We had series conference calls with XYS (968 HK), LONGi (601012 CH) and Xinte Energy (1799 HK) on supply chain update for Poly-Si, wafer, PV glass, and modules. Based on information shared by those companies, by mid-May, we saw 1) slight improvement in PV demand driven by China domestic installation; 2) overseas demand visibility is still low; 3) PV manufacturers in the supply chain are still facing shipment and pricing pressures. We think market was thrilling for an installation rush in China by 30 Jun, and market is also longing for overseas demand recovery to take up the gap from late Jun to sustain 2H20 product shipment and pricing. Based on companies’ updates, however, we feel managements are cautiously optimistic to overseas order recovery. At current valuation, we still believe PV glass sub-sector is in a better position among other products in the supply chain. We reiterate BUY on Xinyi Solar (968 HK, TP: HK$6.31) and HOLD on LONGi (601012 CH, TP: RMB31.23).
- PV supply chain still running on overcapacity. PV demand did improve in Apr-May boosted by installation rush in China, but company representatives still saw quite significant overcapacity due to disruption of overseas PV demand caused by COVID-19. Along the supply chain, 1) Xinte Energy said Poly-Si inventory dropped slightly from 7k tonnes to 6k tonnes, still close to 1 month level; 2) LONGi maintained smooth wafer sales (2 weeks’ inventory) but module inventories also increased to ~1.5 months output; and 3) Xinyi Solar still observed inventory climbing but within control range (1-2 months inventory).
- Demand visibility is low from overseas market. Companies were conservative to future demand outlook, partly because domestic PV installation rush would only support demand till mid-Jun, and overseas demand is still uncertain as epidemic outlook and lockdown easing paces are not clear. LONGi would like to direct its modules sales focus from overseas market back on China for higher order certainty, though domestic module sales may have significantly lower price due to intense competition. XYS also expected mid-Jun will be a key time to determine PV glass price for the next phase in 3Q20, but demand clarity is not high.
- Capacity plan maintained unchanged. Though facing demand uncertainties, XYS, LONGi and Xinte Energy maintained capacity plans unchanged. XYS and LONGi stick to their capacity expanding plans, bringing additional supply of PV glass in 2H20 and mono wafer from 2Q20, which could be additional explanation to weakened product prices in the recent weeks. Xinte Energy intended to increase output to compensate Poly-Si price decline, and the Company didn’t change its scheduled maintenance in Jul.
- Poly-Si price bottomed; while wafer, module and PV glass may face further pressures. According to China Silicon Industry Association, prime for mono Poly-Si priced had declined to RMB58.5/kg, down 18.3% YTD. Xinte Energy thought Poly-Si price had bottomed, and further pricing decline will lead to production suspension for maintenance. For wafer, module and PV glass, pricing outlooks are still uncertain depending on overseas demand recovery. LONGi pointed out that current market module pricing data is lagging behind actual transactions, as recent module tender price had dropped to an extremely low at RMB1.44/watt (VAT incl.). If overseas recovery progress is slow, LONGi thought that would bring further pressures on module, cell and wafer. We also expect the pressures will transmit to PV glass.
- Stock pick: looking for certainties in an uncertain market. XYS and LONGi’s share price had rebounded 11.6% and 32.3% respectively since Apr. We think market had largely priced in optimistic demand recovery outlook in several A-share listing names such as LONGi, Tongwei (600438 CH, NR), Tianjin Zhonghuan (002129 CH, NR), while overseas demand recovery pace is lagging those expectations. With reference to valuation status among the solar manufacturing sector, EPS growth prospect, industrial consolidation status, and supply chain position, we prefer PV glass producers over other PV manufacturers. Our sector pick is XYS (968 HK, BUY, TP: HK$6.31) for its YoY ASP growth outlook in 1H20 with improving costs structure from declining natural gas and soda ash prices. We are more cautious on other PV manufacturing links for higher valuation but low demand visibility. We reiterate our HOLD rating on LONGi (601012 CH, TP: RMB31.23).
