LONGi reported strong FY19/1Q20 earnings results, with net profit read RMB5,280mn/1,864mn, up 106.4%/205.1% YoY respectively. We think the strong growth momentum is about to face headwinds, as impacts from COVID-19 spreading around major solar installation market such as US and Europe will emerge from 2Q20. Continuous price-cutting among the PV supply chain would be an exhibit of demand disruption. We think earnings visibility for FY20E is low, implying significant uncertainties for both product ASP and shipment volume. We cut TP by 9.8% to RMB31.23 to reflect ASP risks. We think LONGi is fairly priced for now, and suggest staying on the sideline until recovery signal is confirmed. Maintain HOLD.
- Outstanding FY19 results. LONGi recorded 49.6% YoY revenue growth in FY19 to RMB32.9bn, Strong revenue growth was driven by 139.3%/23.4% mono wafer and module shipment YoY growth (see Figure 2). Overall GPM was 28.9%, up 6.7% YoY, mainly backed by stunning wafer GPM of 32.2% and module GPM of 25.2%. Net profit was RMB5.28bn, up 106.4% YoY, close to high end of earnings preview.
- Surprising good 1Q20 earnings. To market’s surprise, LONGi’s strong earnings growth momentum continued in 1Q20, with revenue surged 50.6% to RMB8,599mn, and quarter net profit reached RMB1.86bn refreshing record high. In 1Q20, the Company maintained stable QoQ wafer sales and significant decline in QoQ module shipment, but manage to boost module sales ASP through increasing module export to the US market. According to mgmt., 450MW modules were ship to US market, accounting for 24% of quarter shipment which enjoyed significant pricing premium. 1Q20 wafer and module GPM were high at 39.7% and 22.5% respectively, reflecting the Company’s effort in costs reduction and efficiency improvement.
- Headwinds to emerge in 2Q20. Mgmt. maintained FY20 wafer/module shipment (internal usage incl.) targets at 58GW/20GW unchanged, in view of 1) ~8GW module order was secured; and 2) optimistic outlook that order flow to pick up as US and Europe to resume functional from city lockdown mode. We are afraid that the demand disruption will end LONGi’s stunning growth momentum, as wafer/module price had declined 14.7%/4.1% since 25 Mar. As market visibility is still low, we expect there will be further price cut coming. We trim our wafer/module ASP assumption down by 4.4%/6.8% to RMB2.39/pc and RMB1.52/watt, reflecting FY20E GPM of 29.1%/17.4% respectively.
- Earnings growth to slow down in FY20E. Based on our revised ASP and costs assumptions, we trim LONGi’s FY20/21E EPS outlook by 7.6%/2.7% to RMB1.49/1.80. Based on 21x FY20 PER, we cut TP by 9.3% to RMB31.23. LONGi is close to fairly priced given potential risks. Maintain HOLD.
- Accelerating wafer costs reduction in 2019. LONGi accelerated its wafer costs reduction pace in FY19. Mgmt. disclosed that 1) non-silicon ingots costs had declined 25.46% YoY, and 2) non-silicon wafer cutting costs also declined 26.5% YoY. We estimate overall non-silicon wafer costs dropped to RMB0.91/pc in 2019. Mgmt. expects to have another 10% overall non-silicon costs reduction in 2020, and explained further costs saving would be source from a) thinner wafer and diamond wire for wafer thickness from 180µm down to 160µm in the coming 1-2 years, and 2) increasing yield, from currently 93% to 95%. We think LONGi is currently leading in the costs race ahead of peers, and higher GPM achieved in 1Q20 was a good demonstration of its costs leadership, which helped the Company to sustain relatively stable profitability in the potential price war.
- Strong operating cash flow, but somewhat stretching payables. The Company recognized operating cash inflow of RMB8.16bn in 2019, significantly increased from RMB1.17bn in 2018. We anticipate accounts payable increment as one of the key drivers for operating cash inflow, as the account increased RMB5.2bn. Mgmt. explained payables in relation to solar material manufacturing increased only RMB1.3bn, which was a result of expanding business scale, while the remaining increment was largely due to material and equipment related to new project expansion. We think the Company somewhat stretched payables in 2019 due to its massive CAPEX plans, but it would also be market consensus understanding that such strong operating cash inflow cannot sustain in coming years.
