Equity Research Report Energy Equipment & Services
June 2019 By: Corey Chan (S1700518100001) and Dun Wang (S1700519060002) www.research.hsbc.com
Spotlight: ChinaSpotlight: Equipment Solar SPOTLIGHT China Solar Equipment Initiate coverage: Brighter days ahead
We forecast an industry upcycle in 2019-20e, driven by robust export demand
We see upside to stock prices due to market expansion and falling costs
Initiate on Longi, Tongwei, Zhonghuan, Equities // Energy Equipment & Services and Jingsheng with Buy ratings, and First Applied Material with a Reduce June 2019 June
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Equities ● Energy Equipment & Services June 2019
Why read this report?
We are bullish on the global photovoltaic product market in 2019-21e as solar gets closer to competing with fossil fuels on an equal footing
Chinese producers stand to benefit as they increase their dominance of the global supply chain; we think policy concerns are overdone
We explain why Longi and Tongwei are best positioned to benefit
The key messages
The solar industry is no stranger to volatility. Sharp swings in product prices, overcapacity issues and, in turn, knock-on effects on stock prices have been common. The root cause is often subsidies as governments push for cleaner power. Germany led the way and became the world’s largest solar market in 2010. China soon took over and solar capacity grew from 19GW in 2013 to 175GW in 2018. But this led to overcapacity and a supply glut, so China has cut back subsidies and plans to phase them out completely by 2021. China is not alone in cutting Corey Chan* (S1700518100001) subsidies. Other countries like Britain and Spain have also reduced subsidies as solar gets Head of A-share Infrastructure Research * closer to competing with fossil fuels on an equal footing. HSBC Qianhai Securities Limited [email protected] In this report, we explain why we have a bullish outlook on the Chinese solar companies, given: +86 755 8898 3404 1) our global team’s bullish forecasts for global solar installations: and 2) China’s rising Dun Wang* (S1700519060002) penetration of the global solar supply chain. While we expect costs in the supply chain to keep Analyst, A-share Infrastructure HSBC Qianhai Securities Limited falling, we believe the rate of cost decline is likely to subside. We expect future cost reductions [email protected] to come in the form of higher cell efficiency, less raw material consumption, and economies of
scale in production. Lower solar costs – they have already fallen 92% in the last decade – * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ should drive long-term demand and increase photovoltaic (PV) installations. qualified pursuant to FINRA regulations Where our view differs from consensus We believe consensus concerns about policy risk are overdone. We think the role policy incentives play in new solar installations will diminish as the market moves closer to grid parity, the point where alternative energies like solar match the price of using fossil fuels.
We analyze industry technology trends and see more uncertainty in cell and module technology than for wafer and polysilicon.
We compare the risks to oversupply of different parts of the supply chain and conclude that wafer manufacturing is a relatively safe place given its relatively consolidated market and high investment barriers.
Stocks: As supply-chain cost pressure is likely to persist, we expect cost leaders to stand out; we prefer Longi – the cost leader in wafer – and Tongwei – the cost leader in polysilicon and cell, both rated Buy. Compared with other parts of the supply chain, we believe wafer and polysilicon cost leaders will find it relatively easier to maintain scale advantages, given the high share of fixed cost in their cost structure. We also have Buy ratings on Zhonghuan and Jingsheng. We have a Reduce rating on First Applied Material (FAM) as we see pressure on earnings.
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Contents
Why read this report? 1
Facts and figures 3
Related research 4
Entering a new, brighter era 5
Technology upgrades, lower costs to drive upside 15
Our stock-picking framework 37
Company section 43 Longi Green (601012 CH) 44 Tongwei (600438 CH) 55 Zhonghuan Semiconductor (002129 CH) 68 Jingsheng M&E (300316 CH) 79 First Applied Materials (603806 CH) 90
Disclosure appendix 105
Disclaimer 108
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Facts and figures 11% 129GW
Global new PV installations CAGR Global new PV installation in 2020e in 2018-20e
We expect a closer levelized cost of electricity (LCOE) gap between solar and cRMB270bn competing power sources to drive global Market size of the global PV supply new PV installation growth in a secular chain in 2020e manner
c90% c80% c50%
China’s share in global China’s share in global China’s share in global wafer supply in 2018 cell/module supply in 2018 polysilicon production in 2018
We expect the share to increase to over 26% 70% by 2021 when China reaches grid The share of new global PV installations parity, making policy incentive a less- by countries that achieved solar grid important factor for solar demand parity in 2018
92% 10-40%
How much solar costs have dropped in the This is how much solar costs need to drop last decade from the current level for solar grid parity on a global scale
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Related research
Recommended reading...
China Power T&D Equipment: Initiate coverage: Time to power up, 11 April 2019
GCL-Poly Energy Holdings (3800 HK), 30 March 2019
Global Upstream Solar, 25 March 2019
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Entering a new, brighter era
We believe there are brighter days ahead for the solar industry, underpinned by sustainable growth in long-term demand and the move towards grid parity. With technology advances and cost reductions underway, we see opportunities for suppliers along the solar supply chain. Our preferred stocks are Longi and Tongwei.
Long-term sustainable growth ahead
China supplies 80-90% of the global mid-to-downstream PV products, and its dominance is China supplies 80-90% of the global mid-to-downstream PV expanding upstream to polysilicon. Our global team expects the country to account for 60% of products global polysilicon supply in 2019, up from 53% in 2018 (see HSBC Global Renewable team’s report titled Global Upstream Solar, 25 March 2019). Given China’s rising penetration of the global solar supply chain and our global team’s bullish forecasts for global new PV installations (Exhibit 2), we see upside potential for Chinese producers positioned along the supply chain.
We believe consensus concern about policy risks is overdone. In fact, we think the role policy incentives play in new solar installations will diminish as the market moves closer to grid parity. Globally, 26% of PV new installations in 2018 came from the markets which have already achieved grid parity. With China targeting grid parity by 2021, the share would increase to c70%. In fact, the share could be higher as China’s solar levelized cost of energy (LCOE) premium is one of the highest globally due to the low generation cost of its coal-fired power plants. LCOE describes the cost of the power produced over a period of time.
PV system costs have dropped by 75% since 2010. While we expect this to continue, the rate of cost decline is likely to subside. We expect another 10-40% cuts in system costs to enable grid parity on a global scale. Not all cost cuts will pressure margins, as some of the reduction could come from the improvement in cell efficiency. We expect a 1ppt increase in cell efficiency to bring about at least 3% reduction in PV system cost.
Given the important role that technology plays in the solar industry, suppliers that have invested Suppliers that have invested in the right equipment and in the right equipment and processes are likely to become tomorrow’s winners. While some processes are likely to technology outcomes can be difficult to predict, some trends are easy to observe – like mono-Si become tomorrow’s winners over multi-Si in the wafer space. This should give mono-Si market leaders like Longi and Zhonghuan a material advantage over their multi-Si peers. We see more uncertainties about cell and module technology trends as there are more alternatives than in the upstream.
Compared with other parts of the supply chain, we believe wafer manufacturing is safer from oversupply due to its relatively consolidated market, high investment barrier, and relative low profitability for incumbents. However, module production is more vulnerable to new supply given relatively low investment levels and technology barriers.
A-share PV product suppliers are trading at a 19x 12-month forward PE, close to the historical average valuation since 2015. However, in view of lower demand volatility associated with policy changes with the industry approaching grid parity, we expect valuation to rise to 20-30x, at the upper-end of the historical range. As the supply-chain cost pressure is likely to persist in
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the near term, we expect cost leaders to outperform its peers down the road. We therefore have Longi – the cost leader in wafer – and Tongwei – the cost leader in polysilicon and cell – as our preferred stocks. Compared with other parts of the supply chain, we believe it should be relative easy for wafer and polysilicon cost leaders to maintain their scale advantage, given the high share of fixed cost in their cost structure.
Exhibit 1. A-share PV product suppliers: Exhibit 2. HSBC forecasts global PV Industry trading close to the historical installations to rise at a 11% CAGR in average valuation 2018-20e
70.0 140 60.0 120 100 50.0 80 40.0 60 30.0 40 20.0 solar installations (GW) installationssolar 20 10.0 0 - 2015 2016 2017 2018 2019e 2020e Jan-12 Jan-14 Jan-16 Jan-18 China ROW
PE Mean +1SD -1SD
Source: Wind, HSBC Qianhai Securities. Source: Wind, HSBC Global Research estimates
Concerns over the China-US trade dispute overdone In June 2018, the US started to impose an additional 25% tariff on imported Chinese solar cells Exports to the US accounted for only 4% of Longi’s 2018 and modules. Many market participants are concerned about the negative impacts of the tariff sales on the demand of China’s PV product. We believe such concern is overdone. Exports to the US accounted for only 4% of Longi’s 2018 sales, and almost none for Tongwei. In addition, China’s overwhelming share in the producer market implies limited likelihood of US reducing its reliance on China’s PV products, given a lack of substitute supplies.
In fact, the trade dispute could be a blessing in disguise for Chinese upstream solar producers. In August 2018, China announced plans to impose an additional 5-25% tariff on polysilicon imported from the US. We believe this could reduce foreign competition for polysilicon suppliers, including Tongwei and TBEA. Should the trade dispute deepen to include a trade ban on US- made production equipment, we expect Chinese equipment makers like Jingsheng to benefit.
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Exhibit 3. China accounts for c30% of Exhibit 4. … but more than 50% of the global cumulative PV installations… global PV supply chain
Global cumulative PV installations (2017) China's share of global supply Latin Middle East America & 100% 94% & Africa 84% Carribbean 2% 90% 82% Rest of 2% 80% 68% 68% 68% Asia-Pacific India 70% & Central 5% 60% 53% Asia China 50% 5% 32% 40% Japan 30% 14% 12% 20% 10% North Europe 0% America 28% Wafer Cell PV Module Polysilicon 14% 2018 2010
Source: Bloomberg, HSBC Qianhai Securities. Source: Company, Wind, HSBC Qianhai Securities.
How much higher can renewable energy penetration go? The Chinese government has set bold targets for renewable energy, aiming for a 50% share of power generation from renewable sources (including hydro, solar, and wind) by 2030. Some market participants doubt the feasibility of such a scenario given the variable nature of power outputs from renewable sources like solar and wind. We believe this concern is groundless. Power penetration of wind and solar reached 28.3%/24.5%/23.8%/25.1%/21.2% in Germany/Netherlands/Portugal/Spain/UK in 2018. The share in China and the US is still low, at 7.8% and 8.2% respectively, implying great growth potential. We believe dispatchable baseload power such as hydro (18% share of power mix in China) and natural gas (35% share of power mix in the US), and a smarter grid can help to smooth out the generation cycles of wind and solar farms.
Exhibit 5. National policy targets for solar capacities Country Policy Targets China To increase power generation from renewables from 30% in 2018 to 50% in 2030 France To increase solar capacity from 10GW in 2018 to 20GW in 2023 Germany Renewables' share of power generation to rise from 46% in 2018 to 80% in 2050 India To increase solar capacity from 28GW in 2018 to 100GW in 2022 Italy To increase solar capacity from 20GW in 2018 to 50GW in 2030 Japan Renewables' share of power generation to rise from 16% in 2017 to 22-24% in 2030 Sweden 100% power generation from clean energy sources by 2040 US Investment tax credits on solar at federal level Source: Bloomberg, HSBC Qianhai Securities.
7 Equities ● Energy Equipment & Services June 2019
Exhibit 6. China’s power mix (2018): Solar Exhibit 7. Germany’s power mix (2018): A and wind accounted for just an 8% share 28% share from solar and wind power
Biomass and Biomass Wind other Wind Nuclear and other 5% 13% 21% 4% 1% Solar 3% Nuclear Solar 13% 8% Hydro 17%
Hydro Thermal 4% Thermal power power 70% 41%
Source: Wind, HSBC Qianhai Securities. Source: Bloomberg, HSBC Qianhai Securities.
Exhibit 8. China’s solar tariff: Subsidies reduced for centralized projects after 1 July 2019 RMB/kWh Zone I Zone II Zone III Bidding or Not Poverty-alleviation projects 0.65 0.75 0.85 No bidding
Centralized On grid before 1st Jul. 2019 0.50 0.60 0.70 No bidding On grid after 1st Jul. 2019 0.40 0.45 0.55 Bidding
Household Self-use Sold to grid On grid before 1st Jul. 2019 0.18+retail tariff 0.18+coal-fired plant on-grid tariff No bidding On grid after 1st Jul. 2019 0.18+retail tariff 0.18+coal-fired plant on-grid tariff No bidding
Other decentralized Self-use Sold to grid On grid before 1 July 2019 0.32+retail tariff 0.32+coal-fired plant on-grid tariff No bidding On grid after 1 July 2019 0.10+retail tariff 0.10+coal-fired plant on-grid tariff Bidding Source: NEA, NDRC, HSBC Qianhai Securities.
Initiate coverage of five A-share PV product makers
Longi (601012 CH, Buy, TP RMB36.2): As the largest global mono wafer producer, Longi is well positioned to benefit from the trend of rising share of mono wafers in PV panel production (up from 45% in 2018 to 69% in 2021e). The company has been a cost leader in the wafer industry, cutting its non-Si cost by 72% since 2013. We expect further declines of c40% in 2018-21, driven by economies of scale. This, together with the addition of 37GW new wafer capacities in 2019-21, should lead to market share gains from 35% in 2018 to 42% in 2021. Valuation at 20x 2019e PE looks attractive, with a 43% earnings CAGR in 2018-21e.
Tongwei (600438 CH, Buy, TP RMB19.4): Tongwei is a global cost leader in both Passivated Emitter and Rear Cell (PERC) and polysilicon production. Its cell processing cost at RMB0.23/W in 1Q19 is 34% below the industry average, and we expect that to drop to RMB0.19/W in 2021. In polysilicon production, the company’s Baotou Ph1 and Leshan Ph1 projects have a unit overall cost of RMB50,000/t, close to the bottom of the industry range. Around 60% of the company’s revenue in 2018 came from the agriculture business, which generates steady cash flow. This should alleviate the capex burden of Tongwei’s PV business. Valuation at 17x 2019e PE looks attractive, in our view, with a 27% earnings CAGR in 2018-21e.
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Zhonghuan (002129 CH, Buy, TP RMB14.3): The state-owned company is the second largest PV mono wafer supplier in the world and a leading semiconductor wafer supplier in China. We expect its revenue to more than double in 2018-21e with the completion of new PV and semiconductor wafer capacities. Compared with its private sector peers, access to funding is relatively easy and the company has a low borrowing cost historically thanks to its SOE status. On the completion of the RMB5bn private placement, we expect its net gearing to drop to 27% in 2019 from 55% in 2018. While 2019e PE appears rich at 51x, we expect that to drop to 24x in 2020e and 16x in 2021e.
Jingsheng (300316 CH, Buy, TP RMB14.1): We view Jingsheng as the best way to play the wafer capacity upcycle among our coverage, given the company’s market leadership in wafer-making equipment in China. The company has a c50% market share in third party made crystal-growing equipment in China. We expect Jingsheng’s crystal-growing equipment to register a 28% revenue CAGR in 2018-21e, driven by capacity expansions in China’s PV and semiconductor wafer industry, leading to a 25% earnings CAGR in 2018- 21e. Valuation at 19x 2019e PE is attractive, in our view.
FAM (603806 CH, Reduce, TP RMB25.8): The company is the largest supplier of ethylene vinyl acetate (EVA) film in the world, with around a 60% market share in 2018. While the EVA market is likely to grow with rising global new PV installations, we flag higher cell conversion efficiency and continuous cuts in post-cell fabrication costs as downside risks. As a result, we expect only 3% earnings CAGR for FAM in 2018-21e. Valuation at 25x 2019e PE looks rich, we believe.
Company-specific catalysts Longi: 1) Stronger-than-expected wafer orders driven by better-than-expected global solar new installations; 2) larger-than-expected reduction in wafer non-Si cost; and 3) mono’s share of the wafer market growing faster than expected.
Tongwei: 1) Stronger-than-expected solar cell orders driven by stronger-than-expected global solar new installations; 2) ramp-up of the new polysilicon capacity sooner-than-expected; and 3) better-than-expected polysilicon pricings on industry capacity cuts.
Zhonghuan: 1) Stronger-than-expected wafer orders driven by better-than-expected global solar new installations; 2) making inroads in the 12’ semi wafer markets; and 3) sooner-than- expected completion of the new production facilities in Inner Mongolia and Wuxi.
Jingsheng: 1) Better-than-expected demand for crystal-growing equipment, spurred by stronger-than-expected capacity expansion by wafer makers; 2) new product launches; and 3) better-than-expected market share, driven by an acceleration of localization of Chinese wafer- lines owing to heightening China-US trade tensions.
FAM: 1) EVA film demand weaker than expected, driven by lower-than-expected global solar new installations; 2) slower-than-expected progress made in diversification into 3C and semiconductor downstream; and 3) weaker-than-expected contribution from POE film on slower-than-expected adoption of bifacial panels.
Where we are different from consensus Longi: Our 2020-21 earnings estimates are 4-11% above consensus as we expect faster earnings growth for its wafer and module businesses.
Tongwei: Our 2021 earnings estimate is 7% above consensus as we expect stronger earnings growth for its mono cell business.
Zhonghuan: Our 2021 earnings estimate is 9% above consensus as we expect stronger earnings contribution for its Wuxi semiconductor wafer project, slated for completion in phases in 2019-22.
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Jingsheng: Our 2019 earnings estimate is 7% above consensus as we expect stronger crystal- growing machine demand, driven by aggressive capacity expansion plans of Chinese wafer makers.
FAM: Our 2020-21 earnings estimates are 9-21% below consensus as we are more bearish on EVA film demand driven by higher cell efficiencies.
Exhibit 9. HSBC Qianhai Securities estimates vs. Consensus __ HSBC Qianhai estimates______Consensus estimates ______Variance ______Company RMBm 2019 2020 2021 2019 2020 2021 2019 2020 2021 Longi Revenue 29,000 37,451 49,803 28,442 37,314 48,445 2% 0% 3% Net profit 3,592 5,598 7,445 3,595 5,386 6,717 0% 4% 11% Zhonghuan Revenue 18,745 22,105 30,281 17,911 21,835 29,274 5% 1% 3% Net profit 635 1,384 2,094 661 1,370 1,924 -4% 1% 9% FAM Revenue 5,740 6,050 6,243 5,880 7,139 8,399 -2% -15% -26% Net profit 694 764 820 701 839 1,032 -1% -9% -21% Jingsheng Revenue 3,271 3,953 4,637 3,173 3,967 4,393 3% 0% 6% Net profit 801 971 1,146 747 987 1,123 7% -2% 2% Tongwei Revenue 34,926 37,755 40,001 34,669 37,830 38,795 1% 0% 3% Net profit 3,220 3,955 4,166 3,176 3,992 3,891 1% -1% 7% Source: Wind, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates Note: Net profit here is after distribution to preferred shareholders and to perpetual security holders
Sector catalysts and downside risks Catalysts: 1) Stronger-than-expected PV installations globally underpinned by faster-than-expected solar grid parity; 2) supportive government policies; 3) vertical integration that could generate synergies; 4) evolution of technologies in favour of existing players; 5) stronger-than-expected cost reduction in the supply chain on technology improvement and economies of scale.
Downside risks: 1) Weaker-than-expected PV installations on slower-than-expected solar grid parity; 2) unfavourable policy shifts; 3) equity dilution risks stemming from heavy capex; 4) market-shifting new technologies unfavourable to incumbents; 5) hurdles to cost reduction in the supply chain.
ESG The five companies have all set detailed guidelines for ethical management, safety management and social contributions, and also follow China’s market rules on corporate governance. Average board tenure for each of the five companies are all over two years. All five companies have independent board members accounting for over 20% of the board.
We believe global governments’ efforts to deliver emission caps are positive for the solar industry. Over the past decade, global countries have set extensive, clear targets to reduce emissions as part of economic growth efforts, and/or have provided tax incentives for renewables. In China, solar capacities reached 175GW in 2018, far ahead of the original targets.
Exhibit 10. ESG indicators, 2018 Longi Zhonghuan FAM Jingsheng Tongwei No. of board members 12 11 7.0 10.0 11 Average board tenure (years) 4.6 2.5 3.9 5.2 3.4 No. of female board members 3 5 1 2 0 Female board members (%) 25.0% 45.5% 14.3% 20.0% 0.0% No. of independent board members 3 4 3 3 3 Board member independence (%) 25.0% 36.4% 42.9% 30.0% 27.3% Source: Wind, Company data, HSBC Qianhai Securities
10
Exhibit 11.Global Solar: Valuation comps Company Stock Code Cur Rating TP Closing Market cap. ADTV _____ P/E ______P/B ______ROE ______DY ______Name 6/14/2019 USbn USm 19e 20e 19e 20e 19e 20e 19e 20e Polysilicon producer GCL-Poly Energy 3800 HK HKD 0.4 1.03 11 8.6 7.7 0.3 0.3 4% 4% 0.3% 0.0% DAQO New Energy DQ US USD 45.5 0.60 12 4.8 4.3 0.8 0.7 17% 16% NA NA TBEA * 600089 CH CNY Buy 10.0 7.1 3.81 49 10.8 9.1 0.9 0.8 8% 9% 3.1% 3.7% OCI 010060 KS KRW 94200.0 1.90 12 14.8 12.8 0.6 0.6 4% 5% 0.9% 1.0% Wacker Chemie AG WCH GR EUR 70.2 4.12 17 14.2 11.7 1.1 1.0 8% 9% 3.7% 4.2% Tongwei * 600438 CH CNY Buy 19.4 14.2 7.97 88 17.1 14.0 3.2 2.7 19% 19% 1.8% 2.2%
Crystalline silicon wafer producer Zhonghuan * 002129 CH CNY Buy 14.3 9.6 3.86 97 50.6 24.1 1.8 1.7 4% 7% 0.2% 0.4% Longi * 601012 CH CNY Buy 36.2 22.3 11.67 146 19.9 14.5 3.5 2.9 18% 20% 0.5% 0.7% Sino-American Silicon products 5483 TT TWD 82.1 1.53 29 6.1 5.0 1.4 1.3 23% 26% 10.1% 12.0%
Solar cell and module producer Canadian Solar CSIQ US USD 21.7 1.29 19 8.0 9.1 0.8 0.7 11% 8% 0.0% 0.0% Jinko Solar JKS US USD 24.7 1.07 21 2.0 2.1 0.6 0.6 32% 27% 0.0% 0.0% United Renewable Energy/Taiwan 3576 TT TWD 10.1 0.81 4 NA NA NA NA NA NA NA NA First Solar Inc FSLR US USD 62.2 6.55 81 16.9 17.2 1.1 1.1 7% 6% NA NA
Other solar material and equipment First Applied Material * 603806 CH CNY Reduce 25.8 32.8 2.48 9 24.7 22.4 2.9 2.6 12% 12% 1.3% 1.4% Jingsheng * 300316 CH CNY Buy 14.1 12.0 2.23 50 19.3 15.9 3.3 2.8 17% 18% 1.1% 1.4% Sungrow Power Supply 300274 CH CNY 8.8 1.85 64 9.3 7.5 1.3 1.1 14% 15% 1.3% 1.7% Solaredge Technologies SEDG US USD 57.9 2.75 30 19.7 20.3 2.8 2.3 14% 11% NA NA
Source: Bloomberg, Company data, HSBC Qianhai Securities, *HSBC Qianhai Securities estimates. E= Bloomberg consensus estimates for all other companies
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Exhibit 12. Key suppliers along the solar supply chain Wafer equipment： Solar glass： Jingsheng (300316.SZ) Flat Glass (6865.HK) Inverter： S.C New Energy Technology China Southern Glass Sungrow Power (300724.SZ) (000012.SZ) (300274.SZ) 其他 Solaredge Technology ： (SEDG.O) PV System Polysilicon Hua Wei GCL Poly (3800.HK) EPC: Wacker Chemie AG TBEA (600089.SH) (WCHG.DE) EVA film： FAM (603806.SH) SunPower (SPWR.O) OCI (010060.KS) Blattner Energy Tongwei (600438.SH) Wafer： Sveck Hiuv Talesun Solar Xinte Energy (1799.HK) Longi (Mono-Si) Chint Electronics (601012.SH) DAQO New Energy (601877.SH) Zhonghuan (Mono-Si) (DQ.N) Module： Jinko Solar(JKS.N) (002129.SZ) REC Silicon (REC.OL) Jinko Solar (JKS.N) Risen Energy GCL Poly (Multi-Si) Hemlock Semiconductor Cell： Canadian Solar (300118.SZ) Sinosico (3800.HK) (CSIQ.O) East Hope Group Jinko Solar (JKS.N) Trina Solar Trina Solar Hanwha Chemical JA Solar Tongwei (600438.SH) JA Solar (009830.KS) Canadian Solar (CSIQ.O) Longi (601012.SH) Longi (601012.SH) Hankook Silicon LDK solar Hanwha Q Cells Hanwha Q Cells JA Solar Zhongli Group Canadian Solar (002309.SZ) (CSIQ.O) GCL System JinkoSolar (JKS.N) (002506.SZ) Aiko Solar Energy Yingli Green Energy (600732.SH) Csun Solar Equities Risen Energy Risen Energy (300118.SH) (300118.SH) Yingli Green Energy
Neo Solar Power ● (3576.TW) Energy Equipment & Services
June 2019 June
Source: Company data, HSBC Qianhai Securities
Equities ● Energy Equipment & Services June 2019
Valuation and risks
Valuation methodology Risks
Current price: Our TP of RMB36.2 is derived from our discounted cash flow (DCF) Longi Downside risks: RMB22.3 valuation model. Key assumptions in our DCF valuation model 601012 CH Target price: include: 1) Cost of equity (COE): We use a COE of 10.0%. This is Weaker-than-expected PV demand derived from a risk-free rate of 2.5%, a market risk premium of RMB36.2 6.5%, and a beta of 1.16; 2) Cost of debt (COD): We assume the Risk of equity dilution from fundraising exercise Buy Up/downside: pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. 62% We use our 2020e debt-to-capital ratio of 20% as our long-term Greater-than-expected cuts to wafer ASP debt-to-capital ratio; 3) Operating cash flow to grow 11% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 11% in 2018-29e, reflecting solid growth in demand; 4) Capital expenditure (capex): We assume high capex of around RMB6bn per annum in 2019-21e, reflecting
the expansion of its wafer/cell/module capacities; we assume steady capex of around RMB1-2bn per annum in 2022-29e, reflecting steady investment in maintenance; 5) Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029. With our TP implying upside of 62%, we initiate with a Buy rating.
Corey Chan | [email protected] | +86 755 8898 3404
Current price: Our TP of RMB19.4 is derived from our discounted cash flow (DCF) Tongwei Downside risks: RMB14.2 valuation model. Key assumptions in our DCF valuation model
600438 CH Target price: include: 1) Cost of equity (COE): We use a COE of 11.8%. This is Weaker-than-expected polysilicon prices
RMB19.4 derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.42. 2) Cost of debt (COD): We assume the Ramp-up of the new polysilicon capacity taking longer-than-
Buy Up/downside: pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. expected 36% We use our 2020e debt-to-capital ratio of 42% as our long-term debt-to-capital ratio. 3) Operating cash flow to grow 9% per Weaker-than-expected PV demand annum: We expect operating cash flow (before changes in working
capital) to expand at a CAGR of 9% in 2018-29e, reflecting solid Risk of equity dilution from fundraising exercise. growth in demand. 4) Capital expenditure (capex): We expect a capex of RMB13bn in 2019e, driven by cell and solar farm capacity Evolution of the cell technology which could undermine expansion. Thereafter, we expect capex to drop to around RMB2- investment in PERC 3bn per annum in 2020-29e, reflecting steady maintenance capex. 5) Terminal growth rate at 2%, and we assume the company Greater-than-expected cuts to cell ASPs reaches a steady growth period after 2029. With our TP implying upside of 36%, we initiate with a Buy rating.
Corey Chan | [email protected] | +86 755 8898 3404
Current price: Our TP of RMB14.3 is derived from our discounted cash flow (DCF) Zhonghuan Downside risks: RMB9.60 valuation model. Key assumptions in our DCF valuation model
002129 CH Target price: include: 1) Cost of equity (COE): We use a COE of 9.2%. This is Weaker-than-expected PV demand
RMB14.3 derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.03. 2) Cost of debt (COD): We assume the China-US trade tension which could hinder equipment
Buy Up/downside: pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. procurement from US suppliers 49% We use our 2020e debt-to-capital ratio of 38% as our long-term debt-to-capital ratio. 3) Operating cash flow to grow 11% per Risk of equity dilution from fundraising exercise annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 11% in 2018-29e, reflecting solid Weaker-than-expected semi demand growth in demand. 4) Capital expenditure (capex): We assume Greater-than-expected cuts to wafer ASP steady capex of around RMB5bn per annum in 2019-29e, reflecting high investment in new projects and capacity expansion. 5) Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029. With our TP implying upside of 49%, we initiate with a Buy rating.
Corey Chan | [email protected] | +86 755 8898 3404
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Valuation methodology Risks
Current price: Our TP of RMB14.1 is derived from our discounted cash flow (DCF) Jingsheng Downside risks: RMB12.0 valuation model. Key assumptions in our DCF valuation model 300316 CH Target price: include: 1) Cost of equity (COE): We use a COE of 10.8%. This is Weaker-than-expected PV and semi demand. derived from a risk-free rate of 2.5%, a market risk premium of RMB14.1 6.5%, and a beta of 1.28. 2) Cost of debt (COD): We assume the Weaker-than-expected capex of Zhonghuan. Buy Up/downside: pre-tax cost of debt to be 5% and the after-tax cost of debt to be 17% 4%. We use our 2020e debt-to-capital ratio of 2% as our long-term Higher-than-expected receivable provision. debt-to-capital ratio. 3) Operating cash flow to grow 13% per annum: We expect operating cash flow (before changes in working Weaker-than-expected margin on intensified competition capital) to expand at a CAGR of 13% in 2018-29e, reflecting stable growth in demand. 4) Capital expenditure (capex): We expect capex of around RMB700m per annum in 2019-21e, reflecting the company’s share of investment in the Wuxi semi wafer project.
Thereafter, we expect a steady capex of around RMB200-300m per annum in 2022-29e, reflecting maintenance capex. 5) Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029e. With our TP implying upside of 17%, we initiate with a Buy rating as we believe the company is the best name to play the upcoming capacity expansions in China’s PV and semiconductor wafer industry.
Corey Chan | [email protected] | +86 755 8898 3404
Current price: Our TP of RMB25.8 is derived from our discounted cash flow (DCF) Upside risks: FAM RMB32.8 valuation model. Key assumptions in our DCF valuation model 603806 CH Stronger-than-expected contribution from the electronic Target price: include: 1) Cost of equity (COE): We use a COE of 9.0%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, material business RMB25.8 and a beta of 1.00. 2) Cost of debt (COD): We assume the pre-tax Stronger-than-expected PV demand Reduce Up/downside: cost of debt to be 5% and after-tax cost of debt to be 4.3%. We use -21% our 2020e debt-to-capital ratio of 0% as our long-term debt-to-capital Better-than-expected margin on lessening competition ratio. 3) Operating cash flow to grow 4% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 4% in 2018-29e, reflecting steady growth in demand. 4) Capital expenditure (capex): We expect a steady capex of around
RMB200m per annum in 2019-29e, reflecting steady investment in maintenance. 5) Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029e. With our TP implying downside of 21%, we initiate with a Reduce rating.
Corey Chan | [email protected] | +86 755 8898 3404
Priced at 14 June 2019 Source: HSBC estimates * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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Technology upgrades, lower costs to drive upside
We expect a rise in demand for PV products, driven by technology upgrades and lower system costs. This should benefit China’s producers, accounting for 50-90% of the global solar supply chain
Wafer manufacturing to be the most resilient part of the supply chain, given its relatively consolidated market, high investment barrier, and less risk associated with the technology roadmap
As cost pressures persist, we expect cost leaders like Longi and Tongwei to be market consolidators, extending their reach both horizontally and vertically
Our global team expects a 11% CAGR in the world’s PV installations in 2018-20e, driven by lower PV costs
Solar grid parity on a global scale is closer than ever Solar cost has dropped by 92% in the last decade, resulting in significant reductions in the gap Solar cost has dropped by 92% in the last decade between the cost of solar power and that of competing fuel sources. As shown in Exhibit 14, the levelized cost of electricity (LCOE) of solar is now competitive with that of competing forms of power generation and wholesale electricity prices in several key markets including India, the US, and western Europe (Exhibit 15). These markets accounted for around 26% of global PV installations in 2018.
In India, which accounted for 8% of global PV demand in 2018, the LCOE of solar is 40% below that of coal thanks to the nation’s abundant solar resources. In France and Germany, the LCOE of solar is 25% and 50% below that of nuclear and that of coal respectively. In China, which accounted for around 42% of global PV demand in 2018, the LCOE of solar is still 40% above that of coal, but the government targets parity by 2021. Since China’s electricity price is one of the lowest globally (Exhibit 16), having parity would have global implications. As such, we are bullish over the world’s PV demand in 2019-21.
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Exhibit 13. Solar system cost has dropped 71% since 2010
4.0 40% 3.53 3.5 35% 3.0 2.80 30% 2.5 25% 2.0 1.83 20% 1.60 1.52
USD/W 1.45 1.5 1.23 15% 1.04 0.89 1.0 0.80 0.77 0.74 10% 0.5 5% 0.0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e 2021e Module Inverter BoP EPC Other Other y-o-y decline (%)
Source: BNEF, HSBC, e= HSBC Global Research estimates
Exhibit 14. PV LCOE: Already on parity with electricity wholesale price in several key markets PV LCOE / LCOE of competing power 250% source or electricity wholesale price
200%
150%
100%
50%
0% Brazil Japan Indonesia China Germany US France Australia Spain India vs LCOE of major electricity power source vs electricity wholesale price Grid parity
Source: Bloomberg, HSBC Qianhai Securities Note: Major electricity power source for each country: Brazil (hydro), Japan (nuclear), Indonesia (coal), China (coal), Germany (coal), US (natural gas), France (nuclear), Australia (coal), Spain (wind), India (coal)
Exhibit 15. Global solar installation breakdown, 2015-18
100% 11% 10% 11% 90% 23% 11% 6% 80% 24% 6% 70% 60% 45% 53% 50% 31% 42% 40% 30% 3% 6% 14% 10% 8% 20% 19% 12% 11% 10% 17% 9% 8% 9% 0% 2015 2016 2017 2018 Europe USA India China Japan ROW
Source: Bloomberg, HSBC Qianhai Securities
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Exhibit 16. China has one of the lowest electricity prices in the world
Electricity retail prices in 2018 (USD/MWh)
350 330 300 250 240 250 220 190 200 130 130 150 100 100 80 80 50 0 Germany Australia Spain Japan France Brazil US Indonesia China India
Source: Bloomberg, HSBC Qianhai Securities
Exhibit 17. HSBC global solar installation forecasts
140 Phase 1 Phase 2 Phase 3 Phase 4 60% Europe drives demand; overcapacity China capacity ramp 120 China dominates RoW drives starts to build drives down pricing supply and demand rebound 50% 100 40% 80 30% 60 20% 40
solar installations (GW) installationssolar 20 10% 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e China ROW China as % of total (RHS)
Source: SolarPower Europe, HSBC, e= HSBC Global Research estimates
China has become a major contributor of the global solar supply chain China’s share of the global solar supply chain has expanded strongly over the last few years (Exhibit 18). In 2018, the country accounted for c90% of the global wafer supply, c80% of the global cell/module supply, and c50% of the global polysilicon supply. In view of our bullish outlook of the world’s PV demand, we expect significant growth in China’s PV module exports in the coming years. As shown in Exhibit 19, China’s PV module monthly export reached a record level of 6.3GW in March 2019, up 81% y-o-y.
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Exhibit 18. Global solar: China’s share of Exhibit 19. China’s module exports production has grown strongly over the reached a new record in March 2019 last few years
China's share of 7.0 GW YoY 140.0% global supply 6.0 120.0% 100% 94% 100.0% 84% 82%
Thousands 5.0 90% 80.0% 80% 68% 68% 68% 70% 4.0 60.0% 53% 60% 40.0% 50% 3.0 40% 20.0% 30% 2.0 14% 0.0% 20% 1.0 10% -20.0% 0% 0.0 -40.0% Wafer Cell PV Module Polysilicon Jan-15 Dec-15 Nov-16 Oct-17 Sep-18 2018 2010 China Module Export YoY
Source: Company data, Bloomberg, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities
Solar supply chain still faces pricing pressure, but not as strong as that in the past Globally, PV LCOE ranges from USD50/MWh to 120/MWh, depending on the cost of the PV system and the effective operating hours. As shown in Exhibit 20, the average LCOE of global coal-firing power plants is around USD70/MWh. Hence, to achieve cost parity with fossil-fuel burning power plants on a global scale, we believe PV LCOE needs to drop by another 10-40% from the current level. As shown in Exhibit 21, the relationship between LCOE and PV system cost is almost linear on stable effective operating hours. Hence, we believe PV system cost needs to drop by 10-40%, to achieve a similar degree of reduction in LCOE, assuming stable operating hours. In our view, this is achievable via improvements in cell technology and production on a mass scale.
Exhibit 20. LCOE of coal-firing power plants (2018)
LCOE of coal-firing power plants (USD/MWh) 140 120 100 Global PV LCOE band 80 60 40 20 0 Australia US Indonesia Japan Malaysia India Brazil South Canada China Korea
Source: Bloomberg, HSBC Qianhai Securities
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Exhibit 21. PV LCOE: Sensitivity to PV system cost and effective operating hours PV system cost (RMB/W) Effective operating hours -30% -25% -20% -15% -10% -5% 0% 750 -7% 0% 7% 13% 20% 27% 33% 800 -13% -6% 0% 6% 13% 19% 25% 850 -18% -12% -6% 0% 6% 12% 18% 900 -22% -17% -11% -6% 0% 6% 11% 950 -26% -21% -16% -11% -5% 0% 5% 1,000 -30% -25% -20% -15% -10% -5% 0% 1,050 -33% -29% -24% -19% -14% -10% -5% 1,100 -36% -32% -27% -23% -18% -14% -9% 1,150 -39% -35% -30% -26% -22% -17% -13% 1,200 -42% -38% -33% -29% -25% -21% -17% 1,250 -44% -40% -36% -32% -28% -24% -20% Source: HSBC Qianhai Securities estimates
Exhibit 22. The PV panel manufacturing process: the method of ingot creation is what differentiates mono-Si panels from multi-Si
Source: HSBC Qianhai Securities
BOS and module processing could see more price cuts
BOS is the largest contributor to system cost The cost of a PV system can be broken down into five key parts – polysilicon, wafer non-Si cost, cell processing cost, module processing cost, and balance of system (BOS). BOS, including installation and other non-module related cost items, is the biggest, accounting for c50% of the system cost in 2018. This makes it an ideal target for cost-saving initiatives by PV system operators. We estimate a 10% cut in BOS reduces system cost by 5%. This compares with a 2% reduction for a 10% cut in module processing cost, and just 1% reduction for a 10% cut in polysilicon prices/wafer non-Si cost/cell processing cost.
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Exhibit 23. PV system cost breakdown (2018)
Rmb/W 2.10 4.25 4.50 4.00 3.50 3.00 2.50 1.03 2.00 0.53 1.50 0.35 1.00 0.24 0.50 - - Polysilicon Wafer Cell Module BOS PV system cost Cost of sales Gross Margin
Source: HSBC Qianhai Securities
Exhibit 24. PV system cost is most sensitive to BOS cuts 10% reduction in PV system cost reduction Polysilicon ASP -1.2% Wafer non-Si cost -1.1% Cell processing cost -1.1% Module processing cost -1.7% BOS -4.9% Source: HSBC Qianhai Securities estimates
The rise in cell efficiency has bigger impact on post-cell fabrication costs BOS and module processing costs are post-cell fabrication costs as they are incurred after the cells are made. These costs are largely independent of the kind of cell installed and more to do with the size of the module. This makes them highly susceptible to the increase in cell efficiency. We expect a 1ppt increase in cell efficiency to lower BOS and module processing costs by 4% and PV system cost by 3% (Exhibit 27). Here, we assume no change to the cell cost per watt as it is difficult to predict the cost trend for different cell technologies. As the improvement in cell efficiency is likely to be a long-term trend for the industry, we expect the downside pressure of BOS and module processing cost to linger for the next few years.
Exhibit 25. Module processing cost (2018): Exhibit 26. BOS cost breakdown (2018): A Costs like glass, EVA, and frame are majority of the costs are fixed relevant to the size of the module
D&A Management Secondary Others 3% fee equipment Labor 3% 2% 4% 3% Inverter Package 11% Primary 1% equipment Conductive Glass 12% adhesive 20% Structure 3% Welding 11% Roof Wire box adjustment belt Back plate 9% 5% Roof 12% 14% E&C leasing Frame 23% 2% 28% Grid connecting EVA cost 11% 10% Cable 13%
Source: CPIA, HSBC Qianhai Securities Source: CPIA, HSBC Qianhai Securities
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Exhibit 27. Rise in cell efficiency could bring down post-cell fabrication costs ______Cell efficiency ______Module BOS Other non-cell Cell cost PV system cost processing cost related costs Chg RMB/W RMB/W RMB/W RMB/W RMB/W 22% Unchanged 0.56 2.10 0.47 1.12 4.25 23% +1ppt 0.54 2.01 0.45 1.12 4.11 24% +2ppt 0.51 1.92 0.43 1.12 3.98 25% +3ppt 0.49 1.85 0.41 1.12 3.87 26% +4ppt 0.47 1.77 0.39 1.12 3.76 27% +5ppt 0.46 1.71 0.38 1.12 3.66 28% +6ppt 0.44 1.65 0.37 1.12 3.57 Source: HSBC Qianhai Securities estimates
The decline in per watt polysilicon usage to continue with rising share of mono In fact, the system cost savings from a 1ppt increase in cell efficiency could be larger than 3% if we factor in lower per watt raw material usage. As shown in Exhibit 28, per watt polysilicon usage declined 52% in 2007-18, during which cell efficiency had risen from c12% to c20%. The decline in per watt polysilicon usage is likely to continue on a rising share of mono wafer which uses 0.7g/w less polysilicon than multi wafer does. We estimate that a 10% reduction in per watt polysilicon usage could reduce PV system cost by 1.2% (Exhibit 29).
Exhibit 28. Per watt polysilicon usage: Exhibit 29. Sensitivity of PV system cost to Down 52% since 2007 per watt polysilicon usage
Polysilicon usage PV system cost Polysilicon usage (g/w) per watt 9.0 % changes RMB/W % changes 8.0 0% 4.25 0.0% 7.0 -5.0% 4.22 -0.6% -10.0% 4.20 -1.2% 6.0 -15.0% 4.17 -1.8% 5.0 -20.0% 4.15 -2.3% 4.0 -25.0% 4.12 -2.9% -30.0% 4.10 -3.5% 3.0
2.0 1.0 0.0 2007 2009 2011 2013 2015 2017 2019e 2021e
Source: HSBC Source: HSBC Qianhai securities estimates
Wafer and polysilicon production to benefit more from economies of scale Besides improvements in cell efficiency, economies of scale in production could also help to reduce system costs by diluting labour and fixed costs over a larger product base. As shown in Exhibit 30, wafer manufacturing is most sensitive to economies of scale as 34% of its COGS is in labour and fixed costs. Next is polysilicon (26%), followed by cell (13%). For module production, only 3% of its COGS is in labour and fixed costs, and the share in its total cost (including SG&A) could be even lower as selling expense (a variable cost) is higher for module compared with the upstream.
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Exhibit 30. Labour and fixed costs: Higher Exhibit 31. Mono wafer COGS breakdown share in wafer and polysilicon COGS (2018)
100% 13% 3% 26% 80% 34%
67% 60% 32% 67% Ingot pulling 33% 40% 52% Polysilicon 52% 20% 41% Wafer 30% 20% cutting 14% 15% 0% Wafer Polysilicon Cell Module Energy & Consumables Raw material Mono wafer COGS = RMB0.46/W Labour & Fixed cost
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Wafer and polysilicon more defensive against supply expansion
While capacity expansion has become rampant along the supply chain, we believe the wafer and the polysilicon segments are more defensive compared with other parts of the supply chain. This is because of their relatively high market concentration, the relatively heavy investment required for new capacity, and low profitability, all factors that should safeguard the market from new entrants.
Market concentration highest for wafer and lowest for cell We believe a consolidated market reduces the risk of technology leakage to industry copy-cats and, in turn, greater competition. Compared with other parts of the supply chain, market concentration is high for wafer, particularly mono wafer. As shown in Exhibit 32, the top two players accounted for 36% of global overall wafer supply and 65% of global mono wafer supply in 2018 (Exhibit 32). We expect this to increase to 42% and 77%, respectively in 2019 (Exhibit 34). Comparatively, the cell market is relatively fragmented, with the top two accounting for only 14% of global supply in 2018.
Exhibit 32. Market concentration of various parts of the solar supply chain (2018)
90% 81% 80% 65% 70% 61% 60% 53% 50% 40% 36% 34% 40% 29% 30% 19% 20% 14% 10% 0% Wafer (Mono-Si) Wafer (Overall) Polysilicon Module Cell
Top 5 players' market share Top 2 players' market share
Source: Company, Bloomberg, HSBC Qianhai Securities
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Exhibit 33. Polysilicon: Global capacity Exhibit 34. Mono wafer: Global production breakdown (2019e) breakdown (2019e)
Daqo Group 5% TBEA Others Others 10% 16% 34%
GCL-Poly Longi 20% 42%
Wacker Chemie Tongwei Zhonghuan AG OCI 10% JinkoSolar 11% 10% 35% 7%
Source: HSBC Qianhai Securities, e = Bloomberg consensus estimates Source: Company data, HSBC Qianhai Securities, e = Bloomberg consensus estimates
Exhibit 35. Cell: Global production Exhibit 36. PV module: Global production breakdown (2019e) breakdown (2019e)
GCL Hanwha Q Cells Zhongli System JA Solar Canadian Motech 7% Talesun 5% 6% Solar Industries 6% Hanwha 6% 3% JA Solar Q Cells 7% 7% JinkoSolar LONGi 7% 7% Others LONGi Trina Solar 42% 7% 8% Others 50% Tongwei Canadian 7% Solar Trina Solar 8% JinkoSolar 7% 10%
Source: Company data, Bloomberg, HSBC Qianhai Securities, e = Bloomberg Source: Company data, Bloomberg, HSBC Qianhai Securities, e = Bloomberg consensus estimates consensus estimates
Mono wafer has high investment and technology entry barriers Compared with other parts of the supply chain, investment levels and technology entry barriers for mono wafer are high. As shown in Exhibit 37, the prevailing investment cost for 1GW of mono wafer production capacity is around RMB500m, higher than that of PERC cell and polysilicon. The investment cost for PV module capacity is much lower, at around RMB80m/GW. In addition to its higher investment cost, mono wafer capacity also takes longer to ramp up. As shown in Exhibit 38, a typical mono wafer line takes up to 12 months to ramp up to its face-plate capacity. This compares with six months for polysilicon lines and three months for cell lines.
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Exhibit 37. The Investment costs of mono wafer lines are high compared with other parts of the supply chain RMB mn/GW
600 500 500 420 408 400 295 300 200 80 100 - Wafer (Mono-Si) Cell (PERC) Polysilicon Wafer (Multi-Si) PV Module Investment Cost
Source: Company data, HSBC Qianhai Securities
Exhibit 38. New capacity by type: Mono wafer takes the longest to ramp up
Capacity ramp-up period (months) 14 12 12 10 8 6 6 4 3 2 0 Wafer (Mono) Polysilicon Cell
Source: Company data, HSBC Qianhai Securities
Profitability for wafer and polysilicon is low, discouraging new supply Wafer’s profitability is low, even for market leaders. As shown in Exhibit 39, the two largest players – Longi and Zhonghuan – generated just 15-16% gross margin for their wafer business in 2018. With SG&A cost ratios at around 8-10%, operating margin could be as low as 5-8%. Margins are likely to be even lower for smaller players. This does not give new entrants a lot of incentive to increase supply. For polysilicon, due to a 53% price decline since early 2018, only a handful of producers, including Tongwei, TBEA, and Daqo are still profitable while others are loss-making. For cell, gross margins of industry leaders are still high, at around 20-30% in 1Q19, thanks to the price recovery y-t-d (Exhibit 44). We believe this could lead to more supply in the near term.
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Exhibit 39. Wafer: GMs for market leaders Exhibit 40. Wafer: Pricings have stabilized at mid-to-low teens in 2019e since end-2018
PV wafer GM Rmb/unit 35% 7.0 30% 6.0 25% 5.0 20% 4.0 15% 3.0 10% 2.0 5% 1.0 0% 0.0 2015 2016 2017 2018 2019E Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Zhonghuan Longi Multi-Si wafer Mono-Si wafer
Source: Company data, HSBC Qianhai Securities estimates Source: Wind, HSBC Qianhai Securities
Exhibit 41. Polysilicon: GMs for market Exhibit 42. Polysilicon: Prices have leaders down to 20-30% in 2019e on price retreated 53% since early 2018 declines
Polysilicon GM Rmb/kg 160 47% 50% 45% 140 42% 45% 120 40% 34% 34% 33% 35% 28% 100 26% 28% 30% 80 25% 18% 20% 60 15% 40 10% 20 5% 0% 0 Tongwei TBEA DAQO GCL-Poly Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 2017 2018 2019E
Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities estimates
Exhibit 43. Cell: GMs for market leaders Exhibit 44. Cell: Prices have shown a around 20-30% in 1Q19 recovery y-t-d
PV cell GM Rmb/W 35% 2.0 30% 1.8 30% 1.6 25% 1.4 20% 19% 1.2 20% 1.0 15% 0.8 0.6 10% 0.4 0.2 5% 0.0 0% Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Tongwei Risen Energy Aikosolar Mono-Si cell Multi-Si cell 1Q19
Source: Company data, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities
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Implications of cost pressure for the market landscape
Cost leaders could emerge as market consolidators As cost pressure is likely to persist in the medium term, we see a chance of deepening market consolidation that should boost the market positions of cost leaders like Longi and Tongwei. In wafer production, Longi, the first to introduce diamond wire sawing (DWS) in 2015, has led the cost curve. As shown in Exhibit 45, Longi’s non-Si costs in wafer production dropped by 72% in 2013-18, and we expect that to decline by a further c40% in 2018-21e, driven by economies of scale. As non-Si costs account for around 50% of wafer costs, this should give Longi a material advantage against its competitors. In cell and polysilicon markets, Tongwei’s cost of production is amongst the lowest (Exhibit 46).
Exhibit 45. Longi: Managed to cut wafer Exhibit 46. Tongwei: Cell processing cost non-Si costs by 72% since 2013 is 30-40% below the industry average
RMB/W 1.00 RMB/W 0.90 0.50 0.80 0.45 0.70 0.40 0.60 0.35 0.50 0.30 0.40 0.25 0.30 0.20 0.20 0.15 0.10 0.10 - 0.05 2013 2015 2017 2019E 2021E - Wafer non-Si cost 2017 2018 2019E 2020E 2021E Tongwei Industry average
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, CPIA, HSBC Qianhai Securities estimates
Exhibit 47. Tongwei: Average variable cost for polysilicon production at low-end of the industry range
Tongwei (China) 6.2 Daqo (China) 6.5 TBEA (China) 7.1 GCL Poly (China) 7.5 OCI (Korea) 10.0 Wacker Chemie (US and Germany) 10.8 Hemlock (US) 15.00 Japan 20.00 REC (US) 20.00
0.00 5.00 10.00 15.00 20.00 25.00 Average variable cost (USD/kg)
Source: BNEF, HSBC Qianhai Securities
Vertical integration could become a key strategy We believe vertical integration along the supply chain carries three key benefits:
1. It allows downstream players to secure supplies and upstream players to secure markets;
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2. It generates synergy as a lot of the tasks along the supply chain such as marketing and service are repetitive.
3. It allows upstream players to know and address market demand better, and to develop business objectives in line with that of the users.
Given these benefits, top solar supply chain players including Longi, Zhonghuan, Tongwei, JA Top solar supply chain players have been extending Solar, Trina Solar, GCL Poly, Canadian Solar, Jinko Solar, and Risen Energy, have been their businesses along the extending their businesses along the supply chain. supply chain Longi expanded into solar cell and module manufacturing by acquiring Lerri Solar in 2014. As of end-2018, the company has a module capacity of 8.8GW. It supplied 7.3GW of modules in 2018, or a 7% market share globally. As the largest mono wafer supplier globally, the company is able to self-supply wafers to its modules, which leads to lower costs and better margins for its modules compared with that of its peers (Exhibit 48).
Longi’s weak spots, in our view, are polysilicon and cell. The company does not produce polysilicon and its 6GW cell capacity at end-2018 can hardly satisfy its own wafer supply of 18GW in 2018. As such, co-operation with polysilicon and cell players becomes critical. On 3 June 2019, Longi announced a strategic co-operation with Tongwei in polysilicon and wafer. According to the announcement, Tongwei will take a 30% stake in Longi's 15GW mono wafer project in Yinchuan, while in return Longi will take a 30% stake in Tongwei's 50,000 tonnes Baotou polysilicon project. We believe the partnership is beneficial to both parties as it helps Longi to secure upstream polysilicon supply for its wafers and helps Tongwei to secure a major customer for its polysilicon. Longi’s Yinchuan project, slated for completion around 2020, will need to consume c50,000 tonnes of polysilicon per annum, an exact match for the production at Baotou Ph1-2.
Zhonghuan moved into cell and module manufacturing by acquiring a 90% stake of Gdsolar in July 2018. The RMB644m consideration was settled via issuing 84m shares to the seller at RMB7.67/share. Zhonghuan will build 5GW of shingled-cell module capacity on Gdsolar’s existing plant and upgrade Gdsolar’s existing HJT cell line.
Exhibit 48. PV module GM: Longi’s higher than peers thanks to its self-supplied wafers PV module GM
35% 31% 30% 27% 24% 25% 18% 20% 17% 16% 15% 13%
10% 6% 5% 0% 0% 2016 2017 2018 Longi Chint CECEP Solar Energy
Source: Company data, HSBC Qianhai Securities
Solar technology trends
The PV panel manufacturing process can be broken down into four parts: polysilicon, wafer, cell, and module. There have been competing technologies in each part, like mono-Si vs. multi- Si in wafer processing, and p-type vs. n-type in cell production. In this section, we analyze the
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technology trends of various parts of the manufacturing process as we view the technology trends as one of the biggest uncertainties for companies in the solar supply chain. We believe there is more uncertainty concerning the technology trends of cell and module than with wafer and polysilicon. It is difficult to identify the winner in the cell industry as there are at least five competing cell technologies to choose from. In our view, in order of technology risk, cell > module > polysilicon > mono wafer.
How does a solar cell work? When the sunlight hits the surface of a solar cell, photons are absorbed as energy. This activates the electrons breaking free from the silicon atoms, creating pairs of negatively-charged electrons and positively-charged electron hole. By adding tiny amounts of the right elements to the top and bottom sides of a silicon wafer, a P-N junction can be formed that stops electrons that are knocked below it from going back to the atoms they came from. The roaming electrons are then attracted to the positively charged area N and the electron holes to the negatively charged area P, developing an electric voltage across the cell.
Exhibit 49. An illustration of the working mechanism of a solar cell
Sunlight Front electrode (-)
Anti-reflection coating
N-type silicon (P+)
P-type silicon (B-)
Back electrode (+)
Current
Source: HSBC Qianhai Securities
Polysilicon purification: modified-Siemens method has become the mainstream Polysilicon is the upstream of the solar supply chain. Polysilicon can be produced from metallurgical-grade silicon through chemical purification or physical methods. At present, the modified-Siemens method (a chemical method), adopted by over 90% of the polysilicon production facilities globally, is the mainstream production method. We see it as the most competitive method. The modified-Siemens method produces the high quality polysilicon (9- 11N) required for mono wafers. Compared with the Fluidized bed reactor method, a traditional chemical method, the modified-Siemens method has lower production cost and higher levels of safety. We expect the modified-Siemens method to remain the mainstream way of producing polysilicon in the medium term.
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Exhibit 50. Polysilicon purification: modified-Siemens method has become a mainstream way
Poly-Crystalline Silicon Purification
Chemical purification method Physical method
Modified Siemens Fluidized bed reactor Energy beam Other metallurgical CP method method method method method
Source: HSBC Qianhai Securities
Wafer: Choosing between multi-Si brick and mono-Si rod The key difference in the production of multi-Si and mono-Si wafer is in ingot processing – a step before wafer cutting (Exhibit 53). Mono-Si products are pulled into rods under the Czochralski (CZ) method, while multi-Si products are casted into bricks. The furnaces used for mono-Si and multi-Si are very different and cannot be shared.
As the average efficiency of a mono-based panel is 10-15% higher for a similar price point, mono panels are gaining popularity among users. This, however, was not the case back in 2015 when multi-Si products still had more than 80% of the market share thanks to its lower cost. The market landscape started to shift in 2016 after Longi developed the diamond wire sawing (DWS) technology, which was adopted industry-wide in 2017. DWS enables thinner slicing and lowered the cost of mono-Si wafer cutting far more than it did for the multi-Si counterparts. In 2018, mono-Si wafer accounted for 45% of Si cell production and the China PV Industry Association forecasts that this will grow to 69% by 2021.
Improvements in technology are far from over. We believe future cost reduction could come from mono c-Si via the technology that allows multiple-crystals to be pulled from a single crucible. The HSBC Asia Utilities & Alternative Energy team also noted the shift of technology trends towards mono wafers in their report, GCL-Poly Energy Holdings (3800 HK), 30 March 2019.
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Exhibit 51. Share of mono-Si has risen Exhibit 52. Longi has managed to cut non- from 24% in 2013 to 45% in 2018 Si cost by 72% since 2013, and we expect the cuts to continue
100% RMB/W 1.00 90% 0.90 80% 0.80 70% 0.70 60% 0.60 50% 0.50 40% 0.40 0.30 30% 0.20 20% 0.10 10% - 0% 2013 2015 2017 2019E 2021E 2013 2015 2017 2019E 2021E non-Si cost Multi-Si Mono-Si
Source: CPIA, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
Exhibit 53. Mono rods vs multi bricks is the key difference in the production of mono and multi solar panels
Higher cost but less Diamond wire sawing Texturing and impurities; overall (DWS) technology was polishing process higher conversion adopted industry-wise with alkaline efficiency from sunlight in 2017 and lowered solution has lower into electricity cost cost
Monocrystal Mono-silicon Mono-silicon Mono-silicon ingot pulling wafer cell PV module process
Production process is Polysilicon similar and equipment Power Lower cost but more highly replaceable generation impurities; overall lower conversion efficiency from sunlight into electricity
Multicrystal Multi-silicon Multi-silicon Multi-silicon ingot casting wafer cell PV module process Texturing and polishing process with acid solution has Mono-like higher cost; Mono- crystal (what Complete industry- like crystal can also GCL-Poly is wise adoption of be treated with producing) DWS in 2019; but alkaline solution cost reduction is not as significant as that As multi-si, its in mono-si wafer appearance and production performance are close to that of the mono-si
Source: HSBC Qianhai Securities
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Cell: Five key technologies PERC: PERC (Passivated Emitter and Rear Cell) differs from the standard cell architecture in that, at the rear surface, it has a passivation layer formed by SiNx or Al2O3 with tiny pockets or holes (Exhibit 54). This film allows the transmitted photons to be reflected back to the silicon layer for a second chance to get absorbed. This structure can increase conversion efficiency by 0.6-1.0ppts for multi-Si cells and 1.0-1.5ppts for mono-Si cells. Compared with other technology, the adoption of PERC on existing cell lines is relatively easy as it only requires two extra manufacturing steps – back passivation and laser grooving. Given these benefits, the PERC cell share of total c-Si cell production has increased from 9% in 2015 to 34% in 2018. And that could grow to 61% in 2021, according to the China PV Industry Association’s forecasts.
Exhibit 54. Cell structure comparison: PERC vs Traditional P-type cell
Traditional P-type cell Mono PERC cell
Ag electrode Ag electrode
SiN/SiO2 Al2O3 layer
N+ emitter (phosphorus) N+ emitter (phosphorus)
P-Si P-Si P+ （Boron BSF）
P+ (Boron BSF) Passivation layer
SiN capping layer
Screen-printed Al-paste Ag electrode Ag electrode
BSF: Back Surface Field
Source: HSBC Qianhai Securities
N-PERT: N-PERT (N-type Passivated Emitter Rear Totally Diffused Cell) is an n-type mono cell. An n-type cell has the boron-doped Si wafer on the front, and the phosphorus-doped wafer on the back, the opposite to the arrangement of a p-type cell (Exhibit 55). Similar to the PERC design for p-type cells, N-PERT cells also have passivation layers. While N-PERT cells are relative easy to produce, their yield relative to the costs is not as good as the double-sided PERC cells. In 2018, N-PERT accounted for 5% of global c-Si cell production.
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Exhibit 55. Cell structure comparison: P-type cell vs N-type cell
P-type cell N-type cell
Ag electrode Ag electrode
SiN/SiO2 Al2O3 layer
N+ emitter (phosphorus) P+ (Boron)
P-Si N-Si
P+ (Boron BSF) N+ (phosphorus BSF) Al2O3 layer SiN capping layer
Ag electrode Ag electrode
BSF: Back Surface Field
Source: HSBC Qianhai Securities
HJT: HJT (Heterojunction) is another n-type mono technology that combines the advantage of c-Si cells and thin film technologies, enabling solar cells to achieve higher degree of efficiency. The key differentiating part of this technology is that it applies thin layers of doped and intrinsic amorphous silicon on both sides of the n-type mono-Si layer. The amorphous layer has wider bandwidth that catches more photons and reduces the number of electrons lost on the surface. In addition, a transparent and conductive oxide layers (TCO) is placed on the surface to better absorb the generated power. We see a promising outlook for this technology given its high conversion efficiency (26% in laboratory trials). However, equipment prices are high and that could hinder mass production. Cell manufactures, including Tongwei, Panasonic, Sunpreme, Jinergy, CIE Power, and GS-solar, are all eyeing this area. In 2018, HJT accounted for only 1% of global c-Si cell production.
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Exhibit 56. Cell structure comparison: HJT vs traditional N-type cell
HJT (Heterojunction cell) N-type cell
Ag/Al electrode TCO (transparent Ag electrode and conductive oxide) layers on the front SiN/SiO2 Al2O3 layer
P+ (Boron) P+ (Boron) a thin layer of doped and intrinsic amorphous silicon N-Si N-Si
a thin layer of doped and intrinsic amorphous silicon N+ (phosphorus BSF) N+ (phosphorus BSF) SiN capping layer
TCO layers on the back Ag electrode Ag electrode
BSF: Back Surface Field Source: HSBC Qianhai Securities
TOPCon: In Topcon (Tunnel Oxide Passivated Contact) cell, a thin oxide layer is introduced to the back of the cell in addition to a layer of heavily doped Si wafer. These layers passivate the back of the cell and reduce the recombination loss significantly. TOPCon cell is very hard to mass produce and the potential for conversion efficiency improvement is likely to be lower than that of HJT. So far, among the players who had made production plans, only LG Chemical can mass produce TOPCon cells.
IBC: IBC (Interdigitated Back Contact) is one of the most complicated technologies among all the viable alternatives but also offers great potential for efficiency improvement. In traditional solar cells, metal contacts are placed on the front side of the cell. For IBC cells, the contacts are placed on the rear side of the cell. This allows IBC to achieve higher efficiency than the traditional cells given reduced shading on the front side. An IBC cell can achieve a conversion efficiency as high as 23.5-24.5%, but is costly and hard to produce. Players like Sun Power and LG Chemical are setting foot in this area.
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Exhibit 57. Cell structure comparison: IBC vs traditional N-type cell
IBC (Interdigitated Back Contact) N-type cell
Ag/Al electrode Lightly doped front diffusion layer: reduces texture plus anti-reflection coating recombination loss SiN/SiO2 Al2O3 layer
P+ （Boron）
N-Si N-Si
P+ N+ P+ N+ P+ N+ N+ （phosphorus BSF） SiN capping layer
Passivating SiO2 layer: Backside mirror: reduces reduces surface backlight absorption and recombination loss negative positive contact contact traps light Ag electrode
Recombination loss: losses incurred when electrons and electron holes recombine
Source: HSBC Qianhai Securities
Exhibit 58. Market share of key cell technologies, 2018-21e
100% 90% 17% 30% 80% 39% 70% 60% 60% 50% 61% 40% 56% 51% 30% 20% 34% 15% 10% 8% 10% 0% 5% 2018 2019E 2020E 2021E
Others IBC HJT N-PERT PERC BSF
Source: CPIA, HSBC Qianhai Securities, E= HSBC Qianhai Securities estimates
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Exhibit 59. Solar cell: Roadmap of key technologies
IBC HBC N-Type HJT Mono PERT TOPCon
P-Type PERC SE
Multi P-Type PERC Black Silicon Mono-like Crystal?
Source: HSBC Qianhai Securities
Exhibit 60. Solar cell: Pros and cons of different technologies P-Mono PERC N-PERT N-TOPCon HJT IBC Conversion efficiency 21.5-22% 21.5-21.7% 22.5-23% 22.5-23.5% 23.5-24.5% Capacity ~63GW ~2.1GW ~2GW ~3.8GW ~1.5GW Suppliers Mainstream Jolywood, Linyang LG Panasonic, LG，SunPower Sunpreme Technology difficulties Low Medium-to-low High Medium Highest Mass-scale production Low Medium Only LG can Medium High difficulties produce in mass- scale Production procedures Less Relatively less Many Least Most Equipment spending Low Medium-to-low High High Highest Compatible Compatible Partly compatible Completely Completely Compatibility with existing lines incompatible incompatible Weakness Ceiling to efficiency Not as cost-effective Difficult to High equipment Highest improvement as bifacial p-PERC produce in mass- cost production cell scale difficulty and cost Conclusion Strength Cost-effective Can convert from Partly compatible Least production Highest existing line with existing line procedures conversion efficiency Source: PV InfoLink, HSBC Qianhai Securities
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Module: The evolution of the array of cells Half-cut solar cells: Half-cut solar cells are traditional silicon solar cells that have been cut in half (Exhibit 61). When solar cells are halved, the current generated from each cell is also halved, leading to lower energy losses. As a result, power output of a half-cut solar cell is 2-4% higher than that of a full piece. In 2018, half-cut solar cells accounted for 5% of the global module production, and the China PV Industry Association forecasts that will grow to 40% by 2028.
Shingled cell module: A shingled cell module breaks a solar cell further into 4-5 pieces and places them in a shingled manner like roof tiles. This structure requires little need for a welding belt and reduces the spaces between the solar cells (Exhibit 62). As a result, cell units on the surface can be increased by 13%. In addition, the removal of the busbar, a metal wire grid on top of the cell, increases the light-receiving area by 5-6%. Instead of having wires run on the surface, a conductive adhesive is used to connect cells and make electrical contacts required for current to flow.
Exhibit 61. Cutting a solar cell in half can Exhibit 62. Shingled cell module increases increase power by a maximum 4% the light-receiving area
Shingled cell module:
Traditional module:
Source: HSBC Qianhai Securities Source: HSBC Qianhai Securities
Exhibit 63. Market share of half-cut and Exhibit 64. Various layers of a solar shingled-cell to grow at the expense of module full-slice cells (2018-21e)
100% 90% Glass 80% 51% 70% 66% 60% 80% EVA 92% 50% Cell 40% 30% 35% EVA 20% 26% 10% 17% Backsheet 8% 9% 14% 0% 1% 4% 2018 2019E 2020E 2021E
Shingled-cell Half-cut Full-slice
Source: CPIA, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates Source: HSBC Qianhai Securities
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Our stock-picking framework
We compare five PV product suppliers on eight metrics
Longi looks strong overall
Tongwei’s valuation is the lowest among peers
Summary
We are initiating coverage of Longi, Tongwei, Zhonghuan, Jingsheng and FAM. In this section, we compare the five companies. We believe that they are comparable as they all generate the majority of their revenue from various parts of the solar supply chain. We compare them on: 1) revenue exposure; 2) valuation; 3) growth potential; 4) cash-generating ability; 5) return on equity; 6) balance sheet strength; 7) receivable impairment risk; and 8) R&D capability.
In order of preference, we like Longi, followed by Tongwei, Zhonghuan, Jingsheng and FAM. Our order of preference is Longi, followed by Tongwei, We like Longi’s for its superior ROE, strong balance sheet, and solid growth potential Zhonghuan, Jingsheng and underpinned by wafer market share gains. We like Tongwei for its attractive valuation, low FAM account receivable days, and cost leadership in polysilicon and cell.
1. Revenue exposure: We divide PV manufacturing into upstream polysilicon, midstream wafer and cell, and downstream module and packaging material. In the order of preference, we like wafer > polysilicon > cell > module > packaging material. We like wafer the most given its relatively consolidated market, high investment barrier, and less risks associated with the technology roadmap. It is also easier for wafer leaders to get scale advantage given high share of fixed cost in the cost structure. We like packaging material the least given its susceptibility to cell efficiency improvements and to module makers’ cash situation. As shown in Exhibit 65, Longi, Zhonghuan, and Jingsheng are all well exposed to wafer manufacturing, while FAM is predominantly a packaging material supplier.
Exhibit 65. China solar peers: Revenue exposure breakdown, 2018 Longi Zhonghuan Tongwei Jingsheng FAM Upstream (Polysilicon) 12% Midstream (Wafer, crystal-growing equipment) 28% 78% 84% Midstream (Cell) 2% 10% 28% Downstream (Module) 60% Downstream (Packaging material) 97% Power generation 4% 2% 2% 1% Others 7% 10% 57% 16% 2% Total 100% 100% 100% 100% 100% Source: Company, HSBC Qianhai Securities
2. Valuation: On 2019e PE, the peer group trades at a range of 17-51x with a median of 20x. Tongwei and Jingsheng are both trading below the median, at 17x and 19x respectively. Zhonghuan and FAM, however, are valued above the median, at 51x and 25x.
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Exhibit 66. 2019e PE: Tongwei is the most attractive
60.0 PE 50.6 50.0
40.0
30.0 24.7 19.9 19.3 20.0 17.1
10.0
0.0 Zhonghuan FAM Longi Jingsheng Tongwei 2019 PE
Source: Company data, HSBC Qianhai Securities, e= HSBC Qianhai Securities estimates
3. Growth potential: We expect Zhonghuan to register the highest EPS CAGR in 2018-21e (Exhibit 67), driven by capacity expansion in semiconductor (semi) and PV wafers. Longi ranks second on EPS CAGR, fuelled by strong market share gains in mono wafer. FAM’s 2018-21e EPS CAGR at 3% is the lowest among peers. This is because we see limited growth potential for the EVA film market to which the company is exposed.
Exhibit 67. EPS CAGR: Zhonghuan to register the fastest growth in 2018-21e
45.0% YoY 41.8% 40.0% 35.0% 30.2% 30.0% 27.3% 24.7% 25.0% 20.0% 15.0% 10.0% 5.0% 2.9% 0.0% Zhonghuan Longi Tongwei Jingsheng FAM EPS CAGR (2018-21)
Source: Company data, HSBC Qianhai Securities, e= HSBC Qianhai Securities estimates
4. Cash-generating ability: We use cash generation days and operating cash flow (OCF) to net profit to compare the cash flow strength for the peer group. Zhonghuan has the lowest cash generation days and the highest OCF to net profit multiple among peers in 2018 (Exhibits 68-69). We believe this is due to a better working capital cycle as the result of its stronger bargaining power in payment terms for suppliers. This is validated by the long cash generation days of Jinsheng, one of Zhonghuan’s key supplier in crystal-growing machines. However, Zhonghuan’s FCF to net profit multiple was the lowest among peers in 2018, due to heavy capex.
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Exhibit 68. Cash generation days (2018): Zhonghuan is the lowest cash days
250 201 200 144 150 100 50 30 0 (50) (100) (53) (150) (103) Zhonghuan Tongwei Longi Jingsheng FAM 2018
Source: Company data, HSBC Qianhai Securities
Exhibit 69. Operating cash flow to net profit (2018): Zhonghuan is the strongest
4.00 2.70 OCF to net profit (2018) FCF to net profit (2018) 1.54 2.00 0.46 0.28 0.23 0.43 0.00 -0.49 -2.00 -0.78 -1.66 -4.00
-6.00 -6.41 -8.00 Zhonghuan Tongwei Longi Jingsheng FAM
Source: Company data, HSBC Qianhai Securities
5. ROE: On average, the peer group generated 12.3% ROE in 2018. Longi’s ROE was 15.5% in 2018, the highest among peers. We believe this is due to the company’s higher asset-to- equity leverage (2.4x in 2018) stemming from its large amounts of transactions (sales and purchases) with other players in the supply chain. The company supplies wafers to cell makers and procures the cells back for module production. This results in very similar amounts of trade receivables and trade payables on its balance sheet.
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Exhibit 70. Return on equity (2018): Longi is the highest ROE 18.0% 15.5% 16.0% 14.3% 13.7% 13.5% 14.0% 12.0% 10.0% 8.0% 6.0% 4.7% 4.0% 2.0% 0.0% Longi Jingsheng Tongwei FAM Zhonghuan 2018
Source: Company data, HSBC Qianhai Securities
6. Balance sheet strength: We use a net debt to total equity ratio to compare balance sheet strength. As shown in Exhibit 71, Jingsheng, FAM, and Longi all have net cash on their balance sheets in 2018. Zhonghuan had a net debt to total equity ratio of 55% in 2018, the highest among peers. However, we expect the ratio to drop to 27% in 2019 upon the completion of the RMB5bn private placement.
Exhibit 71. Net debt to equity (2018): Jingsheng, FAM, and Longi are all net cash
60.0% 54.7% 50.0% Net debt / total equity (2018) 40.0%
30.0% 22.2% 20.0% 10.0% 0.0% -10.0% -2.5% -10.3% -8.6% -20.0% Jingsheng FAM Longi Tongwei Zhonghuan 2018
Source: Company data, HSBC Qianhai Securities
7. Receivable impairment risk: The earnings risk of PV product suppliers is highly dependent on the susceptibility of receivables to impairment. As shown in Exhibit 72, Jingsheng and FAM both had account receivable (AR) days over 200 days in 2018, well above the average of 90 days for the other three companies. We believe Jingsheng’s higher AR days is the result of its reliance on Zhonghuan as its key customer. FAM’s higher AR days is likely driven by delayed payments by downstream module makers, of which the cash flows are poor.
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Exhibit 72. Account receivable days (2018): Tongwei has the lowest number AR days 250 228 202 200
140 150 101 100
50 29
0 Jingsheng FAM Longi Zhonghuan Tongwei 2018
Source: Company data, HSBC Qianhai Securities
Exhibit 73. Receivable provision rate (2018): Longi has the lowest rate Receivable provision rate 12.0% 10.2% 10.0%
8.0% 6.5% 6.2% 6.0%
4.0% 2.6% 1.7% 2.0%
0.0% Jingsheng Tongwei FAM Zhonghuan Longi 2018
Source: Company data, HSBC Qianhai Securities
8. R&D capability: As shown in Exhibit 74, Jingsheng’s R&D expense as percentage of revenue was 7% in 2018, topping that of industry peers. We believe such a high R&D expense ratio supports Jingsheng’s leading market position in crystal-growing machines. Tongwei’s R&D expense as percentage of revenue was only 2% in 2018. However, after excluding the agriculture business which accounted for c60% of revenue and requires limited R&D, the R&D expense ratio was 5% in 2018.
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Exhibit 74. R&D expense as % of revenue (2018): Jingsheng is the highest
R&D expense as % of revenue 8.0% 7.2% 7.0% 6.0% 5.0% 3.7% 4.0% 3.0% 3.0% 2.2% 2.0% 0.9% 1.0% 0.0% Jingsheng FAM Zhonghuan Tongwei Longi 2018
Source: Company data, HSBC Qianhai Securities
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Company section
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Longi Green (601012 CH)
The largest mono wafer maker globally, with a 35% market share
Cost leadership and new capacity addition should drive 43% net earnings CAGR in 2018-21e
Initiate with a Buy rating and a TP of RMB36.20
Investment summary
Cost leader in mono wafer production As the largest global mono wafer producer, Longi is well positioned to benefit from the trend of The company has been a cost leader in the wafer rising share of mono in PV panel production. The company has been a cost leader in the wafer industry industry, cutting its non-Si cost significantly by 72% since 2013. We expect further declines of c40% in 2018-21e, driven by economies of scale. This, together with the addition of 37GW new wafer capacity in 2019-21, should lead to its market share rising from 35% in 2018 to 42% in 2021e.
The stock price has rallied 58% y-t-d, outperforming the benchmark index by 36% on strong export volume. However, we believe the market has yet to factor in a better long-term growth prospects, driven by lower demand volatility associated with policy changes as the industry approaches grid parity.
Exhibit 75. Longi: We expect earnings to Exhibit 76. Longi: Revenue breakdown, rise at a 43% CAGR in 2018-21e 2018
Rmb mn PV system Mono c-Si rods PV EPC 8,000 250% 0% 1% 3% Others 7,000 200% Solar Cell 2% 6,000 2% 150% Power 5,000 generation 4,000 100% 4% 3,000 50% PV 2,000 Mono- Modules 0% crystalline 1,000 60% wafer 0 -50% 28% 2016 2017 2018 2019E2020E2021E Net profit YoY
Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
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Investment positives
Dominant mono wafer producer globally With a 35% market share in 2018, Longi is the largest producer of mono wafer in the world. We Longi is the largest producer of mono wafer in the world expect its market share to rise to 42% in 2021e in line with rapid capacity expansions. As shown in Exhibit 80, mono has become a more widely used wafer in the last few years, given higher conversion efficiencies (Exhibit 79) and the evolution of the process flow that reduced costs (down 30% in 2016-17). The trend is likely to continue – the China PV Industry Association forecasts mono to account for 69% of all Si cell production in 2021, up from 45% in 2018.
Exhibit 77. Mono wafer: Longi is the Exhibit 78. Longi: To gain market share largest supplier with a 35% market share significantly over 2019-21e in 2018
Longi's Market share 50% 45% Longi 40% Others 35% 35% 25% 30% 25% 20% 15% 10% 5% 0% 2015 2016 2017 2018 2019E 2020E 2021E Zhonghuan 29% JinkoSolar Mono-Si wafer Global wafer 11%
Source: Company data, HSBC Qianhai Securities Source: CPIA ,Company data, HSBC Qianhai Securities，E= HSBC Qianhai Securities estimates
Exhibit 79. Conversion efficiency: Mono Exhibit 80. Global Si cell production by cell is higher substrate: Share of mono to rise over 2019-21e
100% 25.0% 90% 20.0% 80% 70% 15.0% 60% 50% 10.0% 40% 30% 5.0% 20% 0.0% 10% 2013 2014 2015 2016 2017 0% Mono-Si cell Multi-Si cell 2013 2015 2017 2019E 2021E Multi-Si Mono-Si
Source: CPIA, HSBC Qianhai Securities Source: CPIA, HSBC Qianhai Securities, E = CPIA estimates
Sales growth rising with capacity expansion in 2019-21e As of the end 2018, the company has 28GW of wafer production capacity. It plans to increase this to 36GW in 2019, 45GW in 2020e, and 65GW in 2021e. Of the 17GW additional capacity in 2019-20, 12GW will be from the new capacities in Yunnan (slated for completion in mid-2019)
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and 5GW from upgrading the existing production facilities. Hence, we expect wafer production to rise at a CAGR of 35% in 2018-21e.
Exhibit 81. Longi: Capacity by segment, Exhibit 82. Longi: Wafer production to 2016-21e register a 35% CAGR in 2018-21e
GW GW 50 80% 70 65 45 45 70% 60 40 36 32 60% 45 35 50 Thousands
Thousands 50% 36 30 40 25 40% 28 30 18 30 25 20 30% 20 15 20 15 16 15 20% 9 11 10 8 5 8 6 10% 10 2 4 5 - - 0% 2016 2017 2018 2019E 2020E 2021E 2018 2019E 2020E 2021E Mono-Si wafer sales YoY Mono-Si Wafer Cell PV Module
Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates estimates
The entry barrier of mono wafer manufacturing is high While we are concerned about rapid capacity expansion along the solar supply chain, we believe mono wafer has probably the least to worry about given its relatively high investment and technology entry barriers. As shown in Exhibit 83, the prevailing investment cost for 1GW of mono wafer production capacity is around RMB500m, higher than that of PERC cell and almost 6x that of PV module. In addition, the market is relatively consolidated with the top three producers – Longi, Zhonghuan, and JinkoSolar – accounting for an aggregate c80% share of the market. We believe this reduces the risk of technology leakage to new entrants.
Exhibit 83. The Investment cost of mono wafer is high compared with that of other parts of the solar supply chain RMB mn/GW
1,600 1,500 1,400 1,200 1,000 800 500 600 420 408 400 295 200 80 - Cell (HJT) Wafer (Mono-Si) Cell (PERC) Polysilicon Wafer (Multi-Si) PV Module Investment Cost
Source: Company data, HSBC Qianhai Securities
Strong balance sheet to support future growth As of end 2018, the company had a net cash balance of RMB421m on hand. While capex could rise in 2019 on capacity expansion, the company raised RMB3.9bn from a rights issue in April 2019, alleviating the balance sheet pressure. Hence, we expect its net gearing to remain negative in 2019-21e. Of the RMB3.9bn proceeds raised, RMB2.5bn will be used to fund the
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investment in a 5GW mono cell project in Ningxia, RMB1.1bn to fund the 5GW PV module project in Chuzhou, and the remainder to replenish working capital.
Exhibit 84. Longi: Details of the RMB3.9bn rights issue Announcement date Aug-18 Issuance date Apr-19 Proceeds (RMBm) m shares RMB/share Rights issue 3,893 837 4.65
Uses (RMBm): Total investment Amt. raised Ningxia 5GW Mono-Si cell project 3,050 2,540 Chuzhou 5GW Mono-Si PV module project 2,262 1,060 Replenish working capital 300 300 Total 5,611 3,900 Source: Company data, HSBC Qianhai Securities
Investment concerns
Heavy capital commitment in 2019-21e We expect the company to incur heavy capex of RMB8bn in 2019, and RMB7bn in both 2020 and 2021 due to the expansion of its wafer/cell/module capacities. This is likely to result in significant investing cash outflows. We forecast its net cash / equity to reduce in 2020-21e after an increase in 2019 (Exhibit 86).
Exhibit 85. Longi: FCF has been negative Exhibit 86. Longi: Net cash / equity to since 2015 reduce in 2020-21e after an increase in 2019e
1.5 0% 1.0 -5% 0.5 -10% 0.0 (0.5) -15%
(1.0) -20% Rmb bn Rmb (1.5) -25% (2.0) -30% (2.5) -35% (3.0) 2015 2016 2017 2018 2019E2020E2021E 2015 2016 2017 2018 2019E 2020E 2021E Net debt / Equity FCF
Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates estimates
Equity financing has been frequent since listing Equity raising has been a key part of the company’s financing since its listing in 2012. This inevitably dilutes the interests of existing shareholders. In general, equity financing is more favourable than debt financing when the project risk is high, and vice versa. Due to reduced policy risk as we move to grid parity, we expect debt raising to become more common.
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Exhibit 87. Longi: Historical equity financing Announcement date Financing via Total proceeds (RMBm) 2019-04-03 Right Issue 3,875 2017-10-31 Convertible bond 2,800 2016-09-10 Private placement 2,980 2015-06-26 Private placement 1,960 2012-03-26 IPO 1,575 Source: Company, HSBC Qianhai Securities
The company’s cell operation has been a weak spot PV modules consist of solar cells which are made from wafers. Hence cells are important industrial links between wafers and modules. In terms of Longi’s position in wafer/cell/module, the cell business has been a weak spot, achieving only 9% gross margin in 2018. As shown in Exhibit 88, the gross margin of the cell business has underperformed that of the wafer and the module businesses since 2016. The capacity of the cell operation at 6GW as of end-2018 is also much smaller than that of wafer (28GW) and module (9GW). This means Longi will need to rely on external cell makers like Tongwei for cell supply (for module) and for wafer procurement.
Exhibit 88. Longi: Solar cell achieved only 9% gross margin in 2018
GM 35% 30% 25% 20% 15% 10% 5% 0% 2015 2016 2017 2018 PV module Wafer Cell
Source: Company data
Financial forecasts
Earnings forecasts We expect a 43% earnings CAGR in 2018-21e, compared with a 70% earnings CAGR in 2015- 18. We base our forecasts on the following key assumptions:
Revenue: We forecast a revenue CAGR of 31% in 2018-21e, driven by the strong growth of the PV module segment (45% revenue CAGR in 2018-21e).
Gross margin: We forecast the gross margin to improve from 22.2% in 2018 to 27.5% in 2021e driven by rapid cost reduction in the wafer segment.
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Exhibit 89. Longi: Segments and full P&L forecasts RMBm 2018 2019e 2020e 2021e 2018-21e CAGR Turnover 21988 29000 37451 49803 31% PV Modules 13091 15648 26232 39592 45% Mono-crystalline wafer 6116 11090 8981 8049 10% Power generation 797 800 776 700 -4% Solar Cell 522 0 0 0 -100% PV system 72 72 72 72 0% Mono c-Si rods 318 318 318 318 0% EMS 97 97 97 97 0% Polysilicon 82 82 82 82 0% Others 212 212 212 212 0% PV EPC 682 682 682 682 0%
Gross Profit 4892 6551 10222 13687 41% PV Modules 3119 4294 7721 11429 54% Mono-crystalline wafer 995 1527 1786 1590 17% Power generation 503 505 489 442 -4% Solar Cell 49 0 0 0 -112% PV system 16 16 16 16 0% Mono c-Si rods 40 40 40 40 0% EMS 30 30 30 30 0% Polysilicon 4 4 4 4 0% Others 68 68 68 68 0% PV EPC 68 68 68 68 0%
Gross Margin 22.2% 22.6% 27.3% 27.5%
Business tax (117) (155) (200) (265) 31% Selling expenses (1,017) (1,342) (1,733) (2,304) 31% Admin. expenses (825) (1,088) (1,405) (1,868) 31% Asset impairment losses / Fair value changes (728) (304) (279) (437) -16% Other gain / (losses) 867 800 200 200 -39% Operating profit 3072 4463 6806 9012 43%
Net finance charges (267) (295) (270) (296) 4% Share of JCE 62 62 62 62 0%
Profit before taxes 2,867 4,230 6,597 8,778 45% Tax (301) (625) (980) (1,307) 63% Minorities (9) (12) (19) (26) 44%
Pre-exceptional profit 2,558 3,592 5,598 7,445 43% Dividend to preferred shareholders and perpetual capital securities 0 0 0 0 Exceptionals 0 0 0 0 Net profit 2,558 3,592 5,598 7,445 43% Source: Wind, company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates
Balance sheet and cash flow forecasts We forecast the company to remain in a net cash position in 2019-21e, supported by the RMB3.9bn rights issue in 2019. We expect the increase in OCF to offset higher capex in 2019-21e.
Exhibit 90. Longi: Net debt and cash flow forecasts RMBm 2018 2019e 2020e 2021e Net debt/(cash) (421) (2,045) (326) (612) Net debt to equity -2% -9% -1% -2% Cash from Operations 1,173 3,981 5,311 7,542 Cash from Investing (3,169) (5,600) (6,400) (6,400) FCF (1,996) (1,619) (1,089) 1,142 Source: Wind, company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates
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Valuation and risks
Target price of RMB36.20 Our TP of RMB36.20 is derived from our discounted cash flow (DCF) valuation model. It implies a 2020e PE of 24x, slightly above the historical average valuation of 21x. We believe this is reasonable in view of lower demand volatility associated with policy changes as the industry approaches grid parity. Key assumptions in our DCF valuation model include:
Cost of equity (COE): We use a COE of 10.0%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.16.
Cost of debt (COD): We assume the pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. We use our 2020e debt-to-capital ratio of 20% as our long-term debt-to-capital ratio.
Operating cash flow to grow 11% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 11% in 2018-29e, reflecting solid growth in demand.
Capital expenditure: We assume high capex of around RMB6bn per annum in 2019-21e, reflecting the expansion of its wafer/cell/module capacities. We assume steady capex of around RMB1-2bn per annum in 2022-29e, reflecting steady investment in maintenance.
Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029.
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Exhibit 91. Longi: Discounted cash flow valuation Rmbm 2015 2016 2017 2018 2019e 2020e 2021e 2022e Profit after tax 521 1,551 3,549 2,567 3,604 5,617 7,471 8,068 YoY growth 198% 129% -28% 40% 56% 33% 8% Add: Depreciation & amortization 285 426 748 1,206 761 868 1,174 1,239 Net finance expense 88 83 326 371 295 270 296 313 Operating cash flow before W/C 893 2,060 4,623 4,144 4,660 6,755 8,941 9,621 changes Changes in working capital (656) (1,766) (2,860) (2,917) (617) (1,382) (1,337) Net operating cash flow 237 294 1,763 1,227 4,043 5,373 7,604 9,621 CAPEX (1,216) (2,152) (3,774) (3,169) (5,600) (6,400) (6,400) (1,500) Free Cash Flow (979) (1,858) (2,011) (1,942) (1,557) (1,027) 1,204 8,121 Discount Factor 1.00 0.92 0.84
Gross PPE 3,617 5,981 12,814 16,239 14,552 20,495 26,803 28,303 Depreciation Rate 8% 7% 6% 7% 5% 4% 4% 4% PV of FCF (1,027) 1,106 6,849 RMBn 2023E 2024E 2025E 2026E 2027E 2028E 2029E Terminal Value Profit after tax 8,714 9,150 9,607 10,087 10,390 10,702 11,023 YoY growth 8% 5% 5% 5% 3% 3% 3% Add: Depreciation & amortization 1,306 1,373 1,441 1,509 1,578 1,648 1,718 Net finance expense 330 346 364 381 398 416 434 Operating cash flow before W/C 10,349 10,869 11,411 11,977 12,366 12,765 13,174 changes Changes in working capital 0 0 0 0 0 0 0 Net operating cash flow 10,349 10,869 11,411 11,977 12,366 12,765 13,174 CAPEX (1,515) (1,530) (1,545) (1,561) (1,577) (1,592) (1,608) Free Cash Flow 8,834 9,339 9,866 10,416 10,790 11,173 11,566 171,366 Discount Factor 0.77 0.71 0.65 0.60 0.55 0.51 0.46 0.46
Gross PPE 29,818 31,348 32,894 34,455 36,031 37,623 39,232 Depreciation Rate 4% 4% 4% 4% 4% 4% 4% PV of FCF 6,843 6,644 6,446 6,250 5,946 5,655 5,376 79,659 Summary of PV (Enterprise Value) 129,748 Less: Net debt (incl. perpetual) 2,045 Equity value 131,793 Less: Minority interest (385) Shareholder Equity Value 131,408 Total shares issued by year-end 2019 3,628 Per Share Value - RMB 36.2
Assumptions Risk free rate 2.5% ERPch 6.5% Beta 1.16 Cost of equity = RFR + BETA*ERPch 10.0% Cost of debt 5.0% Income tax 15% After tax cost of debt 4.3% Debt/Capital 20% WACC 8.9% Terminal Growth 2% Source: Wind, company data, HSBC Qianhai Securities. E= HSBC Qianhai Securities estimates
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Exhibit 92. Longi forward PE: Trading Exhibit 93. Longi forward PB: Trading close to the historical average above the historical average
45.0 7.0 40.0 6.0 35.0 5.0 30.0 25.0 4.0 20.0 3.0 15.0 2.0 10.0 1.0 5.0 - 0.0 Jan-13 Jan-15 Jan-17 Jan-19 Jan-13 Jan-15 Jan-17 Jan-19
PE Mean +1SD -1SD PB Mean +1SD -1SD
Source: Wind, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities
Exhibit 94. Longi: Earnings sensitivity to gross margin and revenue changes, 2020e ______Gross Margin ______Revenue -3% -2% -1% 0% 1% 2% 3% 20% 0% 7% 14% 21% 28% 34% 41% 15% -4% 3% 9% 16% 22% 29% 35% 10% -8% -2% 4% 10% 17% 23% 29% 5% -13% -7% -1% 5% 11% 17% 23% 0% -17% -11% -6% 0% 6% 11% 17% -5% -21% -16% -11% -5% 0% 6% 11% -10% -26% -21% -16% -10% -5% 0% 5% -15% -30% -25% -20% -16% -11% -6% -1% -20% -34% -30% -25% -21% -16% -12% -7% Source: HSBC Qianhai Securities estimates
Downside risks: Weaker-than-expected PV demand: PV module and wafer accounted for 87% of Longi’s revenue in 2018. Should global PV installations slow, we see downside risks to our earnings forecasts.
Risk of equity dilution from fundraising exercise: Equity raising has been a key part of the Longi’s financing since its listing in 2012. We see risks of equity dilution should the company fail to fulfill its capex needs via debt financing.
Greater-than-expected cuts to wafer ASP: We expect mono wafer ASP to decline by 20%/10%/10% in 2019/20/21e, respectively. We see risks of larger-than-expected margin erosion if the ASP cuts are greater than expected.
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Financials & valuation: LONGI GREEN Buy
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) EV/sales 3.7 2.7 2.2 1.6 Revenue 21,988 29,000 37,451 49,803 EV/EBITDA 18.5 14.9 10.4 7.8 EBITDA 4,340 5,285 7,735 10,248 EV/IC 5.9 4.1 3.1 2.5 Depreciation & amortisation -1,206 -761 -868 -1,174 PE* 24.2 19.9 14.5 10.9 Operating profit/EBIT 3,134 4,524 6,868 9,074 PB 3.8 3.4 2.8 2.3 Net interest -267 -295 -270 -296 FCF yield (%) 0.7 -1.5 0.1 2.8 PBT 2,867 4,230 6,597 8,778 Dividend yield (%) 0.4 0.5 0.7 0.9 HSBC Qianhai PBT 2,867 4,230 6,597 8,778 * Based on HSBC Qianhai EPS (diluted) Taxation -301 -625 -980 -1,307 Net profit 2,558 3,592 5,598 7,445 HSBC Qianhai net profit 2,558 3,592 5,598 7,445 ESG metrics Cash flow summary (CNYm) Environmental Indicators [n/a] Governance Indicators 12/2018a Cash flow from operations 1,173 3,981 5,311 7,542 GHG emission intensity* [n/a] No. of board members 12 Capex -3,169 -5,600 -6,400 -6,400 Energy intensity* [n/a] Average board tenure (years) 4.6 Cash flow from investment -3,169 -5,600 -6,400 -6,400 Dividends -669 -362 -359 -560 CO2 reduction policy [Yes] Female board members (%) 25 Change in net debt 1,112 -1,624 1,719 -286 Social Indicators Board members independence (%) 25 FCF equity 604 -1,234 84 2,244 Employee costs as % of revenues [n/a] Balance sheet summary (CNYm) Employee turnover (%) [n/a] Intangible fixed assets 237 232 226 220 Diversity policy [Yes] Tangible fixed assets 14,116 18,960 24,498 29,730 Source: Company data, HSBC Qianhai Securities Current assets 22,901 28,125 30,439 36,992 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 7,708 9,332 7,613 7,899 Total assets 39,659 49,784 57,693 69,533 Operating liabilities 15,896 18,879 21,531 26,460 Issuer information Gross debt 6,938 6,938 6,938 6,938 Share price (CNY) 22.30 Free float 73% Net debt -770 -2,394 -675 -961 Shareholders' funds 16,452 23,581 28,820 35,705 Target price (CNY) 36.20 Sector Energy Equipment Invested capital 13,649 19,106 26,020 32,583 RIC (Equity) 601012.SS Country China Bloomberg (Equity) 601012 CH Analyst Corey Chan Market cap (USDm) 11,685 Contact +86 755 8898 3404 Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e Y-o-y % change Price relative Revenue 34.4 31.9 29.1 33.0 EBITDA -12.6 21.8 46.3 32.5 Operating profit -25.6 44.4 51.8 32.1 23.80 23.80 PBT -28.6 47.5 56.0 33.1 HSBC Qianhai EPS -48.6 21.7 37.9 33.0 18.80 18.80 Ratios (%) 13.80 13.80 Revenue/IC (x) 1.8 1.8 1.7 1.7 ROIC 24.0 23.6 25.9 26.4 8.80 8.80 ROE 16.7 17.9 21.4 23.1 ROA 7.1 8.1 10.5 11.7 3.80 3.80 EBITDA margin 19.7 18.2 20.7 20.6 2017 2018 2019 Operating profit margin 14.3 15.6 18.3 18.2 LONGI GREEN Rel to CSI 300 Index EBITDA/net interest (x) 16.3 17.9 28.6 34.6 Net debt/equity -4.6 -10.0 -2.3 -2.7 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -0.2 -0.5 -0.1 -0.1 Note: Priced at close of 14 Jun 2019 CF from operations/net debt Per share data (CNY) EPS Rep (diluted) 0.92 1.12 1.54 2.05 HSBC Qianhai EPS (diluted) 0.92 1.12 1.54 2.05 DPS 0.10 0.11 0.15 0.21 Book value 5.89 6.50 7.94 9.84
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Exhibit 95. Longi green: Company structure, April 2019
Li Zhenguo Li Chun'an Li Xiyan Public 15% 11% 5.35% 68.65%
Tianjin Zhonghuan Semiconductor Longi (601012 CH) （002129.SZ)
Equities
●
Energy Equipment & Services PVEVA Modules film Other PV-related Other business Power generation
Mono-crystalline wafer
June 2019 June
Source: Company data, HSBC Qianhai Securities
Equities ● Energy Equipment & Services June 2019
Tongwei (600438 CH)
Cost-leader in PERC cell and polysilicon production
The agricultural business is a cash cow, supplementary to PV
Initiate with a Buy rating and a TP of RMB19.40
Investment summary
Cost advantage in cell and polysilicon to drive long-term growth Tongwei is a global cost leader in both PERC cell and polysilicon production. Its cell processing We expect the company to register a 27% earnings cost – at RMB0.23/W in 1Q19 – is 34% below the industry average, and we expect that to drop CAGR in 2018-21e to RMB0.19/W in 2021e. In polysilicon production, the company’s Baotou Ph1 and Leshan Ph1 projects have a unit overall cost of RMB50k/t, close to the bottom of the industry range. Around 60% of the company’s revenue in 2018 was from the agriculture business, which generates steady cash flow. This should alleviate the capex burden of Tongwei’s PV business. We expect the company to register a 27% earnings CAGR in 2018-21e, driven by cost reduction efforts and capacity expansion in cell and polysilicon.
Exhibit 96. Tongwei: Revenue breakdown, Exhibit 97. Tongwei: We expect earnings 2018 to grow at a 27% CAGR in 2018-21e
Food processing, Other business, PV cell and Rmb mn livestock & poultry 1% modules, 4,500 120% breeding, 5% 27% 4,000 100% 3,500 Polysilicon 3,000 80% and 2,500 60% chemicals, 2,000 12% 1,500 40% 1,000 20% Feed, Power 500 53% generation, 0 0% 2% 2016 2017 2018 2019E 2020E 2021E
Net profit YoY
Source: Wind, company data, HSBC Qianhai Securities Source: Bloomberg, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Investment positives
Leading solar cell producer globally As of end-2018, the company had 12GW capacity in solar cells. It plans to increase its capacity to 20GW in 2019 with the completion of its new production facility in Meishan (6GW) and Chengdu (2GW). The ramp-up of a new cell production line normally takes 2-3 months, much shorter than that of the production line of polysilicon. Hence, we expect cell sales to see a 45%
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CAGR in 2018-21e. Upon completion of the new production facility, Tongwei will have 15GW capacity in PERC mono cell, or a 16% share of global capacity (Exhibit 99). We expect the market share of PERC mono cell to rise from 34% in 2018 to 61% in 2021e (Exhibit 100), given better light capture near the rear surface.
Exhibit 98. Tongwei: Solar cell sales Exhibit 99. Tongwei: PERC mono cell volume to rise on a 45% CAGR in 2018-21e capacity to reach 15GW by end 2019
GW GW 16 20% 25 14 20 12 15%
Thousands 10 15 8 10% 10 6 4 5% 5 2 0 0 0% 2016 2017 2018 2019E 2020E 2021E 2018 2019E Mono-Si Multi-Si Tongwei's capacity % of the global capacity
Source: Company, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
Exhibit 100. Global cell market share: PERC to rise from 34% in 2018 to 61% in 2021e
100% 90% 17% 30% 80% 39% 70% 60% 60% 50% 61% 40% 56% 51% 30% 20% 34% 15% 10% 8% 10% 0% 5% 2018 2019E 2020E 2021E
Others IBC HJT N-PERT PERC BSF
Source: CPIA, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Cell processing cost at low-end of the industry range Tongwei recorded around 30% gross margin for its solar cell in 1Q19, well above industry peers’ 10-20%. We believe this stems from its lower cell processing cost. Cell processing costs account for 44% of the production cost of solar cells. The company’s cell processing costs at RMB0.23/W in 1Q19 are 34% below the industry average at RMB0.35/W (Exhibit 101). This gives the company a significant cost advantage in solar cells. We expect Tongwei’s cell processing costs to drop to RMB0.20/W in 2020e on economies of scale (Exhibit 102).
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Exhibit 101. Cell processing cost: Tongwei Exhibit 102. Cell processing cost: We at low-end of the industry range expect further declines in 2019-21e
RMB/W RMB/W 0.45 0.40 0.50 0.45 0.4 0.35 0.40 0.35 0.30 0.30 0.28 0.35 0.3 0.27 0.27 0.23 0.30 0.25 0.25 0.2 0.20 0.15 0.15 0.1 0.10 0.05 0.05 - 0 2017 2018 2019E 2020E 2021E Tongwei Aikosolar Risen Energy Industry 2018 1Q19 average Tongwei Industry average
Source: Company data, HSBC Qianhai Securities Source: Company data, CPIA, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Polysilicon sales volume to see a major uplift in 2019 on capacity expansion Polysilicon sales accounted for around 5-7% of Tongwei’s revenue in 2017-18. In 2018, the company completed the Baotou Ph1 and Leshan Ph1 projects, adding 60,000 tonnes of new capacity to its earlier capacity of 20,000 tonnes. In view of this, we expect polysilicon sales to quadruple from 19,000 tonnes in 2018 to 70,000 tonnes in 2019. The company will consider whether to invest in Baotou Ph2 and Leshan Ph2 projects later in 3Q19 (60,000 tonnes capacity). The company expects the new capacity of Baotou Ph1 and Leshan Ph1 to achieve an overall unit cost of RMB50k/t, 10% below that of the old capacity.
Exhibit 103. Tongwei: We expect Exhibit 104. Polysilicon: Tongwei’s new polysilicon sales to reach 70,000 tonnes in capacity has a much lower production 2019e cost than most of the existing capacities
k ton '000 RMB/t Polysilicon production cost 100 90 90 80 60 52 52 80 70 48 48 50 70 40 Thousands 60 40 50 30
40 Thousands 20 30 16 19 20 12 10 10 - - DAQO GCL-Poly TBEA Tongwei Tongwei 2016 2017 2018 2019E 2020E 2021E (old (new capacity) capacity) Sales volume
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
Funding difficulties easing with the RMB5bn convertible bond issuance In April 2019, Tongwei issued an RMB5bn convertible bond, with a conversion price of RMB12.44/share. The bond can be converted into 402m shares, or 10.4% of the total shares outstanding. The conversion rights will become effective in September 2019. RMB2.7bn of the RMB5bn proceeds will be used to fund the Baotou Ph1 project (25,000 tonnes), and the remainder to fund the Leshan Ph1 project (25,000 tonnes).
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Exhibit 105. Tongwei: Details of the RMB5bn convertible bond issuance Announcement date 16/12/2017 Issuance date 05/04/2019 CB Issuance (RMBm) 5000 Conversion price (RMB) 12.44 Shares (m) 402
Project (RMBm) Total Inv. Amount raised from the CB issuance Baotou polysilicon project Ph1 3,229 2,650 Leshan polysilicon project Ph1 3,184 2,350 Total 6,413 5,000 Source: Company data, HSBC Qianhai Securities
Exhibit 106. Tongwei: Net gearing to drop Exhibit 107. Tongwei: FCF to improve in in 2020-21e 2020-21e
6 70% 4 60% 50% 2 40% -
30% -2 Rmb bn Rmb 20% -4 10% -6 0% -8 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E Net debt / Equity FCF
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
Investment concerns
Polysilicon could face overcapacity in the medium term HSBC’s China solar team expects annual global polysilicon production to reach 626,000 tonnes by 2020e, based on the current expansion plans of global polysilicon suppliers. This will be higher than the expected global demand of 491,000 tonnes at the time. Hence, we expect pricing pressure on Tongwei’s polysilicon business in 2019-20e. In our model, we assume Tongwei’s polysilicon ASP drops 15% in 2019e, and drops 5% in both 2020e and 2021e.
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Exhibit 108. HSBC global demand & supply forecast for polysilicon
700,000
600,000
500,000
400,000
300,000 Tonnes
200,000
100,000
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e2020e2021e Total production Total demand
Source: Wind, Solarzoom, e = HSBC Global Research estimates
Exhibit 109. Polysilicon: ASP dropped 53% Exhibit 110. Tongwei: Polysilicon gross since early 2018 margin to decline in 2019 on price drop
Rmb/kg 160 GM 50% 140 45% 120 40% 35% 100 30% 80 25% 60 20% 15% 40 10% 20 5% 0 0% Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 2017 2018 2019E 2020E 2021E Polysilicon
Source: Wind, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
HJT cell coating technology has a brighter future than that of PERC Except for 200MW capacity in HJT (Heterojunction) cell, the majority of Tongwei’s 20GW cell manufacturing capacity by end-2019 will be in PERC. While PERC (Passivated Emitter Rear Contact) cell is likely to be the mainstream solar cell technology in the near term, there are certain limitations with the technology which affect its potential for further increases in conversion efficiency. Currently, the conversion efficiency of PERC cells is around 21-22%. Comparatively, HJT (Heterojunction) cells achieve higher conversion efficiencies of 22-23%. Hence, we see a brighter future for the HJT cell coating technology than that of PERC. The production methodologies of HJT and PERC cells are very different and conversion between the production lines is almost impossible. Hence, we see risks to Tongwei’s investment in PERC should HJT becomes a mainstream cell coating technology.
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Exhibit 111. The conversion efficiency of Exhibit 112. The conversion efficiency multi-junction cell (incl. HJT) is higher premium of HJT cell over PERC is likely to than mono/multi-Si cell (incl. PERC) sustain over time
50% 46.0% 45% 30.0% 40% 33.3% 35% 25.0% 26.7% 30% 22.3% 25% 20.0% 20% 15% 15.0% 10% 5% 10.0% 0% III-V Multi- III-V on Si (2 Mono-Si Multi-Si 5.0% Junction terminal) 0.0% Concentrator Solar Cell 2018 2019E 2020E 2021E PERC mono-Si cell HJT cell Cell Efficiencies (2017)
Source: CPIA, HSBC Qianhai Securities Source: CPIA, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Asset-heavy model entails high D&A expenses Tongwei has an asset-heavy business model which requires continuous capital outlays to maintain its market position. As a result, depreciation and amortization (D&A) expenses have been high in the last three years, about 4% of the company’s revenue.
Financial forecasts
Earnings forecasts We expect a 27% earnings CAGR in 2018-21e. We base our forecasts on the following key assumptions:
Revenue: We forecast a revenue CAGR of 13% in 2018-21e, driven by strong growth of the PV cell and module segment (29% revenue CAGR in 2018-21e).
Gross margin: We forecast the gross margin to improve from 19% in 2018 to 23% in 2021e on rapid cost reductions of the PV cell and modules segment.
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Exhibit 113. Tongwei: Segments and full P&L forecasts RMBm 2018 2019e 2020e 2021e 2018-21e CAGR Turnover 27,535 34,926 37,755 40,001 13% PV cell and modules 7,642 12,868 14,982 16,547 29% Polysilicon and chemicals 3,317 6,229 6,598 6,920 28% Power generation 620 1,108 1,355 1,506 34% Solar: Inter-segment elimination (1,575) (2,748) (3,119) (3,396) 29% Feed 15,236 15,693 16,164 16,649 3% Food processing, livestock & poultry breeding 1,397 1,397 1,397 1,397 0% Other business 377 377 377 377 0% Inter-segment elimination (131) 0 0 0 -100%
Gross Profit 5,208 7,568 8,684 9,124 21% PV cell and modules 1,429 2,939 3,810 4,074 42% Polysilicon and chemicals 1,183 1,805 1,882 1,935 18% Power generation 381 681 833 926 34% Solar: Inter-segment elimination (224) (390) (443) (482) 29% Feed 2,225 2,292 2,361 2,431 3% Food processing, livestock & poultry breeding 69 69 69 69 0% Other business 172 172 172 172 0% Inter-segment elimination (28) 0 0 0 -100%
Gross Margin 19% 22% 23% 23%
Business tax (111) (141) (153) (162) 13% Selling expenses (863) (1,094) (1,183) (1,253) 13% Admin. expenses (1,637) (2,076) (2,244) (2,377) 13% Asset impairment losses / Fair value changes (48) (41) (16) (13) -36% Other gain / (losses) 148 59 59 59 -26% Operating profit 2,697 4,275 5,147 5,379 26%
Net finance charges (316) (484) (486) (468) 14% Share of JCE 17 17 17 17 0%
Profit before taxes 2,398 3,808 4,678 4,928 27% Tax (367) (569) (699) (737) 26% Minorities (12) (20) (24) (25) 27%
Pre-exceptional profit 2,019 3,220 3,955 4,166 27% Dividend to preferred shareholders and perpetual 0 0 0 0 NA capital securities Exceptionals 0 0 0 0 NA Net profit 2,019 3,220 3,955 4,166 27% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Balance sheet and cash flow forecasts We forecast net gearing to increase to 65% in 2019e from 22% in 2018, driven by the capex for 8GW new capacity in PERC-cell in Meishan and Chengdu and for 540MW new capacity in solar farms.
Exhibit 114. Tongwei: Net debt and cash flow forecasts RMBm 2018 2019e 2020e 2021e Net debt/(cash) 3,382 11,617 9,793 7,525 Net debt to equity 22% 65% 47% 32% Cash from Operations 3,100 5,870 6,500 7,153 Cash from Investing (6,442) (13,000) (3,200) (3,200) FCF (3,342) (7,130) 3,300 3,953 Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Valuation and risks
Target price of RMB19.40 Our TP of RMB19.40 is derived from our discounted cash flow (DCF) valuation model. It implies a 2020e PE of 19x, above the historical average valuation of 16x. We believe this is reasonable in view of lower demand volatility associated with policy changes as the industry approaches grid parity. Key assumptions in our DCF valuation model include:
Cost of equity (COE): We use a COE of 11.8%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.42.
Cost of debt (COD): We assume the pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. We use our 2020e debt-to-capital ratio of 42% as our long-term debt-to- capital ratio.
Operating cash flow to grow 9% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 9% in 2018-29e, reflecting solid growth in demand.
Capital expenditure: We expect a capex of RMB13bn in 2019e, driven by cell and solar farm capacity expansion. Thereafter, we expect capex to drop to around RMB2-3bn per annum in 2020-29e, reflecting steady maintenance capex.
Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029.
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Exhibit 115. Tongwei: Discounted cash flow valuation RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e Profit after tax 808 1,023 2,038 2,031 3,239 3,979 4,191 4,401 YoY growth 27% 99% 0% 59% 23% 5% 5% Add: Depreciation & amortization 611 841 969 1,218 1,309 1,770 2,187 2,278 Net finance expense 360 247 241 403 484 486 468 488 Operating cash flow before W/C changes 1,779 2,111 3,248 3,652 5,033 6,236 6,846 7,167 Changes in working capital 38 323 (264) (512) 855 282 324 Net operating cash flow 1,817 2,435 2,984 3,140 5,887 6,517 7,170 7,167 Capex (1,464) (4,393) (4,099) (6,442) (13,000) (3,200) (3,200) (2,000) Free Cash Flow 353 (1,959) (1,115) (3,302) (7,113) 3,317 3,970 5,167 Discount Factor 1.00 0.92 0.85
Gross PPE 11,307 14,035 18,481 24,292 30,996 42,737 47,645 49,645 Depreciation Rate 5% 6% 5% 5% 4% 4% 5% 5% PV of FCF 3,317 3,654 4,378 RMBm 2023e 2024e 2025e 2026e 2027e 2028e 2029e Terminal Value Profit after tax 4,621 4,852 5,094 5,349 5,616 5,785 5,958 YoY growth 5% 5% 5% 5% 5% 3% 3% Add: Depreciation & amortization 2,375 2,476 2,582 2,694 2,811 2,934 3,063 Net finance expense 508 530 553 577 602 628 656 Operating cash flow before W/C changes 7,504 7,858 8,229 8,619 9,029 9,347 9,677 Changes in working capital 0 0 0 0 0 0 0 Net operating cash flow 7,504 7,858 8,229 8,619 9,029 9,347 9,677 Capex (2,100) (2,205) (2,315) (2,431) (2,553) (2,680) (2,814) Free Cash Flow 5,404 5,653 5,914 6,188 6,477 6,667 6,863 105,441 Discount Factor 0.78 0.72 0.66 0.61 0.56 0.52 0.47 0.47
Gross PPE 51,745 53,950 56,265 58,696 61,249 63,929 66,743 Depreciation Rate 5% 5% 5% 5% 5% 5% 5% PV of FCF 4,214 4,058 3,908 3,764 3,626 3,436 3,256 50,019 Summary of PV (Enterprise Value) 87,630 Less: Net debt (incl. perpetual) (11,617) Equity value 76,013 Less: Minority interest (509) Shareholder Equity Value 75,505 Total shares issued by year-end 2019 (mn) 3,882 Per Share Value - Rmb 19.4 Upside 28% Assumptions Risk-free rate 2.5% ERPch 6.5% Beta 1.42 Cost of equity = RFR + BETA*ERPch 11.8% Cost of debt 5.0% Income tax 15% After tax cost of debt 4.3% Debt/Capital 42% WACC 8.6% Terminal Growth 2% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Exhibit 116. Tongwei forward PE: Trading Exhibit 117. Tongwei forward PB: Trading in line with the historical average above the historical average
35.0 5.0
30.0 4.0 25.0 3.0 20.0
15.0 2.0 10.0 1.0 5.0 - 0.0 Jan-13 Jan-15 Jan-17 Jan-19 Jan-13 Jan-15 Jan-17 Jan-19
PE Mean +1SD -1SD PB Mean +1SD -1SD
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities
Exhibit 118. Tongwei: Earnings sensitivity to gross margin and revenue changes, 2020e ______Gross Margin ______Revenue -3% -2% -1% 0% 1% 2% 3% 20% -7% 2% 12% 22% 31% 41% 51% 15% -11% -2% 7% 16% 26% 35% 44% 10% -16% -7% 2% 11% 20% 29% 38% 5% -20% -11% -3% 5% 14% 22% 31% 0% -24% -16% -8% 0% 8% 16% 24% -5% -28% -21% -13% -5% 2% 10% 18% -10% -33% -25% -18% -11% -4% 4% 11% -15% -37% -30% -23% -16% -9% -3% 4% -20% -41% -35% -28% -22% -15% -9% -2% Source: HSBC Qianhai Securities estimates
Downside risks: Weaker-than-expected polysilicon prices: Polysilicon business accounted for 10% of Tongwei’s gross profit in 2018. Greater-than-expected declines in polysilicon prices due to a supply glut could pose downside risk to our earnings forecasts.
Ramp-up of the new polysilicon capacity taking longer than expected: In our model, we expect the new polysilicon project ramp-up to its face-plate capacity of 60,000 tonnes by end-2019. Should the ramp-up take longer than expected, we see downside risks to our 2019 earnings forecasts.
Weaker-than-expected PV demand: Solar cells accounted for 28% of Tongwei’s earnings in 2018. Should global PV installations slow, we see downside risks to our earnings forecasts.
Risk of equity dilution from fundraising exercise: Equity raising has been a key part of Tongwei’s financing since its listing in 2013. As the capex burden is likely to remain high at around RMB13bn in 2019, we see risks of equity dilution should the company fail to fulfill its capex needs via debt financing.
Evolution of the cell technology could undermine investment in PERC: A majority of Tongwei’s existing cell capacity is in PERC, which is not compatible with competing technologies like HJT. Hence a shift of technology trends from PERC to HJT could render Tongwei’s existing PERC capacity useless.
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Greater-than-expected cuts to cell ASPs: We expect solar cell ASPs to decline by 25%/10%/10% in 2019/20/21e. We see risks of larger-than-expected margin erosion if the ASP cuts are greater than expected.
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Financials & valuation: Tongwei Buy
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) Year to 12/2018a 12/2019e 12/2020e 12/2021e Revenue 27,535 34,926 37,755 40,001 EV/sales 2.1 1.9 1.7 1.6 EBITDA 3,932 5,601 6,935 7,582 EV/EBITDA 14.8 11.9 9.3 8.2 Depreciation & amortisation -1,218 -1,309 -1,770 -2,187 EV/IC 3.7 2.5 2.3 2.2 Operating profit/EBIT 2,714 4,292 5,164 5,396 PE* 27.3 17.1 14.0 13.3 Net interest -316 -484 -486 -468 PB 3.7 3.2 2.7 2.4 PBT 2,398 3,808 4,678 4,928 FCF yield (%) -5.8 -15.3 4.6 5.8 HSBC Qianhai PBT 2,398 3,808 4,678 4,928 Dividend yield (%) 1.1 1.8 2.2 2.3 Taxation -367 -569 -699 -737 Net profit 2,019 3,220 3,955 4,166 * Based on HSBC Qianhai EPS (diluted)
HSBC Qianhai net profit 2,019 3,220 3,955 4,166 Cash flow summary (CNYm) ESG metrics Cash flow from operations 3,100 5,870 6,500 7,153 Capex -6,442 -13,000 -3,200 -3,200 Environmental Indicators [n/a] Governance Indicators 12/2018a Cash flow from investment -6,442 -13,000 -3,200 -3,200 GHG emission intensity* [n/a] No. of board members 11 Dividends -936 -621 -991 -1,217 Energy intensity* [n/a] Average board tenure (years) 3.4 Change in net debt 412 8,235 -1,824 -2,268 CO2 reduction policy [Yes] Female board members (%) 0 FCF equity -3,193 -8,451 2,549 3,178 Social Indicators Board members independence (%) 27.3 Balance sheet summary (CNYm) Employee costs as % of revenues [n/a] Intangible fixed assets 2,029 2,013 1,997 1,980 Employee turnover (%) [n/a] Tangible fixed assets 25,217 36,923 38,369 39,399 Diversity policy [Yes] Current assets 8,745 9,395 11,542 14,092 Cash & others 3,412 3,177 5,001 7,269 Source: Company data, HSBC Qianhai Securities Total assets 38,484 50,841 54,435 58,015 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Operating liabilities 16,754 18,493 19,099 19,706 Gross debt 6,503 14,503 14,503 14,503 Net debt 3,090 11,325 9,502 7,234 Issuer information Shareholders' funds 14,738 17,336 20,300 23,249 Share price (CNY) 14.22 Free float 49% Invested capital 15,824 26,660 27,808 28,497 Target price (CNY) 19.40 Sector Agricultural Products
RIC (Equity) 600438.SS Country China Ratio, growth and per share analysis Bloomberg (Equity) 600438 CH Analyst Corey Chan Market cap (USDm) 7,973 Contact +86 755 8898 3404 Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change Revenue 5.5 26.8 8.1 5.9 Price relative EBITDA 10.3 42.4 23.8 9.3 Operating profit 4.6 58.1 20.3 4.5 18.50 18.50 PBT -1.7 58.8 22.9 5.3 16.50 16.50 HSBC Qianhai EPS 0.5 59.5 22.8 5.3 14.50 14.50 Ratios (%) 12.50 12.50 Revenue/IC (x) 1.9 1.6 1.4 1.4 10.50 10.50 ROIC 15.7 17.3 16.2 16.4 ROE 14.4 20.1 21.0 19.1 8.50 8.50 ROA 6.3 7.3 7.6 7.5 6.50 6.50 EBITDA margin 14.3 16.0 18.4 19.0 4.50 4.50 Operating profit margin 9.9 12.3 13.7 13.5 2.50 2.50 EBITDA/net interest (x) 12.4 11.6 14.3 16.2 2015 2016 2017 2018 2019 Tongwei Rel to CSI 300 Index Net debt/equity 20.3 63.5 45.6 30.4 Net debt/EBITDA (x) 0.8 2.0 1.4 1.0 Source: HSBC Qianhai Securities CF from operations/net debt 100.3 51.8 68.4 98.9 Note: Priced at close of 14 Jun 2019 Per share data (CNY) EPS Rep (diluted) 0.52 0.83 1.02 1.07 HSBC Qianhai EPS (diluted) 0.52 0.83 1.02 1.07 DPS 0.16 0.26 0.31 0.33 Book value 3.80 4.47 5.23 5.99
66
Exhibit 119. Tongwei: Company structure, April 2019
Liu Hanyuan Guan Yamei
80% 20%
Public Tongwei Group
48.53% 51.47%
Tianjin Zhonghuan Semiconductor Tongwei (600438 CH) （002129.SZ)
Equities
●
Energy Equipment & Services PV cellEVA and film modules Feed Food processing, Other livestock & poultry breeding Power Polysilicon and chemicals generation
June 2019 June
Source: Company data, HSBC Qianhai Securities
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Equities ● Energy Equipment & Services June 2019
Zhonghuan Semiconductor (002129 CH)
Second largest player in PV mono wafer globally, after Longi
Largest semi float-zone mono-wafer supplier in China, with an 18% global market share
Initiate with a Buy rating and a TP of RMB14.30
Investment summary
Strong growth outlook supported by capacity expansion and low funding costs The company is the second largest PV mono wafer supplier globally with a 29% market share in The company plans to raise its PV mono wafer capacity 2018. We expect its market share to rise to 35% in 2019 on the production ramp up of the Inner by 25GW to 55GW Mongolia Ph4 project. The company is also a leading semi wafer supplier in China with an 18% market share in float-zone mono wafer (a wafer used in IGBT) globally. Looking ahead, the company has ambitious plans to raise its PV mono wafer capacity by 25GW to 55GW (Inner Mongolia Ph5 project) and semi mono wafer capacity by 1.35m slices/mth to 1.67m slices/mth by 2022e (Wuxi semi wafer project). Upon completion of these projects, we expect the company’s revenue to triple from c.RMB14bn in 2018. Compared with its private sector peers like Longi, Zhonghuan’s borrowing cost is low (averaging 3.7% in the past three years). This gives the company a competitive advantage in fundraising to support its expansion plans. The company plans to raise RMB5bn from a private placement (document submitted for CSRC’s review in January 2019), which could reduce its net gearing from 55% in 2018 to 27% in 2019e.
Exhibit 120. Zhonghuan: Revenue Exhibit 121. Zhonghuan: Earnings to breakdown, 2018 double y-o-y in 2020e on new semi wafer capacities in Wuxi
Semiconductor Others Power Rmb mn device 1% generation 2,500 140% 1% 3% 120% 2,000 100% Semiconductor material 1,500 80% 7% 60% 1,000 40% 20% 500 Renewable 0% energy 0 -20% product 2016 2017 2018 2019E 2020E 2021E 88% Net profit YoY
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities estimates. E = HSBC Qianhai Securities estimates
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Investment positives
No. 2 in a near duopoly market With a 29% market share in 2018, Zhonghuan is the second-largest supplier of PV mono wafer globally, after Longi. The number three is the much smaller JinkoSolar, which had an 11% market share in 2018. Unlike Longi and Zhonghuan, JinkoSolar’s mono wafer are mainly used internally to supply its own solar cell production. This has led to a near duopoly market dominated by Longi and Zhonghuan. We expect the two largest players to account for about 77% of global PV mono wafer supply in 2019e, up from 65% in 2018. We believe this will give the two companies significant pricing power over the downstream cell producers.
Exhibit 122. PV mono wafer market share, Exhibit 123. PV mono wafer market share, 2018 2019e
Others Longi Others 16% 35% 25% Longi 42%
Zhonghuan Zhonghuan JinkoSolar 29% JinkoSolar 35% 11% 7%
Source: Company data, HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Exhibit 124. PV mono wafer: Capacity schedules of the top 3 producers
Mono-Si Wafer Capacity GW 40 35 30 25 20 15 10 5 - 2017 2018 2019E
Longi Zhonghuan JinkoSolar
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Semi wafer revenue to rise 8x in 2018-21e on capacity boost In 2018, the company produced 1.7m slices of semi wafer, nearly all of which was 8’. As of end- 2018, the company has a semi wafer capacity of 320,000 slices per month, composing of 8’ wafer capacity of 300,000 slices per month and 12’ wafer capacity of 20,000 slices per month. In November 2017, the company announced that it will partner with the Wuxi government and Jingsheng to invest USD3bn in a semi wafer project in Wuxi. Zhonghuan will take a 60% stake in the project, the Wuxi government 30%, and Jingsheng 10%. Upon completion, the project
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can supply 750,000 8’ wafer and 600,000 12’ wafer on a monthly basis. We expect the 8’ wafer production line to be completed by 2020 and the 12’ wafer line to be completed by phases in 2020-22e. Given the capacity boost, we expect Zhonghuan’s semi wafer revenue to rise by 8x in 2018-21e.
Exhibit 125. Zhonghuan: Wuxi semi wafer Exhibit 126. Zhonghuan: Semi wafer’s project to add monthly capacities of 1.35m margin is well above that of PV wafer slices
k slices / mth 35% GM 1200 1050 1050 1050 30% 1000 25% 800 620 20% 600 15% 400 300 300 320 10% 170 200 5% 20 20 0 0% 2018 2019E 2020E 2021E 2022E 2015 2016 2017 2018 2019E 2020E 2021E PV product Semi wafer 8' 12'
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
Lower borrowing cost comparing with Longi Zhonghuan is an SOE with 37% of its shares indirectly held by Tianjin SASAC. We believe the SOE status allows it access to cheaper borrowing compared with its private sector peers like Longi. In 2016-18, Zhonghuan’s average borrowing cost was 3.7%, well below Longi’s 5.8%. The ability to access cheap funding is pivotal for players in the solar industry, which is still in its expansionary phase.
Exhibit 127. Borrowing cost comparison: Exhibit 128. Zhonghuan: We expect PV Zhonghuan lower than Longi wafer capacity to rise from 25GW in 2018 to 55GW in 2021e
Borrowing cost 60 GW 55
6.5% 50 7.0% 5.3% 5.6%
6.0% Thousands 40 5.0% 30 30 3.7% 5.2% 30 25 4.0% 3.0% 2.1% 20 2.0% 10 10 1.0% 0.0% - 2016 2017 2018 2017 2018 2019E 2020E 2021E Longi Zhonghuan PV Mono-Si Wafer
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Net gearing to improve in 2019 on the RMB5bn private placement In January 2019, Zhonghua announced a plan to raise RMB5bn by placing 557m shares, or 20% of the total shares outstanding, to less than 10 strategic investors at RMB8.98/share. Of the RMB5bn proceeds, RMB4.5bn will be used to fund the 8-12’ semi wafer project in Wuxi and the remainder to replenish working capital. Upon completion of the private placement, we expect the company’s net gearing to drop from 55% to 27%.
Investment concerns
Supply chain not as consolidated as Longi’s Compared with Longi, which has formed a nearly closed loop supply chain, Zhonghuan’s supply chain is an open-loop. While Longi is able to source the crystal growing equipment used in mono pulling internally, Zhonghuan relies on third party vendors like Jingsheng M&E. This leaves Zhonghuan vulnerable to external supply shocks. To mitigate the risk, the company chooses to invest in or form partnership with its suppliers. For example, in July 2017 the company took a 30% stake in GCL Poly’s polysilicon project in Xinjiang province to secure its polysilicon supply. In November 2017, it partnered with Jingsheng M&E to invest in the Wuxi semiconductor wafer project.
Exhibit 129. Zhonghuan: Corporate milestones Year Corporate Activities Implication 2009 Set up Inner-Mongolia PV material company and invested in mono-Si wafer project Ph1 Entered into PV market 2011 Mono-Si wafer project started production 2012 Invested in mono-Si wafer project Ph2 2012 Supplied CFZ products to overseas customers 2012 Started R&D on diamond wire sawing (DWS) technology Lowered mono-is wafer manufacturing cost 2013 Started mono-Si wafer project Ph3 2015 Set up DZS solar and Tianjin Huanmei Energy Expanded into cell and module business 2016 Started mono-Si wafer project Ph4 2016 Deployment in high-efficiency PERC cell Start developing high-efficiency cell 2017 Invested in high-efficiency shingled-cell module project in Wuxi 2017 Acquired Guodian Solar Improved cell technology 2017 Invested in GCL-Poly Xinjiang Secured upstream polysilicon supply 2017 Partnered with Wuxi government and Jingsheng to invest in semiconductor wafer project in Wuxi Scaling up semi wafer capacity Source: Company, HSBC Qianhai Securities
Solar wafer margin lower than Longi’s In 2015-18, the gross margin of Zhonghuan’s solar wafer business averaged 15%. This is below Longi’s 25% during the same period (Exhibit 130). We believe this is due to its open-loop supply chain that leads to higher COGS compared with Longi’s.
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Exhibit 130. Solar wafer gross margin comparison: Zhonghuan lower than Longi
GM 32.7% 35.0% 28.2% 30.0% 25.0% 21.5% 18.7% 20.0% 14.4% 16.3% 12.5% 15.0% 15.0% 10.0% 5.0% 0.0% 2015 2016 2017 2018 Zhonghuan Longi
Source: Company, HSBC Qianhai Securities
Heavy capex burden in 2019-21 on new capacity build-outs We expect Zhonghuan’s capex to remain high at around RMB5bn per annum in 2019-21 due to the construction of its new semi wafer capacities in Wuxi and its new PV wafer capacities in Inner Mongolia. The Wuxi project has a total capex budget of around RMB20bn, or RMB12bn for Zhonghuan’s 60% stake. The Inner Mongolia project has a capex budget of around RMB5bn.
Exhibit 131. Zhonghuan: We expect FCF Exhibit 132. Zhonghuan: Net gearing to continue to be negative in 2019-20e drop in 2019e post private placement
2 60% 1 50% - 40% -1 30%
-2 Rmb bn Rmb 20% -3 10% -4 -5 0% 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E Net debt / Equity FCF
Source: Company, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
Financial forecasts
Earnings forecasts We expect a 52% earnings CAGR in 2018-21e, compared with a 42% earnings CAGR in 2015- 18e. We base our forecasts on the following key assumptions:
Revenue: We forecast a revenue CAGR of 30% in 2018-21e, driven by strong growth of Zhonghuan’s semi material segment. We expect the semi material segment to register a 113% revenue CAGR in 2018-21e, with the phase-by-phase completion of the company’s new semi wafer capacities in Wuxi.
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Gross margin: We forecast gross margin to improve from 17% in 2018 to 23% in 2021e, driven by a rising contribution from the semi material segment, which has a better margin.
Exhibit 133. Zhonghuan: Segments and full P&L forecasts RMBm 2018 2019e 2020e 2021e 2018-21e CAGR Turnover 13,756 18,745 22,105 30,281 30.1% Renewable energy products 12,092 16,160 16,205 19,744 17.8% Semiconductor materials 1,013 1,920 5,202 9,806 113.1% Semiconductor devices 153 153 153 153 0.0% Power generation 335 349 382 416 7.4% Services 48 48 48 48 0.0% Others 114 114 114 114 0.0%
Gross Profit 2,387 2,907 4,764 6,938 42.7% Renewable energy products 1,818 1,991 2,744 3,376 22.9% Semiconductor materials 305 634 1,717 3,236 119.8% Semiconductor devices (9) 0 0 0 -100.0% Power generation 214 223 244 265 7.4% Services 34 34 34 34 0.0% Others 26 26 26 26 0.0%
Gross Margin 17% 16% 22% 23%
Business tax (62) (84) (100) (136) 30.1% Selling expenses (171) (233) (275) (377) 30.1% Admin. expenses (996) (1,312) (1,592) (2,180) 29.8% Asset impairment losses / Fair value changes (190) (85) (127) (201) 2.0% Other gain / (losses) 516 361 180 180 -29.5% Operating profit 1,484 1,553 2,852 4,223 41.7%
Net finance charges (618) (628) (538) (559) -3.3% Share of JCE 7 7 7 7 0.0%
Profit before taxes 873 931 2,321 3,671 61.4% Tax (84) (139) (347) (550) 87.3% Minorities (157) (157) (590) (1,028) 87.2%
Pre-exceptional profit 632 635 1,384 2,094 49.1% Dividend to preferred shareholders and perpetual capital securities (54) (54) (54) (54) 0.0% Exceptionals 0 0 0 0 Net profit 578 581 1,330 2,040 52.2% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Balance sheet and cash flow forecasts We forecast the net debt to equity ratio to fall from 55% in 2018 to 26% in 2021e, supported by the company’s strong OCF and the RMB5bn private placement in 2019.
Exhibit 134. Zhonghuan: Net debt and cash flow forecasts RMBm 2018 2019e 2020e 2021e Net debt/(cash) 8,598 5,689 7,393 6,727 Net debt to equity 55% 27% 32% 26% Cash from Operations 1,708 3,611 3,883 6,348 Cash from Investing (5,759) (4,937) (4,937) (4,937) FCF (4,051) (1,325) (1,054) 1,411 Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Valuation and risks
Target price of RMB14.30 Our TP of RMB14.30 is derived from our discounted cash flow (DCF) valuation model. It implies a 2020e PE of 36x, close to the historical average valuation of 40x and is reasonable in our view. Key assumptions in our DCF valuation model include:
Cost of equity (COE): We use a COE of 9.2%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.03.
Cost of debt (COD): We assume the pre-tax cost of debt to be 5% and after-tax cost of debt to be 4%. We use our 2020e debt-to-capital ratio of 38% as our long-term debt-to- capital ratio.
Operating cash flow to grow 11% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 11% in 2018-29e, reflecting solid growth in demand.
Capital expenditure: We assume steady capex of around RMB5bn per annum in 2019- 29e, reflecting high investment in new projects and capacity expansion.
Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029.
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Exhibit 135. Zhonghuan: Discounted cash flow valuation RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e Profit after tax 212 404 591 789 792 1,974 3,121 3,278 YoY growth 90% 46% 34% 0% 149% 58% 5% Add: Depreciation & amortization 452 672 970 1,482 1,203 1,419 1,660 1,920 Net finance expense 230 109 463 681 628 538 559 632 Operating cash flow before W/C 894 1,185 2,024 2,952 2,623 3,930 5,340 5,829 changes Changes in working capital (72) (373) (893) (1,353) 995 (41) 1,014 Net operating cash flow 822 813 1,131 1,600 3,618 3,889 6,355 5,829 Capex (2,265) (1,746) (4,788) (5,759) (4,937) (4,937) (4,937) (4,986) Free Cash Flow (1,443) (934) (3,657) (4,159) (1,319) (1,047) 1,418 843 Discount Factor 1.00 0.93 0.87
Gross PPE 7,950 10,050 15,147 24,670 28,599 33,334 38,230 43,216 Depreciation Rate 6% 7% 6% 6% 4% 4% 4% 4% PV of FCF (1,047) 1,321 732 RMBm 2023e 2024e 2025e 2026e 2027e 2028e 2029e Terminal Value Profit after tax 3,441 3,614 3,794 3,984 4,103 4,227 4,353 YoY growth 5% 5% 5% 5% 3% 3% 3% Add: Depreciation & amortization 2,192 2,476 2,773 3,083 3,405 3,741 4,090 Net finance expense 705 780 855 930 1,007 1,084 1,163 Operating cash flow before W/C 6,338 6,869 7,422 7,997 8,516 9,052 9,606 changes Changes in working capital 0 0 0 0 0 0 0 Net operating cash flow 6,338 6,869 7,422 7,997 8,516 9,052 9,606 Capex (5,036) (5,086) (5,137) (5,188) (5,240) (5,293) (5,346) Free Cash Flow 1,302 1,783 2,285 2,808 3,275 3,759 4,260 81,922 Discount Factor 0.81 0.75 0.70 0.66 0.61 0.57 0.53 0.53
Gross PPE 48,252 53,338 58,475 63,664 68,904 74,197 79,543 Depreciation Rate 5% 5% 5% 5% 5% 5% 5% PV of FCF 1,054 1,345 1,606 1,840 2,000 2,139 2,259 43,436 Summary of PV (Enterprise Value) 56,683 Less: Net debt (incl. perpetual) (6,455) Equity value 50,228 Less: Minority interest (2,557) Shareholder Equity Value 47,672 Total shares issued by yr-end 2019 (mn) 3,342 Per Share Value - Rmb 14.3
Assumptions Risk-free rate 2.5% ERPch 6.5% Beta 1.03 Cost of equity = RFR + BETA*ERPch 9.2% Cost of debt 5.0% Income tax 15% After tax cost of debt 4.3% Debt/Capital 38% WACC 7.3% Terminal Growth 2% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Exhibit 136. Zhonghuan forward PE: Exhibit 137. Zhonghuan forward PB: Trading 1SD below the historical average Trading below the historical average
60.0 8.0 7.0 50.0 6.0 40.0 5.0 30.0 4.0 3.0 20.0 2.0 10.0 1.0 - 0.0 Feb-16 Feb-17 Feb-18 Feb-19 Jan-13 Jan-15 Jan-17 Jan-19
PE Mean +1SD -1SD PB Mean +1SD -1SD
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities
Exhibit 138. Zhonghuan: Earnings sensitivity to gross margin and revenue changes, 2020e ______Gross Margin ______Revenue -3% -2% -1% 0% 1% 2% 3% 20% -11% 1% 13% 25% 37% 49% 61% 15% -15% -4% 7% 19% 30% 42% 53% 10% -20% -9% 2% 13% 23% 34% 45% 5% -25% -15% -4% 6% 17% 27% 37% 0% -30% -20% -10% 0% 10% 20% 30% -5% -34% -25% -16% -6% 3% 13% 22% -10% -39% -30% -21% -13% -4% 5% 14% -15% -44% -36% -27% -19% -10% -2% 6% -20% -49% -41% -33% -25% -17% -9% -1% Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Downside risks: Weaker-than-expected PV demand: PV wafer accounted for around 65% of Zhonghuan’s revenue in 2018. Should global PV installations slow, we see downside risks to our earnings forecasts.
China-US trade tension could hinder equipment procurement from US suppliers: Localization of semi wafer production equipment is low at just 1-2% and many of the key equipment comes from US. Hence, heightening China-US trade tensions could harm Zhonghuan’s semi wafer capacity plans.
Risk of equity dilution from fundraising exercise: Equity raising has been a key part of Zhonghuan’s financing exercise since its listing in 2007. As the capex burden is likely to remain high at around RMB5bn per annum in 2019-21e, we see a risk of equity dilution should the company fail to fulfill its capex needs via debt financing.
Weaker-than-expected semi demand: We expect the semi wafer business to account for 46% of Zhonghuan’s gross profit in 2021e. Should downstream demand be weaker-than- expected or capacity ramp-ups be slower-than-expected, we see downside risks to our earnings forecasts.
Greater-than-expected cuts to wafer ASP: We expect mono wafer ASP to decline by 20%/10%/10% in 2019/20/21e. We see risks of larger-than-expected margin erosion if the ASP cuts are greater than expected.
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Financials & valuation: Zhonghuan Semiconductor Buy
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) EV/sales 2.2 1.5 1.3 1.0 Revenue 13,756 18,745 22,105 30,281 EV/EBITDA 10.3 10.1 6.9 4.9 EBITDA 2,972 2,762 4,277 5,890 EV/IC 1.9 1.4 1.3 1.1 Depreciation & amortisation -1,482 -1,203 -1,419 -1,660 PE* 44.8 50.6 24.1 15.7 Operating profit/EBIT 1,490 1,559 2,858 4,230 PB 2.0 1.7 1.6 1.5 Net interest -618 -628 -538 -559 FCF yield (%) -13.3 -11.2 -5.9 -0.6 PBT 873 931 2,321 3,671 Dividend yield (%) 0.3 0.2 0.4 0.6 HSBC Qianhai PBT 873 931 2,321 3,671 * Based on HSBC Qianhai EPS (diluted) Taxation -84 -139 -347 -550 Net profit 632 635 1,384 2,094 HSBC Qianhai net profit 578 581 1,330 2,040 ESG metrics Cash flow summary (CNYm) Environmental Indicators [n/a] Governance Indicators 12/2018a Cash flow from operations 1,708 3,611 3,883 6,348 GHG emission intensity* [n/a] No. of board members 11 Capex -5,759 -4,937 -4,937 -4,937 Energy intensity* [n/a] Average board tenure (years) 2.5 Cash flow from investment -5,759 -4,937 -4,937 -4,937 Dividends -773 -137 -112 -187 CO2 reduction policy [Yes] Female board members (%) 45.5 Change in net debt 672 -2,909 1,704 -666 Social Indicators Board members independence (%) 36.4 FCF equity -3,488 -2,942 -1,544 -155 Employee costs as % of revenues [n/a] Balance sheet summary (CNYm) Employee turnover (%) [n/a] Intangible fixed assets 1,754 1,700 1,647 1,594 Diversity policy [Yes] Tangible fixed assets 23,299 27,087 30,657 33,987 Source: Company data, HSBC Qianhai Securities Current assets 13,893 17,854 17,215 20,959 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 6,740 8,648 6,945 7,611 Total assets 42,697 50,399 53,284 60,311 Operating liabilities 15,674 18,721 19,745 23,837 Issuer information Gross debt 11,299 10,299 10,299 10,299 Share price (CNY) 9.59 Free float 58% Net debt 4,559 1,650 3,354 2,688 Shareholders' funds 13,325 18,822 20,094 22,001 Target price (CNY) 14.30 Sector Electronic Equipment Invested capital 16,532 19,271 22,830 25,092 RIC (Equity) 002129.SZ Country China Bloomberg (Equity) 002129 CH Analyst Corey Chan Market cap (USDm) 3,779 Contact +86 755 8898 3404 Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e Y-o-y % change Price relative Revenue 42.6 36.3 17.9 37.0 36.90 36.90 EBITDA 42.0 -7.1 54.9 37.7 Operating profit 32.8 4.6 83.3 48.0 31.90 31.90 PBT 27.7 6.7 149.2 58.2 26.90 26.90 HSBC Qianhai EPS -3.2 -11.3 109.7 53.4 21.90 21.90 Ratios (%) 16.90 16.90 Revenue/IC (x) 0.9 1.0 1.1 1.3 ROIC 9.7 7.7 11.8 15.2 11.90 11.90 ROE 4.6 3.6 6.8 9.7 6.90 6.90 ROA 2.1 1.7 3.8 5.5 1.90 1.90 EBITDA margin 21.6 14.7 19.4 19.5 2015 2016 2017 2018 2019 Operating profit margin 10.8 8.3 12.9 14.0 Zhonghuan Semiconductor Rel to CSI 300 Index EBITDA/net interest (x) 4.8 4.4 8.0 10.5 Net debt/equity 29.0 7.7 14.4 10.3 Source: HSBC Qianhai Securities Net debt/EBITDA (x) 1.5 0.6 0.8 0.5 Note: Priced at close of 14 Jun 2019 CF from operations/net debt 37.5 218.8 115.8 236.1 Per share data (CNY) EPS Rep (diluted) 0.23 0.21 0.41 0.63 HSBC Qianhai EPS (diluted) 0.21 0.19 0.40 0.61 DPS 0.03 0.02 0.04 0.06 Book value 4.78 5.63 6.01 6.58
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Exhibit 139. TJ Zhonghuan Semiconductor: Company structure, April 2019
Tianjin Tianjin SASAC SASAC
100% Guodian 100% Technology & ChinaChina Centralcentral electronicsElectronics Bohai Industrial Environment Public Groupgroup Investment Fund Group [1296 HK]
59.79% 27.55% 9.64% 3.02%
Tianjin Zhonghuan Semiconductor （（002129002129.SZ) CH)
Equities
● Renewable energy Energy Equipment & Services EVA film Semiconductor Other material material SemiconductorOther Power generation
businessdevice 2019 June
Source: Company data, HSBC Qianhai Securities
Equities ● Energy Equipment & Services June 2019
Jingsheng M&E (300316 CH)
Top third-party wafer equipment maker in China, with c50% market share in crystal-growing equipment
Early cycle name benefiting from the wafer capacity upcycle
Initiate with a Buy rating and a TP of RMB14.10
Investment summary
Benefiting from the wafer capacity upcycle We view Jingsheng as the best name to play the wafer capacity upcycle among our coverage, We forecast a 25% earnings CAGR in 2018-21e given the company’s market leadership in wafer-making equipment in China. The company has a c50% market share in third-party-made crystal-growing equipment in China. Crystal-growing equipment is key to the production of PV and semi wafer. We expect Jingsheng’s crystal- growing equipment to register a 28% revenue CAGR in 2018-21e, driven by capacity expansion in China’s PV and semiconductor wafer industry, leading to a 25% earnings CAGR in 2018-21e.
Exhibit 140. Jingsheng: Revenue Exhibit 141. Jingsheng: Earnings to breakdown, 2018 double in 2018-21e
Other core business Rmb mn Sapphire 1,400 100% 2% Others material 90% 6% 1,200 5% 80% 1,000 70% Intelligent 800 60% 50% manufacturing 600 equipment 40% 11% 400 30% 20% 200 Crystal growing 10% equipment 0 0% 76% 2016 2017 2018 2019E 2020E 2021E Net profit YoY
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Investment positives
Significant order potential from mono-Si wafer capacity expansion Jingsheng manufactures various type of equipment for the solar supply chain, including automatic mono-Si growing furnaces, multi-Si casting furnaces, silicon float zone crystal pullers, and crystal ingot single wire squaring machines (Exhibit 142). Of these, crystal-growing equipment, including mono-Si growing furnace and multi-Si casting furnace, accounted for 76% of the company’s revenue in 2018. We expect crystal-growing equipment revenue to rise at a
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28% CAGR in 2018-21e due to the growing mono wafer market (Exhibit 145). As mentioned earlier, we expect the world’s mono wafer production to almost double from 52GW in 2018 to 101GW in 2021e. In general, 1GW of mono wafer capacity corresponds with 170 units of mono- Si growing furnace demand. Hence, we expect the 101GW production in 2021 to translate into an installation base demand of 17,000 units of mono-Si growing furnaces, up from 9,000 units in 2018. Assuming a 30% market share for Jingsheng, the potential future order size could be 2,400 units (8,000 new units x 30%), or 2x 2018 sales.
Exhibit 142. Key equipment that Jingsheng produces Crystal growing equipment PV intelligent equipment LED intelligent equipment Sapphire material Automatic Mono-Si Growing Mono-Si Ingot Squaring & Grinding Integrated Automatic Sorting & Testing Equipment for LED Automatic Sapphire Crystal Growing Furnace Machine Device Furnace Silicon Float Zone Crystal Puller Multi-crystal Rounding & Grinding Integrated Automatic LED Light Production Line Sapphire Ingot Machine Multi-Si Casting Furnace Crystal Ingot Single Wire Squaring Machine Sapphire Wafer Source: Company data, HSBC Qianhai Securities
Exhibit 143. Mono-Si growing furnace: Installation base to surge on the growing mono wafer market
Units GW 120 20,000 17,203 18,000 100 16,000 14,985 80 14,000 Thousands 11,735 12,000 60 10,000 8,863 101 69 88 8,000 40 6,000 5,685 52 4,000 20 3,280 33 19 2,000 - - 2016 2017 2018 2019E 2020E 2021E Mono-Si Wafer Production Mono-Si growing furnace demand (RHS)
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Exhibit 144. Jingsheng: Mono-Si growing Exhibit 145. Jingsheng: Crystal-growing furnace sales to register a 27% CAGR in equipment revenue up on a 28% CAGR in 2018-21e 2018-21e
Unit RMB mn 3,000 200% 4,500 150% 4,000 2,500 150% 3,500 100% 2,000 100% 3,000 50% 2,500 1,500 50% 2,000 0% 1,000 0% 1,500 1,000 500 -50% -50% 500 0 -100% - -100% 2013 2015 2017 2019E 2021E 2013 2015 2017 2019E 2021E Mono-Si growing furnace sales YoY Crystal growing equipment revenue YoY
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
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Capitalising on strong R&D capability Jingsheng’s R&D expense as percentage of revenue was 7% in 2018, topping that of industry peers (Exhibit 146). We believe such a high R&D expense ratio supports the company’s leading market position in high-end PV equipment.
Exhibit 146. Jingsheng has the highest R&D expense ratio among peers
R&D expense as% of revenue 8.0% 7.2% 7.0% 6.0% 5.0% 3.7% 4.0% 3.0% 3.0% 2.2% 2.0% 0.9% 1.0% 0.0% Jingsheng FAM Zhonghuan Tongwei Longi 2018
Source: Company data, HSBC Qianhai Securities
A robust market outlook for semiconductor equipment The company also supplies crystal-growing furnaces for semiconductor wafer makers. In 2018, the company signed new semi equipment contracts worth RMB500m, around 16% of the total value of the new contracts signed during the year. As of end 1Q19, the company has semi equipment contracts worth RMB558m on its orderbook. We see a robust market outlook for its semi equipment. Base on the announced capacity expansion plans by major semi wafer makers, we see an additional monthly semi capacity of 2.5m slices for 8’ and 3.1m slices for 12’ in 2019-22. In general, 1m slices/mth of capacity translates into a semi crystal-growing furnace demand of 150 units. We therefore see an incremental demand of 840 units of semi crystal- growing furnace (150 x 5.6) or RMB12bn in contract value. To tap the market upside, Jingsheng has taken a 10% stake in Zhonghuan’s semi wafer project in Wuxi.
Exhibit 147. Jingsheng: New contract Exhibit 148. Jingsheng: Backlog composition, 2017-18 composition, 2017-18
RMB mn New contract RMB mn Order backlog 4,000 3,000 3,500 2,500 3,000 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 - - 2017 2018 2017 2018
PV Equipment Semi Equipment PV equipment Semi equipment
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
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Exhibit 149. Semi crystal-growing furnace: Exhibit 150. Semi crystal-growing furnace: China’s market size calculation China’s demand forecasts, 2019-22e
RMB mn Crystal-growing funance demand forecasts 4,000 8-inch 12-inch 3,500 China's new semi capacity (m 2.5 3.1 slice/mth) 3,000 Crystal-growing furnace 2,500 375 465 demand (unit) 2,000 ASP (RMBm /unit) 6 20 1,500 Crystal-growing furnace 1,000 2,250 9,300 demand (RMBm) 500 - 2019E 2020E 2021E 2022E
8-inch 12-inch
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Investment concerns
Longi can make its own mono-Si growing furnace Despite being the largest third-party producer of mono-Si growing furnaces in China, Jingsheng is unable to penetrate into Longi’s supply chain. This is because Longi, partnered with Naura, develops mono-Si growing furnaces for its own use. We therefore see a ceiling for Jingsheng’s market share, given Longi’s dominant position in mono-Si wafer production (Exhibit 151). In our model, we forecast a 30% market share for Jingsheng’s mono-Si growing furnace, which is c50% of the addressable market excluding Longi.
Exhibit 151. Mono-Si wafer market share, Exhibit 152. Crystal-growing equipment: 2019e Jingsheng has a c50% share of the market, excluding Longi
3rd party vendor market share, 2012-18 Others Huasheng Tianlong 16% Photoelectric 8% Jingyuntong Longi Technology 9% 42%
Jingsheng Zhonghuan NAURA 48% JinkoSolar Technology 35% 7% 35%
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
Earnings are highly sensitive to Zhonghuan’s capex plan Zhonghuan is Jingsheng’s largest customer, accounting for 80% of its 2018 new orders. We therefore see high earnings sensitivity to Zhonghuan’s investment plan. Also, relying on a single large customer could constrain the company’s power in terms of negotiation of terms of
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payment, we believe. As shown in Exhibit 154, Jingsheng’s trade and notes receivable days have averaged 350 days in the past three years.
Exhibit 153. Zhonghuan: capex schedule, Exhibit 154. Jingsheng: Trade and notes 2016-21e receivable days, 2015-18
Days 6,000 RMB mn 500 450 5,000 400 350 4,000 300 3,000 250 200 2,000 150 100 1,000 50 0 0 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 Trade and notes receivable days CAPEX
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
We expect net gearing to rise in 2019-20e In 2018, the company took a 10% stake in Zhonghuan’s semi wafer project in Wuxi. The planned investment of the project is around USD3bn (RMB20bn), or RMB2bn attributable to Jingsheng. This is a relative heavy burden for Jingsheng in view of the company’s asset size of RMB6.3bn as of end-2018. We hence expect its net gearing to rise from -10% in 2018 to 4% in 2020.
Exhibit 155. Jingsheng: Net gearing to Exhibit 156. Jingsheng: We expect FCF to peak in 2020, subsiding thereafter remain negative in 2019e
0.4 10% 0.3 5% 0.2 0% 0.1 -5% 0.0 -10% (0.1) (0.2) -15% bn Rmb (0.3) -20% (0.4) -25% (0.5) -30% (0.6) 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E Net debt / Equity FCF
Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates Securities estimates
Financial forecasts
Earnings forecasts We expect a 25% earnings CAGR in 2018-21e, compared with a 77% earnings CAGR in 2015- 18. We base our forecasts on the following key assumptions:
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Revenue: We forecast a revenue CAGR of 22% in 2018-21e, driven by a 28% revenue CAGR for the crystal growing equipment products.
Gross margin: We forecast gross margin to improve slightly from 40% in 2018 to 44% in 2021e.
Exhibit 157. Jingsheng: Segments and full P&L forecasts RMBm 2018 2019e 2020e 2021e 2018-21e CAGR Turnover 2,536 3,271 3,953 4,637 22% Crystal growing equipment 1,940 2,734 3,394 4,054 28% Intelligent manufacturing equipment 277 218 240 264 -2% Sapphire material 125 125 125 125 0% Other core business 49 49 49 49 0% Others 145 145 145 145 0%
Gross Profit 1,002 1,397 1,713 2,029 27% Crystal growing equipment 846 1,254 1,561 1,867 30% Intelligent manufacturing equipment 105 92 101 112 2% Sapphire material 16 16 16 16 0% Other core business 3 3 3 3 0% Others 33 33 33 33 0%
Gross Margin 40% 43% 43% 44%
Business tax (26) (33) (40) (47) 22% Selling expenses (46) (59) (71) (84) 22% Admin. expenses (297) (383) (463) (543) 22% Asset impairment losses / Fair value changes (100) (70) (80) (89) -4% Other gain / (losses) 108 86 86 86 -7% Operating profit 641 939 1,145 1,353 28%
Net finance charges 2 -3 -9 -11 -270% Share of JCE 5 5 5 5 0%
Profit before taxes 649 941 1,141 1,347 28% Tax (80) (140) (170) (201) 36% Minorities 14 0 0 0 -100%
Pre-exceptional profit 582 801 971 1,146 25% Dividend to preferred shareholders and perpetual 0 0 0 0 capital securities Exceptionals 0 0 0 0 Net profit 582 801 971 1,146 25% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Balance sheet and cash flow forecasts We expect net gearing to edge up slightly from -10% in 2018e to 3% in 2021e on investment in the semi wafer project in Wuxi.
Exhibit 158. Jingsheng: Net debt and cash flow forecasts RMBm 2018 2019e 2020e 2021e Net debt/(cash) (434) 124 247 191 Net debt to equity -10% 3% 4% 3% Cash from Operations 166 268 758 976 Cash from Investing (449) (695) (695) (695) FCF (283) (427) 63 281 Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Valuation and risks
Target price of RMB14.10 Our TP of RMB14.10 is derived from our discounted cash flow (DCF) valuation model. It implies a 2020e PE of 19x, 1SD below the historical average valuation. We believe this is reasonable as Jingsheng’s earnings are tied to wafer capacity expansion, which is highly cyclical. Key assumptions in our DCF valuation model include:
Cost of equity (COE): We use a COE of 10.8%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.28.
Cost of debt (COD): We assume the pre-tax cost of debt to be 5% and the after-tax cost of debt to be 4%. We use our 2020e debt-to-capital ratio of 2% as our long-term debt-to- capital ratio.
Operating cash flow to grow 13% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 13% in 2018-29e, reflecting stable growth in demand.
Capital expenditure: We expect capex of around RMB700mn per annum in 2019-21e, reflecting the company’s share of investment in the Wuxi semi wafer project. Thereafter, we expect a steady capex of around RMB200-300mn per annum in 2022-29e, reflecting maintenance capex.
Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029e.
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Exhibit 159. Jingsheng: Discounted cash flow valuation RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e Profit after tax 113 184 372 568 801 971 1,146 1,283 YoY growth 63% 102% 53% 41% 21% 18% 12% Add: Depreciation & amortization 28 44 56 82 74 97 131 145 Net finance expense 4 6 6 9 3 9 11 12 Operating cash flow before W/C changes 146 234 433 659 877 1,077 1,287 1,439 Changes in working capital (249) (328) (618) (546) (367) (314) (306) Net operating cash flow (103) (94) (185) 113 510 763 981 1,439 Capex (385) (484) 48 (449) (695) (695) (695) (250) Free Cash Flow (488) (578) (137) (335) (185) 68 286 1,189 Discount Factor 1.00 0.90 0.82
Gross PPE 655 903 969 1,436 1,710 2,363 3,054 3,304 Depreciation Rate 4% 5% 6% 6% 4% 4% 4% 4% PV of FCF 68 259 971 RMBm 2023e 2024e 2025e 2026e 2027e 2028e 2029e Terminal Value Profit after tax 1,412 1,553 1,708 1,845 1,992 2,092 2,155 YoY growth 10% 10% 10% 8% 8% 5% 3% Add: Depreciation & amortization 159 174 190 206 222 239 256 Net finance expense 12 13 14 15 16 17 18 Operating cash flow before W/C changes 1,583 1,740 1,912 2,065 2,230 2,348 2,429 Changes in working capital 0 0 0 0 0 0 0 Net operating cash flow 1,583 1,740 1,912 2,065 2,230 2,348 2,429 Capex (250) (250) (250) (250) (250) (250) (250) Free Cash Flow 1,333 1,490 1,662 1,815 1,980 2,098 2,179 25,674 Discount Factor 0.74 0.67 0.60 0.54 0.49 0.44 0.40 0.40
Gross PPE 3,554 3,804 4,054 4,304 4,554 4,804 5,054 Depreciation Rate 4% 5% 5% 5% 5% 5% 5% PV of FCF 984 994 1,002 989 975 933 876 10,320 Summary of PV (Enterprise Value) 18,370 Less: Net debt (incl. perpetual) (124) Equity value 18,247 Less: Minority interest (173) Shareholder Equity Value 18,074 Total shares issued by year-end 2019 (mn) 1,285 Per Share Value - Rmb 14.1
Assumptions Risk free rate 2.5% ERPch 6.5% Beta 1.28 Cost of equity = RFR + BETA*ERPch 10.8% Cost of debt 5.0% Income tax 15% After tax cost of debt 4.3% Debt/Capital 2% WACC 10.7% Terminal Growth 2% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
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Exhibit 160. Jingsheng forward PE: Exhibit 161. Jingsheng forward PB: Trading at low-end of the historical Trading in line with the historical average valuation
45.0 10.0 40.0 35.0 8.0 30.0 6.0 25.0 20.0 4.0 15.0 10.0 2.0 5.0 - 0.0 Apr-16 Apr-17 Apr-18 Apr-19 May-12 May-14 May-16 May-18
PE Mean +1SD -1SD PB Mean +1SD -1SD
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities
Exhibit 162. Jingsheng: Earnings sensitivity to gross margin and revenue changes, 2020e ______Gross Margin ______Revenue -3% -2% -1% 0% 1% 2% 3% 20% 7% 12% 16% 20% 24% 28% 32% 15% 3% 7% 11% 15% 19% 23% 27% 10% -1% 2% 6% 10% 14% 18% 21% 5% -6% -2% 1% 5% 9% 12% 16% 0% -10% -7% -3% 0% 3% 7% 10% -5% -15% -12% -8% -5% -2% 2% 5% -10% -19% -16% -13% -10% -7% -4% -1% -15% -24% -21% -18% -15% -12% -9% -6% -20% -28% -25% -23% -20% -17% -14% -12% Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Downside risks: Weaker-than-expected PV and semi demand: Jingsheng manufactures crystal-growing equipment for PV and semi wafer makers. This contributed 76% of revenue in 2018, so a slowdown in global PV and semi demand could affect earnings negatively.
Weaker-than-expected capex of Zhonghuan: Zhonghuan is Jingsheng’s largest customer, accounting for 80% of its 2018 new orders. A weaker-than-expected capex plan by Zhonghuan could affect Jingsheng’s earnings adversely.
Higher-than-expected receivable provision: Given Jingsheng focuses on Zhonghuan as its major customer, should Zhonghuan delay its payments, Jingsheng could see an uptick in its receivables provision rate which could in turn affect its earnings adversely.
Weaker-than-expected margin on intensified competition: Rising competition could undercut prices and adversely affect the company’s gross margins.
87 Equities ● Energy Equipment & Services June 2019
Financials & valuation: Jingsheng M&E Buy
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) EV/sales 5.9 4.8 4.0 3.4 Revenue 2,536 3,271 3,953 4,637 EV/EBITDA 20.7 15.3 12.6 10.5 EBITDA 728 1,018 1,247 1,488 EV/IC 4.4 3.5 3.0 2.5 Depreciation & amortisation -82 -74 -97 -131 PE* 26.2 19.3 15.9 13.5 Operating profit/EBIT 647 944 1,150 1,358 PB 3.8 3.3 2.8 2.4 Net interest 2 -3 -9 -11 FCF yield (%) 1.3 1.2 2.4 3.8 PBT 649 941 1,141 1,347 Dividend yield (%) 0.8 1.1 1.4 1.6 HSBC Qianhai PBT 649 941 1,141 1,347 * Based on HSBC Qianhai EPS (diluted) Taxation -80 -140 -170 -201 Net profit 582 801 971 1,146 HSBC Qianhai net profit 582 801 971 1,146 ESG metrics Cash flow summary (CNYm) Environmental Indicators [n/a] Governance Indicators 12/2018a Cash flow from operations 166 268 758 976 GHG emission intensity* [n/a] No. of board members 10 Capex -449 -695 -695 -695 Energy intensity* [n/a] Average board tenure (years) 5.2 Cash flow from investment -449 -695 -695 -695 Dividends -108 -128 -177 -214 CO2 reduction policy [Yes] Female board members (%) 20 Change in net debt 265 558 123 -56 Social Indicators Board members independence (%) 30 FCF equity 202 180 373 581 Employee costs as % of revenues [n/a] Balance sheet summary (CNYm) Employee turnover (%) [n/a] Intangible fixed assets 217 210 203 195 Diversity policy [Yes] Tangible fixed assets 1,285 1,913 2,519 3,090 Source: Company data, HSBC Qianhai Securities Current assets 4,427 4,623 5,231 6,012 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 557 -1 -124 -67 Total assets 6,335 7,394 8,606 9,956 Operating liabilities 1,943 2,330 2,747 3,166 Issuer information Gross debt 162 162 162 162 Share price (CNY) 12.03 Free float 44% Net debt -395 162 285 229 Shareholders' funds 4,058 4,730 5,524 6,456 Target price (CNY) 14.10 Sector Energy Equipment Invested capital 3,429 4,417 5,329 6,199 RIC (Equity) 300316.SZ Country China Bloomberg (Equity) 300316 CH Analyst Corey Chan Market cap (USDm) 2,232 Contact +86 755 8898 3404 Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e Y-o-y % change Price relative Revenue 30.1 29.0 20.8 17.3 EBITDA 51.2 39.7 22.6 19.3 Operating profit 51.8 46.0 21.9 18.0 23.60 23.60 PBT 51.2 45.1 21.2 18.0 HSBC Qianhai EPS 17.9 35.5 21.2 18.0 18.60 18.60 Ratios (%) 13.60 13.60 Revenue/IC (x) 0.8 0.8 0.8 0.8 ROIC 18.4 20.6 20.2 20.1 8.60 8.60 ROE 15.3 18.2 18.9 19.1 ROA 9.2 11.7 12.1 12.3 3.60 3.60 EBITDA margin 28.7 31.1 31.6 32.1 2015 2016 2017 2018 2019 Operating profit margin 25.5 28.9 29.1 29.3 Jingsheng M&E Rel to CSI 300 Index EBITDA/net interest (x) 398.9 135.2 139.1 Net debt/equity -9.3 3.3 5.0 3.5 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -0.5 0.2 0.2 0.2 Note: Priced at close of 14 Jun 2019 CF from operations/net debt 165.5 265.6 426.4 Per share data (CNY) EPS Rep (diluted) 0.46 0.62 0.76 0.89 HSBC Qianhai EPS (diluted) 0.46 0.62 0.76 0.89 DPS 0.10 0.14 0.17 0.20 Book value 3.16 3.68 4.30 5.03
88
Exhibit 163. Jingsheng M&E: Company structure, April 2019
Qiu Minxiu
He Jie He Jun (son of Cao Jianwei (daughter of Qiu Qiu Minxiu) Minxiu)
15.31% 8.76% 8.22% 26.77% Public Shaoxing Shangyujingsheng Investment Management Consulting 0.66% 2.77% 45.29% 48.31%
2.97% Zhejiang Jingsheng Mechanical & Electrical （603806 CH)
Equities
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Energy Equipment & Services
Crystal growing Sapphire Intelligent manufacturing Other equipment material equipment business
June 2019 June
Source: Company data, HSBC Qianhai Securities
89
Equities ● Energy Equipment & Services June 2019
First Applied Materials (603806 CH)
Market leader in EVA film with a 60% market share globally
Limited growth potential for the core EVA film business but could benefit from diversifying into non-solar downstream
Valuation at 25x 2019e PE is rich; initiate with a Reduce rating and a TP of RMB25.80
Investment summary
Niche market with limited growth potential FAM is the largest supplier of EVA film in the world, with around 60% market share in 2018. We expect only a 3% earnings CAGR in 2018-21e EVA film is a key material used to encapsulate and protect solar cells. While the EVA market is likely to grow with rising global new PV installations, we flag higher cell conversion efficiency and continuous cuts in post-cell fabrication costs as downside risks. As a result, we expect only a 3% earnings CAGR for FAM in 2018-21e (Exhibit 165). The company’s diversification into non-solar downstream (3C and semiconductor) should reduce business concentration risk, but it will take time for the new business to make a material earnings contribution.
Exhibit 164. FAM: Revenue breakdown, Exhibit 165. FAM: We expect stable 2018 earnings in 2018-21e
Power generation Electronic material RMB mn 1% 1% 900 40% 800 30% Others 700 1% 20% 600 10% 500 0% 400 -10% 300 200 -20% 100 -30% Backsheet for PV film 0 -40% PV module 86% 11% 2016 2017 2018 2019E 2020E 2021E Net profit YoY
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
90 Equities ● Energy Equipment & Services June 2019
Investment positives
Market leader in EVA film globally With around 60% market share in 2018, FAM is the largest supplier of EVA film globally. EVA films are plastic sheets used to encapsulate solar cells for protection. Because of this characteristic, sales of EVA film have a high correlation with global new PV installations. In general, one kW of PV installation translates into 11 sq.m of EVA film demand. Hence, on our forecast for new PV installations of 117GW globally in 2019, we estimate an EVA film market size of 1.3bn sq.m or RMB9bn. We expect the market to expand at an 11% CAGR in 2018-21e on a similar growth rate of new PV installations during the same period.
Exhibit 166. Global EVA film: Market share Exhibit 167. Global EVA film: Sales to breakdown, 2018 surge on rising new PV installations
mn sq.m 1,800 1,691 14% 1,547 1,600 1,391 12% 1,400 1,277 1,144 10% Others 1,200 1,089 11% Hiuv 1,000 8% 14% 800 6% FMA 600 Sveck 60% 4% 15% 400 200 2% - 0% 2017 2018 2019E 2020E 2021E 2022E Global EVA film demand YoY
Source: Company data, HSBC Qianhai Securities Source: Wind, Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Strong balance sheet leads to low interest expenses FAM has maintained a net cash position since 2014. This has resulted in low interest expenses of less than RMB8m a year in 2015-18. Given measured expansion plans, we expect the company to stay in a net cash position in 2019-21e, leading to an annual interest expense of just RMB1m in 2019-21e.
Exhibit 168. FAM: We expect positive FCF Exhibit 169. FAM: To stay in net cash in 2019-21e position in 2019-21e
0.7 0% 0.6 -2% 0.5 -4% 0.4 0.3 -6% 0.2 -8% -10% Rmb bn Rmb 0.1 0.0 -12% (0.1) -14% (0.2) -16% (0.3) -18% 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E Net debt / Equity FCF
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates estimates
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Diversifying into non-solar downstream should reduce business concentration risk To reduce its exposure to the solar industry, the company is actively diversifying downstream into areas like 3C and semiconductor with new products such as light-sensitive film and aluminum-laminated film. As of end-2018, the company has the capacity to produce 50m sq.m of light-sensitive film which is mainly used in the production of printed circuit boards (PCB). It plans to increase its capacity to 200m sq.m by end-2020. The company also has the capacity to produce 2-5m sq.m of aluminum-laminated film, which is a key material in flexible packaging of lithium batteries.
Investment concerns
Pressure for grid parity could pass upstream, driving down EVA prices FAM’s PV film gross margin hinges on EVA film prices (Exhibit 170). EVA film prices have dropped 54% since 2011 due to price-cutting along the solar industry value chain. EVA film accounted for 4% of the cost of a typical 290W module in 2018, up from 3% in 2017, on a sharp decline in module cost (-13% y-o-y) and stable EVA prices (+4% y-o-y). While EVA film prices seemed stable in 2018, pressure for grid parity by PV operators could pass upstream, forcing EVA film producers to lower their prices and margins further.
Exhibit 170. FAM: EVA film price has down Exhibit 171. EVA accounted for 4% cost of 54% since 2011 a typical 290W module
RMB/sq.m RMB / module unit 18 50% 800 16 45% 700 14 40% 12 35% 600 30% 10 500 25% 8 400 20% 6 15% 300 4 10% 200 2 5% 100 0 0% 2011 2013 2015 2017 2019E - 2017 2018 EVA Film ASP PV Film GM (RHS) EVA film Others
Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
Rising conversion efficiency means less usage of EVA film per watt As mentioned, the demand of EVA film is directly correlated with the area of a PV module. With rising cell conversion efficiency, the same amount of power could be generated by a smaller module unit, implying less demand of EVA film on a per watt basis. As shown in Exhibit 172, per kW EVA usage has declined from 16 sq.m in 2012 to 11 sq.m in 2018, with the rise in cell conversion efficiency from 17% to 22% during the same period. According to the China PV Industry Association, the conversion efficiency of PERC P-type mono cell could rise from 21.8% in 2018 to 22.6% in 2021 (Exhibit 173).
92 Equities ● Energy Equipment & Services June 2019
Exhibit 172. Higher conversion efficiency Exhibit 173. PERC mono cell: Conversion corresponds with a decline in EVA usage efficiency to trend higher in 2018-21e per KW, 2012-18
sq.m / KW 23% 20.0 25.0% 22% 16.0 21.8% 21.1% 20.0% 21% 15.0 12.0 17.0% 11.0 20% 15.0% 10.0 19% 10.0% 18% 5.0 17% 5.0% 16% 0.0 0.0% 15% 2012 2017 2018 2018 2019E 2020E 2021E PERC mono-Si cell EVA usage per kW Cell Conversion Efficiency
Source: Company data, HSBC Qianhai Securities Source: CPIA, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Benefits from economies of scale have not been apparent FAM is the largest EVA producer globally. However, the benefits from economies of scale have yet to materialize. Despite being 4x as big as Sveck, the second larger producer of EVA film globally, FAM’s gross margin in 2018 was similar. In fact, the gross margins of the two have been tracking each other since 2015 (Exhibit 175).
Exhibit 174. FAM’s revenue is about 4x as Exhibit 175. …but gross margins of the big as Sveck… two are similar
RMB mn 40% GM 4,500 35% 4,000 30% 3,500 25% 3,000 2,500 20% 2,000 15% 1,500 10% 1,000 5% 500 0 0% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Sveck FAM Sveck FAM
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Earnings to decline in 2019 on lack of one-off gains 2018 earnings rose 28% y-o-y to RMB751m, including RMB258mn gains from factory relocation compensation. Given a lack of one-off gains in 2019, we expect the company’s net profit to decline 8% y-o-y.
Financial forecasts
Earnings forecasts We expect a 3% earnings CAGR in 2018-21e, compared with a 5% earnings CAGR in 2015-18. We base our forecasts on the following key assumptions:
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Revenue: We forecast a revenue CAGR of 9% in 2018-21e, led by the electronic material segment. We forecast a 165% revenue CAGR for the electronic material segment in 2018- 21e, driven by new products and capacity expansion.
Gross margin: We forecast gross margin to remain stable at 20-21% in 2018-21e.
Exhibit 176. FAM: Segments and full P&L forecasts RMBm 2018 2019e 2020e 2021e 2018-21e CAGR Turnover 4810 5740 6050 6243 9% PV film 4153 5004 5004 5004 6% Backsheet for PV module 511 542 558 575 4% Power generation 38 38 38 38 0% Electronic material 29 78 371 547 165% Hot-melt web 21 21 21 21 0% Other main business 11 11 11 11 0% Others 47 47 47 47 0%
Gross Profit 946 1126 1215 1285 11% PV film 795 958 958 958 6% Backsheet for PV module 110 116 120 123 4% Power generation 9 9 9 9 0% Electronic material 2 13 98 164 347% Hot-melt web 5 5 5 5 0% Other main business 5 5 5 5 0% Others 20 20 20 20 0%
Gross Margin 20% 20% 20% 21%
Business tax (19) (23) (24) (25) 9% Selling expenses (87) (104) (109) (113) 9% Admin. expenses (264) (310) (327) (337) 9% Asset impairment losses / Fair value changes (104) (34) (11) (7) -59% Other gain / (losses) 377 151 151 151 -26% Operating profit 850 806 894 954 4%
Net finance charges 5 9 5 10 21% Share of JCE 1 1 1 1 0%
Profit before taxes 856 816 899 964 4% Tax (106) (122) (135) (145) 11% Minorities 1 0 0 0 -100%
Pre-exceptional profit 751 694 764 820 3% Dividend to preferred shareholders and perpetual capital securities 0 0 0 0 NA Exceptionals 0 0 0 0 NA Net profit 751 694 764 820 3% Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Balance sheet and cash flow forecasts We expect FCF to remain positive in 2019-21e, lowering net gearing from -9% in 2018 to -12% in 2021e.
Exhibit 177. FAM: Net debt and cash flow forecasts RMBm 2018 2019e 2020e 2021e Net debt/(cash) (478) (265) (511) (867) Net debt to equity -9% -4% -8% -12% Cash from Operations 170 213 659 786 Cash from Investing 151 (200) (200) (200) FCF 321 13 459 586 Source: Wind, company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
94 Equities ● Energy Equipment & Services June 2019
Valuation and risks
Target price of RMB25.80 Our TP of RMB25.80 is derived from our discounted cash flow (DCF) valuation model. It implies a 2020e PE of 18x, 1SD below the historical average valuation. We believe this is reasonable as we see limited growth potential for the EVA film industry given the rise in cell efficiency and the downtrend in post-cell fabrication costs. Key assumptions in our DCF valuation model include:
Cost of equity (COE): We use a COE of 9.0%. This is derived from a risk-free rate of 2.5%, a market risk premium of 6.5%, and a beta of 1.00.
Cost of debt (COD): We assume the pre-tax cost of debt to be 5% and after-tax cost of debt to be 4.3%. We use our 2020e debt-to-capital ratio of 0% as our long-term debt-to- capital ratio.
Operating cash flow to grow 4% per annum: We expect operating cash flow (before changes in working capital) to expand at a CAGR of 4% in 2018-29e, reflecting steady growth in demand.
Capital expenditure: We expect a steady capex of around RMB200m per annum in 2019- 29e, reflecting steady investment in maintenance.
Terminal growth rate at 2%, and we assume the company reaches a steady growth period after 2029e.
95 Equities ● Energy Equipment & Services June 2019
Exhibit 178. FAM: Discounted cash flow valuation RMBm 2015 2016 2017 2018 2019e 2020e 2021e 2022e Profit after tax 647 848 585 750 694 764 820 860 YoY growth 31% -31% 28% -8% 10% 7% 5% Add: Depreciation & amortization 41 57 75 92 73 79 88 99 Net finance expense 30 5 13 (9) (9) (5) (10) (11) Operating cash flow before W/C changes 719 910 673 833 758 838 897 948 Changes in working capital (339) (540) (375) (693) (545) (179) (111) Net operating cash flow 380 370 297 140 213 659 786 948 Capex (199) (517) 241 151 (200) (200) (200) (202) Free Cash Flow 180 (147) 538 291 13 459 586 746 Discount Factor 1.00 0.92 0.84
Gross PPE 641 1,029 1,259 1,617 1,663 1,832 2,026 2,228 Depreciation Rate 6% 6% 6% 6% 4% 4% 4% 4% PV of FCF 459 538 629 RMBm 2023E 2024E 2025E 2026E 2027E 2028E 2029E Terminal Value Profit after tax 904 949 996 1,046 1,098 1,131 1,165 YoY growth 5% 5% 5% 5% 5% 3% 3% Add: Depreciation & amortization 110 122 134 147 161 175 190 Net finance expense (12) (13) (14) (15) (16) (17) (18) Operating cash flow before W/C changes 1,002 1,058 1,117 1,179 1,243 1,289 1,337 Changes in working capital 0 0 0 0 0 0 0 Net operating cash flow 1,002 1,058 1,117 1,179 1,243 1,289 1,337 Capex (204) (206) (208) (210) (212) (214) (217) Free Cash Flow 798 852 909 968 1,031 1,075 1,120 16,411 Discount Factor 0.77 0.71 0.65 0.60 0.55 0.50 0.46 0.46
Gross PPE 2,432 2,638 2,846 3,056 3,269 3,483 3,700 Depreciation Rate 5% 5% 5% 5% 5% 5% 5% PV of FCF 617 604 592 579 565 541 517 7,579 Summary of PV (Enterprise Value) 13,220 Less: Net debt (incl. perpetual) 265 Equity value 13,485 Less: Minority interest (2) Shareholder Equity Value 13,483 Total shares issued by year-end 2019 (mn) 523 Per Share Value - Rmb 25.8
Assumptions Risk-free rate 2.5% ERPch 6.5% Beta 1.00 Cost of equity = RFR + BETA*ERPch 9.0% Cost of debt 5.0% Income tax 15% After tax cost of debt 4.3% Debt/Capital 0% WACC 9.0% Terminal Growth 2% Source: Wind, company data, HSBC Qianhai Securities, E= HSBC Qianhai Securities estimates
96 Equities ● Energy Equipment & Services June 2019
Exhibit 179. FAM forward PE: Trading in- Exhibit 180. FAM forward PB: Trading line with the historical average around the historical average
45.0 6.0 40.0 5.0 35.0 30.0 4.0 25.0 20.0 3.0 15.0 2.0 10.0 5.0 1.0 - Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 0.0 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 PE Mean +1SD -1SD PB Mean +1SD -1SD
Source: Wind, company data, HSBC Qianhai Securities Source: Wind, company data, HSBC Qianhai Securities
Exhibit 181. FAM: Earnings sensitivity to gross margin and revenue changes, 2020e ______Gross Margin ______Revenue -3% -2% -1% 0% 1% 2% 3% 20% -7% 1% 9% 17% 25% 33% 41% 15% -11% -3% 5% 13% 20% 28% 36% 10% -14% -6% 1% 8% 16% 23% 31% 5% -17% -10% -3% 4% 11% 18% 25% 0% -20% -13% -7% 0% 7% 13% 20% -5% -23% -17% -11% -4% 2% 9% 15% -10% -27% -20% -14% -8% -2% 4% 10% -15% -30% -24% -18% -13% -7% -1% 5% -20% -33% -28% -22% -17% -11% -6% -1% Source: Company data, HSBC Qianhai Securities. E = HSBC Qianhai Securities estimates
Upside risks: Stronger-than-expected contribution from the electronic material business: FAM is actively diversifying into downstream areas like 3C and semiconductor. We expect the electronic material business to contribute 13% earnings to the company in 2021e. Better- than-expected contribution from the electronic material business could positively impact our earnings forecasts.
Stronger-than-expected PV demand: Sales of EVA film are highly correlated with global new PV installations. Hence, stronger-than-expected global PV installations could positively impact our earnings forecasts.
Better-than-expected margin on lessening competition: Less competition could be positive to the company’s gross margins.
97 Equities ● Energy Equipment & Services June 2019
Financials & valuation: First Applied Material Reduce
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) EV/sales 3.5 2.9 2.8 2.6 Revenue 4,810 5,740 6,050 6,243 EV/EBITDA 17.7 19.2 17.1 15.7 EBITDA 943 880 973 1,042 EV/IC 3.3 3.0 2.8 2.6 Depreciation & amortisation -92 -73 -79 -88 PE* 22.8 24.7 22.4 20.9 Operating profit/EBIT 850 807 894 954 PB 3.1 2.9 2.6 2.4 Net interest 5 9 5 10 FCF yield (%) 5.8 3.3 3.8 4.1 PBT 856 816 899 964 Dividend yield (%) 1.4 1.3 1.4 1.5 HSBC Qianhai PBT 856 816 899 964 * Based on HSBC Qianhai EPS (diluted) Taxation -106 -122 -135 -145 Net profit 751 694 764 820 HSBC Qianhai net profit 751 694 764 820 ESG metrics Cash flow summary (CNYm) Environmental Indicators [n/a] Governance Indicators 12/2018a Cash flow from operations 170 213 659 786 GHG emission intensity* [n/a] No. of board members 7 Capex 151 -200 -200 -200 Energy intensity* [n/a] Average board tenure (years) 3.9 Cash flow from investment 151 -200 -200 -200 Dividends -242 -235 -217 -239 CO2 reduction policy [Yes] Female board members (%) 14.3 Change in net debt -131 213 -246 -356 Social Indicators Board members independence (%) 42.9 FCF equity 993 567 643 707 Employee costs as % of revenues [n/a] Balance sheet summary (CNYm) Employee turnover (%) [n/a] Intangible fixed assets 199 197 195 193 Diversity policy [Yes] Tangible fixed assets 1,167 1,296 1,419 1,534 Source: Company data, HSBC Qianhai Securities Current assets 5,014 5,469 5,930 6,418 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 495 281 528 884 Total assets 6,456 7,038 7,622 8,222 Operating liabilities 845 968 1,005 1,025 Issuer information Gross debt 55 55 55 55 Share price (CNY) 32.80 Free float 20% Net debt -439 -226 -472 -829 Shareholders' funds 5,554 6,012 6,560 7,140 Target price (CNY) 25.80 Sector Energy Equipment Invested capital 5,040 5,712 6,012 6,235 RIC (Equity) 603806.SS Country China Bloomberg (Equity) 603806 CH Analyst Corey Chan Market cap (USDm) 2,476 Contact +86 755 8898 3404 Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e Y-o-y % change Price relative Revenue 4.9 19.3 5.4 3.2 60.00 60.00 EBITDA 23.4 -6.6 10.5 7.1 55.00 55.00 Operating profit 23.3 -5.1 10.8 6.7 50.00 50.00 PBT 26.8 -4.6 10.2 7.2 45.00 45.00 HSBC Qianhai EPS -1.4 -7.8 10.2 7.2 40.00 40.00 Ratios (%) 35.00 35.00 Revenue/IC (x) 1.0 1.1 1.0 1.0 30.00 30.00 ROIC 15.5 12.8 13.0 13.3 25.00 25.00 ROE 14.2 12.0 12.2 12.0 20.00 20.00 ROA 12.3 10.3 10.4 10.3 15.00 15.00 EBITDA margin 19.6 15.3 16.1 16.7 2015 2016 2017 2018 2019 Operating profit margin 17.7 14.1 14.8 15.3 First Applied Material Rel to CSI 300 Index EBITDA/net interest (x) Net debt/equity -7.9 -3.8 -7.2 -11.6 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -0.5 -0.3 -0.5 -0.8 Note: Priced at close of 14 Jun 2019 CF from operations/net debt Per share data (CNY) EPS Rep (diluted) 1.44 1.33 1.46 1.57 HSBC Qianhai EPS (diluted) 1.44 1.33 1.46 1.57 DPS 0.45 0.42 0.46 0.49 Book value 10.63 11.50 12.55 13.66
98
Exhibit 182. Hangzhou First Applied Materials: Company structure, April 2019
Zhang Lin Jianhua Hong Hu Weimin and 36 25% 75% other individuals 100% Hangzhou First Linan Tongde Public Technology Group 21.3% Industrial Investment 20.13% 53.63% 5.24%
Hangzhou First Applied Material （603806 CH)
Equities
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Energy Equipment & Services Power EVA film Backsheet for PV generation module and solar Electronic Other system EPC
material business 2019 June
Source: Company data, HSBC Qianhai Securities
99
Equities ● Energy Equipment & Services June 2019
Glossary
Aluminum-laminated film: A type of multilayer composite material that contains aluminum foil. The kind of film that FAM produces is specifically used in flexible packaging of lithium batteries. The composite incorporates the good properties of both aluminum (as a metal) and plastics, possessing high physical strength, acid and alkali resistance, good conductivity to heat and ductility.
Balance of system (BOS): The balance of system encompasses all components of a photovoltaic system other than the photovoltaic panels. This includes wiring, switches, a mounting system, one or many solar inverters, a battery bank and battery charger.
Crystal-growing furnace: A piece of equipment used to produce monocrystalline ingot or multi- crystalline bricks. It typically includes a chamber and hot zone, vacuum and gas system, rotate system, power supply and controls, and water cooling system.
c-Si: Crystalline silicon (c-Si) is the crystalline forms of silicon, either multicrystalline silicon (multi-Si) consisting of small crystals, or monocrystalline silicon (mono-Si), a continuous crystal.
Czochralski (CZ) method: A seed crystal silicon rod is placed on the surface of the molten silicon in the crucible. It is pulled up while rotating it to form a monocrystalline ingot having the same orientation of atoms as the seed crystal.
Diamond wire sawing (DWS): It is the process of using wire of various diameters and lengths, impregnated with diamond dust of various sizes to cut through materials. Because of the hardness of diamonds, this cutting technique can cut through almost any material that is softer than the diamond abrasive. DWC is also more practical and less expensive than some other cutting techniques.
Effective operating hours: Calculated as total electricity generated divided by total installed capacity. It measures how effective the power generation asset is utilised. Normally, effective operating hours for PV solar ranges from 700-1,500 hours per year.
EVA film: Film made of ethylene vinyl acetate (EVA), a chemical copolymer. The film is essentially plastic sheets used to encapsulate the solar cell for protection.
Float-zone: Float-zone silicon is a high-purity alternative to crystals grown by the Czochralski process. In forming a single crystal, a molten silicon is slowly passed along a rod or bar of silicon, which acts as a filter. As a result, impurities in the molten region tend to stay in the molten region rather than be incorporated into the solidified region. Therefore, the concentrations of light impurities, such as carbon and oxygen, are extremely low.
Grid parity: Grid parity occurs when an alternative energy source can generate power at a levelized cost of electricity (LCOE) that is less than or equal to the price of power from the electricity grid. The term is most commonly used when discussing renewable energy sources, notably solar power and wind power.
Levelized cost of electricity (LCOE): It is an economic assessment of the average total cost to build and operate a power-generating asset over its lifetime divided by the total energy output of the asset over that lifetime. It is calculated as the net present value of the total costs over life time divided by total electrical energy produced over lifetime.
Light-sensitive film: A type of thin film material used to create copper pattern on the printed circuit board (PCB). How it works: after exposure to a high intensity ultraviolet light, light- sensitive film (together with the copper underneath) not protected by a piece of mask can be washed away by chemicals. Part of the light-sensitive film (together with the copper underneath) that was covered by the masks, however, can persist through chemical erosion. Therefore, by
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washing away light-sensitive film that is not protected by the mask from the light, the process creates a copper pattern that matches the mask pattern on the PCB.
Mono-Si: The entire sample of monocrystalline silicon is one single, continuous and unbroken crystal as its structure contains no grain boundaries.
Multi-Si: Polycrystalline silicon is a material consisting of multiple small silicon crystals.
N-type cell: An n-type cell has the boron-doped Si wafer on the surface (positively charged), and the phosphorus-doped wafer on the back (negatively charged).
N-type silicon: An n-type silicon is doped with phosphorus, which has one more electron than silicon (making part of the cell negatively charged).
Passivation: Passivation involves the creation of an outer layer of shield material against corrosion, created by chemical reaction with the base material, or allowed to build from spontaneous oxidation in the air.
Photovoltaic (PV): The conversion of light into electricity using semiconducting materials that exhibit the photovoltaic effect.
P-type cell: A p-type cell has the phosphorus-doped Si wafer on the surface (negatively charged), and the boron-doped wafer on the back (positively charged).
P-type silicon: A p-type silicon usually dopes its silicon wafer with boron, which has one less electron than silicon (making part of the cell positively charged).
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Disclosure appendix
Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Corey Chan and Dun Wang
Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
105 Equities ● Energy Equipment & Services June 2019
Rating distribution for long-term investment opportunities As of 19 June 2019, the distribution of all independent ratings published by HSBC is as follows: Buy 52% ( 30% of these provided with Investment Banking Services ) Hold 38% ( 27% of these provided with Investment Banking Services ) Sell 10% ( 21% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price date Disclosure LONGI GREEN 601012.SS 21.77 18 Jun 2019 6, 7 TONGWEI 600438.SS 13.89 18 Jun 2019 4, 7 Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 May 2019, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company 12 As of 13 Jun 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 13 As of 13 Jun 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology.
106 Equities ● Energy Equipment & Services June 2019
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading securities held by the analysts.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
Additional disclosures 1 This report is dated as at 20 June 2019. 2 All market data included in this report are dated as at close 14 June 2019, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument. 5 This report may be a translation of a report authored in another language. If so, and if there is any discrepancy between versions, the original-language version shall prevail. 6 At the time of publication of this report, HSBC Qianhai Securities Limited does not hold 1% or more of a class of common equity securities of this company. Production & distribution disclosures 1. This report was produced and signed off by the author on 20 Jun 2019 06:43 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at https://research.hsbcqh.com.cn/R/34/2qVPWRP
107 Equities ● Energy Equipment & Services June 2019
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HSBC Qianhai Research Team
Head of Research, HSBC Qianhai Securities Industrials and Environmental Services Associate Steven Sun +86 755 8898 3158 Chase Ding [email protected] Analyst, Head of A-share Industrials and Environmental Research Transportation and Logistics Deputy Head of Research, Head of Bonan Li +86 755 8898 3139 Research Product, HSBC Qianhai [email protected] Analyst, Head of A-share Transportation & Securities Logistics Research John Chung Infrastructure David Wu +86 755 8898 3436 Analyst, Head of A-share Infrastructure [email protected] China Equity Strategy Research Corey Chan +86 755 8898 3404 Associate Analyst, Head of China Equity Strategy [email protected] Sonia Luo Research Steven Sun +86 755 8898 3158 Analyst, A-share Infrastructure Research [email protected] Dun Wang +86 755 8898 3460 [email protected] Associate Kate Zhang Petrochemical & New Materials Consumer Analyst, Head of A-share Petrochemical and New Materials Analyst, Head of A-share Food & Beverage Eric Shen +86 755 8898 3403 and Pulp & Paper Research [email protected] Katharine Song +86 755 8898 3142 [email protected] Associate Yi Ru Analyst, A-share Food & Beverage and Pulp & Paper Research Darron Xue +86 755 8898 3407 Telecoms, Media & Technology [email protected] Analyst, Head of A-share Technology Hardware Research Associate Frank He +86 755 8898 3136 Joseph Zhou [email protected]
Associate Analyst, Head of A-share Media & Internet Li Quan Research Yi Guo +86 755 8898 3137 Healthcare [email protected] Analyst, Head of Greater China Healthcare Analyst, A-share Media & Internet Research Jing Han +86 755 8898 3147 Zhijie Zhao +86 755 8898 3144 [email protected] [email protected] Analyst, Head of A-share IT Software Analyst, A-share Healthcare Research Research Esther Wen +86 755 8898 3492 Sijie Ma +86 755 8898 3140 [email protected] [email protected]
Spotlight: China Solar Equipment Equities // Energy Equipment & Services June 2019
Shenzhen, China Shenzhen, Issuer of report: of report: Issuer research.hsbc.com Telephone: +86 755 8898 3288 +86 755 8898 Telephone: HSBC Qianhai Securities Limited Qianhai Securities HSBC S&P Global Intelligence Market Visible Alpha/ONEaccess ® ® ® ® Website: https://research.hsbcqh.com.cn Website: Block 27 A&B, Qianhai Enterprise Dream Park Dream Enterprise 27 A&B, Qianhai Block Global Research Global The EquityThe Brief , search and 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Cooperation Kong Road, Shenzhen-Hong Yi 63 Qianwan Google Play Red Deer Refinitiv Exchange Research ResearchPool or ® ® ® ® ® ® ® ® The MacroThe Brief British Columbia. Corey Chan joined HSBC Qianhai Securities Limited as Head in 2018 of A-share Infrastructure Research. Previously, Corey worked as an equity analyst for a US investment bank in Hong Kong, where he focused on the China capital goods sector. He holds a bachelor of finance degree from the University of Hong Kong. Dun Wang joined HSBC Qianhai Securities Limited as an equity in 2018 research analyst, covering Dun Previously, sectors. energy renewable and electrical equipment infrastructure, A-share worked as an offshore research assistant for a US investment bank and an analyst for a private equity firm. He holds a master’s degree in accounting from the Foster School of Business at the University of Washington and a bachelor’s degree in commerce (honours) from the University of App Store to all our audio and video reports on yourpersonal phone or tablet Bluematrix Factset Markit Hub Available on iOS and Android phones and tablets and phones Android and iOS on Available Download the app from the Subscribe Special weekly podcasts include Bloomberg All our Research, including multi-asset, thematic and daily reports, is available on Subscribe by asset class, analyst, region, country, sector, and ticker, periodical ® ® ® ® ® ® ® ® ® ® ® ® ® Mobile app Mobile ® ® Podcasts ® ® Other platforms ® Website ® ® Analyst, A-shareAnalyst, Infrastructure Qianhai SecuritiesHSBC Limited [email protected] +86 755 8898 3460 [email protected] +86 755 8898 3404 (S1700519060002) Wang* Dun Corey Chan* (S1700518100001) Chan* Corey Research Infrastructure A-share of Head Qianhai SecuritiesHSBC Limited Our multi-channel research * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations Main contributors