NDR meeting takeaway Sep-22
- Concerns on competition in module segment overblown
- Continues driving innovation in cell technology
- Growth opportunities in export markets, especially Europe
- Currently rate BUY with Rmb91 TP
We hosted a conference call with LONGi. Here are the main takeaways. We continue to like LONGi for its vertical integration along the solar value chain. We reckon concerns on increasing competition in the module segment is overdone. Higher-quality entrants such as Tongwei are more likely to displace smaller players rather than leaders such as LONGi. In terms of technology, LONGi focuses on maintaining its lead in solar cells. Innovation in the module and wafer segments lean towards enhancements of manufacturing processes. The company also has an early mover advantage in overseas markets, especially in Europe. We currently rate LONGi BUY with target price of Rmb91
Operational update and outlook
Management reiterated its FY22 sales volume guidance for wafers (90-100GW) and modules (50-60GW). Sales volume growth was slow in 1H22, but LONGi reckons it could catch up in 2H22. As at Aug-22, LONGi expects sufficient orders to meet the sales volume target. The company reckons it is too early to give 2023 sales volume guidance currently.
Blended gross margin was c.17.6% in 1H22, of which wafer/module was c.22%/14%. LONGi expects 2H22 wafer GPM to stay largely stable at 1H22 levels. Module GPM could see some pressure, mostly as LONGi’s own cell capacity does not fully cover its module capacity.
In terms of module ASP, LONGi agrees that Rmb2/watt is on the high side. Solar installation volume should pick up at c.Rmb1.8-1.9/watt levels. However, LONGi reckons modules are only c.50-60% of the total cost of installations. This means Rmb2/watt is not a “hard cap” on solar installations.
Salient questions from the discussion.
Q1: What is LONGi’s outlook on polysilicon supply? Does LONGi have plans to enter the polysilicon business?
A1: LONGi reckons the capacity expansion plans of various polysilicon manufacturers could be sufficient for c.500GW of solar installations. The timing of the expansion plans is difficult to pin down precisely but should ramp up in 2023. In terms of gross margin impact, LONGi expects to keep a relatively constant margin above the cost of polysilicon for its wafer segment. The company has no plan to enter the polysilicon business at it does not consider itself to have sufficient technical expertise. Furthermore, LONGi expects the worst of the polysilicon bottleneck to be largely over by 2023. This should help drive a normalization of the solar supply chain.
Q2: What is LONGi’s strategy in export markets, especially Europe?
A2: In the European market, LONGi estimates the split between distributed/utility solar of c.60%/40% with regional differences. Northern European countries lean more towards distributed solar. Southern European countries (i.e. Spain) have more plentiful sunlight to support utility scale projects. LONGi will focus on selling distributed solar solutions which have higher margins. As at 1H22 the company estimates c.20-25% of its sales volume is going to Europe. Furthermore, LONGi anticipates good reception for modules containing its new Hybrid Passivated Back Contact (HPBC) cell from European customers.
Q3: What are LONGi’s views on increasing competition in the module segment?
A3: LONGi is not too concerned and reckons there is sufficient room for multiple high-quality players in the module segment. Tongwei’s current module business is largely confined to mainland China. LONGi has been in the module business longer and is now expanding its overseas presence. Tongwei’s entry into the market is expected to push out smaller, lower-quality module makers.
Q4: What are LONGi’s views on various technical specifications for wafers?
A4: Regarding wafer sizes (182mm vs 210mm) LONGi expects 182mm to stay relatively dominant (c.65%) while 210mm should take around 30%. Although larger wafers are more powerful per wafer, smaller wafers are currently more reliable. Regarding N-type vs P-type wafers, there is not too much difference in manufacturing techniques. The ingot production (Czochraiski, CZ) process is similar for both types of wafers. However, N-type wafers are more expensive to produce given it requires polysilicon of higher purity. New cell technologies such as perovskite have shown good experimental performance of up to c.30% efficiency ratios. However, this performance is not stable enough for commercial production yet. In the nearer term, LONGi expects its cells (hence modules) to reach around c.26-27% efficiency ratio.