TCL Zhonghuan Earnings: Solar Wafer Shipment Below Expectations

TCL Zhonghuan’s 002129 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.

According to PV Infolink, solar wafer prices hit year-low levels at the end of October. With wafer capacity around double that of demand, we think wafer prices will remain low for a prolonged period. Based on our estimate, it will take at least two years before demand catches up to current capacity. Consolidation could expedite market balance, but we have yet to see that commence. On the contrary, Chinese players are adding more overseas capacity out of geopolitical concerns. Zhonghuan is partnering with Saudi-based Vision Industries to build a solar wafer factory in Saudi Arabia. The phase I capacity is set to be 20 GW, and that is more than 10% of Zhonghuan’s expected 180 GW capacity by the end of 2023. Management thinks phase II capacity could be even larger.