LONGi announced to acquire 100% equity of Ningbo Yize, which owns 3GW cell and 7GW module capacity in Vietnam. The transaction will be all cash, with initial consideration of RMB1.78bn with bet-on value adjustments based on FY19-21E earnings. We believe transaction valuation is less than 7x FY19 P/E. Considering potential ASP boost on LONGi’s module sales, we think the transaction is quite attractive. After due diligence, mgmt. expected to complete the transaction in Jul-Aug 2020. After consolidation, we expect LONGi to seize more US module market shares, and to enhance its short-term profitability and long-term competitiveness.
- Expansion speed is the key. The target Company, Ningbo Yize New Energy (宁波江北宜则新能源), controls 3GW PERC cell and 7GW bifacial half-cell module capacity in Vietnam, and specialized in providing OEM services to leading module brands in the past few years. According to mgmt., Ningbo Yize has state of the art PECR cell technologies, good costs structure and sufficient order backlog to support OEM production in 2020-21. Mgmt. explained expansion speed is the most critical consideration for initiating the deal, as acquisition will save LONGi at least 18 months of construction while CAPEX would be similar as acquisition costs.
- Aiming at the US market. US solar module has significant pricing premium (82% higher vs. Europe) driven by ITC step down schedule (details explained in p.2-3). Additional capacity in Vietnam will help LONGi 1) boost module sales in the US; 2) avoid trade tariff from Section 301(25%) and AD/CVD(~4.1%); and more importantly, 3) bifacial mono c-Si may be exempt from Section 201 tariff (20% in 2020). US panel shipment will significantly raise LONGi’s overall module sales ASP and profitability. Mgmt. intends to boost US module shipment from 1.1GW in 2019 to ~3GW in 2020. We estimate US shipments will increase overall module ASP by at least 5.8% in 2020.
- Preferential payment terms with attractive valuation. The transaction has an initial valuation at RMB1.78bn, with adjustment mechanism based on FY19-21E earnings of RMB220/241/251mn respectively. Ningbo Yize had 9M19 earnings of RMB248mn, implying valuation less than 7x FY19E P/E. With reference to benefits from US sales, we believe deal valuation is attractive, and we noticed the transaction would be settled at 30%/30%/40% in 2020-22 respectively, bringing no financing pressures to LONGi.
- Enhancing market-leading position. We believe the transaction will accelerate LONGi’s capacity expansion pace in downstream module sales, and further enhance the Company’s profitability and leading position. We raise FY20-21E EPS estimates by 2.0%/3.8% to reflect the transaction’s impact, and our TP is also increased to RMB34.62 based on 21.5x FY20E P/E. Maintain Hold.
