LONGi delivered outstanding 1H20 results. 2Q20 net profit was RMB2,252mn, up 61.1% YoY, refreshing quarter earnings new high. Strong earnings was mostly driven by module external shipment growth by 140.2% to 4.7GW during the quarter, while we estimate GPM of mono-wafer sales were above 30% despite continuous price cut in Apr-May. Looking ahead to 2H20, though uncertainties appear to increase with pricing and costs fluctuation, we think LONGi will likely offset those impacts through accelerating shipment growth. We raise FY20-22E EPS forecast by 39.9% - 54.8% to RMB2.08/2.58/3.12. Our TP is lifted to RMB72.40 based on 28.1x FY21E PER. Upgrade to BUY rating.
- 2Q20 results beat. 2Q external module shipment surged 106.2% YoY to 4,708MW, while external wafer shipment stay relatively flat at 1,112mn pieces, down 5.0% YoY. The Company recognized RMB406mn impairment losses mainly from RMB427mn for Taizhou and Chuzhou plants, and largely offset by RMB296mn gain from solar farm disposal and RMB153mn financial income from excess cash management. Net interests gain was recorded for the consecutive second quarter, as LONGi maintained in a net cash position. For 1H20, net profit was RMB4,116mn, up 104.8% YoY, significantly higher than ours and market estimates.
- Strong overseas module shipment sustained excellent profitability. LONGi realized wafer/module external shipment of 2.47bn piece/6.58GW in 1H20, up 14.9%/106.2% YoY. Module sales was a highlight as LONGi had 52% module shipped to overseas market, and US module sales offered explicit high margin with significantly higher ASP (+RMB30-50cents vs. domestic spot price.) Wafer sales recorded high GPM at ~40% in 1Q20, and we estimate wafer sales GPM was above 33% though experienced continuous price cut in Apr-May. In a challenging environment came with impacts from COVID-19, LONGi still maintained smooth sales with limited impacts on profitability, in our view.
- Price/costs impacts to be offset by shipment growth. Recent price/costs fluctuate along the PV supply chain had brought impacts to wafer margin and module demand uncertainties. Based on current pricing structure, wafer GPM declined to ~24% by end-Aug, according to our estimate. We are not over concern on the short term turbulence, as LONGi has state of the art PERC cell (efficiency at 23%), leading product costs structure, and strong overseas module sales network. In 2H20, we expect LONGi to meet its sales target, implying 74.8%/156.4%, which we see strong enough to offset price/costs impacts.
- Raise TP to RMB72.40, upgrade to BUY. We overestimate price and margin impacts to LONGi brought by COVID-19 in our previous estimate. In extremely challenging context in 2018-2020 (such as Chinese government’s 5.31 policy in 2018, project approval delay in 2019, and COVID-19 disruption in 2020), solar demand was resilient on the track with continuous improving cost competitiveness comparing with other energy type. We expect global solar demand to restore its booming track from 2H20. Based on 1H20 operating and financial updates, we raise LONGi’s FY20-22E EPS estimates by 39.9%/42.9%/54.8% to RMB2.08/2.58/3.12. Our TP, based on FY21E 28.1x, is raised to RMB72.40. We upgrade LONGi from Hold to BUY.
- Risk factors: 1) cell technology upgrade to HJT at faster-than-expected pace; and 2) short of Poly-Si to support capacity expansion in 2021E.
