Tongwei Earnings: Strong Shipment Growth but Sluggish Polysilicon Price Sends Profits Lower

We maintain our earnings estimates following Tongwei’s 600438 in-line third-quarter results. Revenue and net income declined by 11% and 68% year on year in the quarter, respectively, due to a large year-on-year decline in the polysilicon price. With significant overcapacity, we expect polysilicon prices to remain subdued for a prolonged period. This drives our forecast for net income to decline by 28% to CNY 18.6 billion in 2023 and a further 31% to CNY 12.8 billion in 2024. The shares closed 23% lower than our CNY 35.90 fair value estimate on Oct. 30, but we think sluggish polysilicon prices should continue to weigh on share prices.

Polysilicon shipments grew by 53% year on year to 280,000 metric tons year-to-September. Tongwei is pressing on with its capacity expansion after withdrawing a planned private placement of new shares. Tongwei’s capacity is expected to exceed 800,000 metric tons by 2025, nearly double of its 420,000 metric tons as of August 2023 and more than three times the 260,000 metric tons capacity in December 2022. On the other hand, the Uyghur Forced Labor Prevention Act essentially banned China domestic polysilicon from entering the U.S., a lucrative market that accounts for about 10% of global solar installation. This results in a supply shortage outside of China and complicates the overcapacity situation.

Tongwei’s solar cell shipments grew by 78% year on year to 58 gigawatts year-to-September. Tongwei’s cell capacity is set to exceed 130 GW by 2024, with at least 66 GW capacity being N-type TOPCon cells. The transition to N-type cells is moving faster than expected. We think Tongwei’s P-type PERC cell capacity could face impairment risk if it is not transformed into TOPCon cell capacity. We have not factored in such impairments in our base-case assumptions. Regardless, the noncash impairment expense should not change our cash-driven fair value estimate.