghuan, 14% CAGR for LONGi, and 12% CAGR for Tongwei over the next five years. We forecast net income to grow at 14% CAGR for Zhonghuan, and 18% CAGR for LONGi, and to decline at 4% CAGR for Tongwei. The decline is because Tongwei made exceptionally strong profits from its polysilicon business in 2022.