LONGi’s robust earnings performance was well expected by the market, but we still discover several highlights, including 1) non-silicon wafer costs reduction reached 31.75%, 2) module GPM reached 28.4%, and 3) accelerating capacity expansion pace. We are impressed by LONGi’s cost control capability, and we believe the Company now has enhanced product pricing power. We roll over valuation to FY20E with multiple of 21.5x. Raise TP to RMB32.37, maintain BUY
- 1H19 earnings surged 53.8%. Revenue increased 41.1% YoY to RMB14,111mn, driven by wafer/module external shipment growth of 183.4%/21.0% YoY. Major operating expense remained in good control, and on track with our full year estimates. Net profit read RMB2,010mn, up 53.8% YoY. Based on 1H19 results, we estimate 2Q19 net profit was RMB1,398mn, up 128.7% QoQ, indicating significant increase in product profitability.
- 1H19 wafer non-silicon cost reduction reached 31.75%. The cost reduction pace was significantly faster than our expectation. At current poly-Si and wafer prices, we estimate LONGi’s wafer sales GPM is likely to reach above 30%, which would be significantly higher than 1H19 wafer sales GPM of 23.2%. Other than margin expansion, mgmt. also disclosed that the Company has been running tight in wafer supply. Therefore, LONGi intenses to accelerate its wafer expansion pace by 1 year earlier, setting new target to have 65GW wafer capacity by end-2020.
- Module shipment reached 3.19GW with a GPM of 28.4%. Module GPM further expanded 4.6ppt YoY, despite the fact that 1H18 module product pricing was substantially better, reflecting LONGi’s capability in cost control. For FY19, LONGi maintains 9.5GW module output target, of which 1-1.5GW for internal use, leaving 8-8.5GW for external sales. Given LONGi’s excellent cost reduction, we expect module sales to maintain stable GPM in 2H19.
- Enhanced pricing power. Given LONGi’s superior profitability comparing with peers, we believe LONGi now has enhanced pricing power over peers, especially to those multi-Si wafer producers.
- Raise TP to RMB32.37, maintain BUY. Based on revised costs and product price outlook and CB conversion impact, we trim FY19-21E EPS forecast by 3.3/1.6/3.2% to RMB1.25/1.51/1.93. LONGi had approached our previous TP of RMB28.00. We roll over our PE valuation to FY20E earnings based on a multiple of 21.5x. Given FY19-21E earnings CAGR of 29.0%, we believe our multiple selection is justified. Lift TP by 15.6% to RMB32.37 per share. Maintain BUY.
