LONGi released strong earnings preview, stating net profit to surge 95.5-107.2% to RMB5.0bn-RMB 5.3bn in FY19E. The strong earnings growth implied a 4Q19 net profit of ~RMB 1.7bn, marking a historical quarter high. In 2020, we see wafer supply to remain tight in 1Q20 but shifting towards oversupply, implying a potential price war in 2H20. We expect wafer ASP to decline by 11.0% YoY, while module ASP to reduce 17.2% in 2020. As we expect competition becomes intense for both wafer and module sales, we turn relative prudent on LONGi’s share performance. We downgrade LONGi to HOLD rating despite raising FY20E EPS by 7.4%.
- Profit reached historical high in 4Q19. Strong quarter profit implied not only significant shipment growth, but also outstanding profitability. By end-4Q19, we estimate LONGi’s wafer capacity raised to 40.8GW, up 45.7% YoY, and module capacity also increased to 16GW, up 81.8% YoY. According to mgmt., overall GPM for wafer and module would be ~32% and ~25% respectively in FY19. We believe those figures would be significantly higher than peers, indicating LONGi’s superior costs control and operating efficiency. LONGi’s FY19E earnings was stronger than our estimates, mainly due to 9.3%/4.2% higher than our expected wafer and module shipment, respectively.
- Wafer and module price under pressure. Based on LONGi’s capacity expansion plan, we expect external wafer/module 2020 shipment will increase 60.5%/121.5% YoY to 7.49bn pieces and 18.45GW respectively, but ASP to decline 11.0%/17.2% YoY. We think mono-wafer supply will still be tight in 1Q20, supporting relatively high selling price, but price will likely to face pressures as more new capacity starts production, which will shift market situation to oversupply in 2H20. We expect price cut will reduce wafer/module GPM to 25.1%/21.1% in 2020.
- Wafer and module trending to larger size. LONGi launched M6 wafer with dimension of 166mm in 4Q19 in response to TJZ (002129 CH, NR)’s challenge with newly developed M12 (210mm) products. According to mgmt., M6 product accounted for less than 10% output and mainly used for internal module production in 2019. In 2020, the Company expects M6 product will account for ~40% output, of which ~50% will be used for internal module production. At current stage, M6 series product is pricing at RMB 0.4/pcs and RMB 5 cents/watt higher than traditional M2 products, sustaining LONGi’s profitability over peers. We expect the pricing premium will narrow as larger size product to supply.
- Downgrade to HOLD rating. Based on operating and forecast update, we revise LONGi’s FY19-21E EPS by 19.6%/7.4%/-4.9% respectively to RMB 1.50/1.62/1.84. We turn relatively prudent to LONGi’s performance due to intense competition outlook. We lift our TP slightly from RMB32.37 to RMB 32.40 based on FY20E 20x PER.
