Key positives: (1) We expect S.C New Energy will continue to see strong order intakes in FY21E due to robust equipment upgrade/replacement demand underpinned by larger wafer format and rising PERC+/TOPCon technologies; (2) We expect gross margin will stabilize in FY21-22E. We continue to like S.C New Energy for its comprehensive product offering, dominant market share and leading technological edge. We raise S.C’s earnings forecast by 5-6% for FY20E-22E and lift TP to RMB 185.00, based on 1.5x FY21E PEG, on the back of 46% FY20-FY22E net profit CAGR. Reiterate BUY. Near-term catalysts: 1) Release of FY20E prelim results; 2) Completion of A-share non-public placement.
- Solid backlog to support revenue growth in FY21E-22E. According to S.C’s latest A-share placement documents, the Company obtained RMB 7.1bn new orders in FY20E, up 45% YoY. We believe this was largely due to strong demand from prevailing larger wafer format (from M6 to M10/G12).
- We expect cell makers’ capacity expansion growth to continue. Looking into 2021E, we expect solar cell makers’ aggressive capacity expansion to continue, which will add a minimum of 120GW new capacity for the industry as whole and lead to >300GW total capacity by YE 2021E. While such large supply will potentially exert pressure on cell prices, we believe solar cell makers will continue to enhance their capex on 1) equipment compatible with larger wafer format (esp. G12) in order to lower its costs, and 2) equipment with advanced technologies, e.g. PERC+/TOPCon, that offers higher efficiency gains while at lower CAPEX than HJT cells.
- S.C New Energy is well-positioned to capture equipment upgrade demand in 2021E. PERC+ and TOPCon require additional equipment on top of a PERC production line, and S.C is already capable to offer these equipment. We estimate the value of a complete set of production line of PERC+/TOPCon reaches RMB200mn/RMB 230mn per GW, ~30-50% higher than that of PERC, while the value of upgrading from PERC is estimated to be ~RMB 50mn per GW. Hence, we believe S.C is well placed to capture the robust orders with higher per GW CAPEX.
- Gross margin to bottom out on new products. S.C’s GPM in FY20E was dragged by 1) lower ASP orders in FY18E (hit by “531 policy”) that was recognized as revenue in FY20E, and 2) the reclassification of part of sales & marketing exp. to COGS. That said, we believe S.C’s gross profit margin will bottom out and back to an upward trend in FY21-22E, given that revenue from new generations of equipment with more advanced technologies will gradually be recognized.
- HJT equipment advancement on track. S.C became capable of offering a complete production line for HJT cells in Dec 2020. Specifically, with its RPD devices, different from mainstream PVD, the Company stated that it could help cell makers to achieve min. 0.6% conversion efficiency gains for HJT cells. The Company also signed agreement with Akcome (002610 CH, NR) and Runergy to provided equipment for a total of 11GW HJT facilities. Going forward, we expect S.C to launch new generation of PECVD with higher throughput (>10,000 pcs/hr) and PAR devices (combining RPD with PVD) that could further lower cell makers costs and continue to exploring new technologies to improve efficiency.
- Raise TP to RMB 185.00; Reiterate BUY. We lift S.C’s FY20E-22E earnings forecast by 5-6% mainly to reflect better margin outlook, while slightly lower revenue in FY21E-22E to reflect lower per GW CAPEX resulted from larger wafer format. We raise our TP by 34% to RMB 185.00, based on 42% diluted EPS CAGR in FY20E-22E (vs. prev. 39%) and 1.5x PEG (vs. prev. 1.3x). We factor in less dilution impact from A-share non-public offering based on the Company’s recent share price performance (FY21E-22E EPS dilution of 4%/6% from prev. 4%/9%, assuming issuance to be completed by 1Q21E). Besides, we apply a higher target PEG of 1.5x, which is in line with that of its closest listed peer Maxwell (300751 CH, NR).
- Risk: 1) Weaker-than-expected downstream capacity expansion and PERC+/TOPCon upgrade demand; 2) Slower recovery of GPM; 3) Deterioration of clients’ financial ability to pay.
