LONGi performed surprisingly stable in a chaotic operating environment in 1Q21. 1Q21 net profit refreshed historical high and read RMB2.5bn, beating market expectations. The Company’s FY20 results was RMB8,552mn, slightly higher than previous earnings guidance, reflecting outstanding costs leadership and sales capability. For the remaining quarters in 2021E, mgmt. admitted challenging business environment, but maintaining a stable development strategy. We believe LONGi has mature planning in view of bumpy way ahead. We expect potential margin squeeze in 2Q/3Q21 will create good opportunities for accumulating shares. We remain optimistic for LONGi’s long term performance, and lift TP by 22.2% to RMB110. Maintain BUY.
- Outstanding FY20 performance. LONGi enhanced its leading position in solar supply chain in 2020. Revenue surged 66% to RMB54.6bn in 2020. GP read RMB13.4bn with quarterly increment trend. GPM was 24.6%, down 4.3ppt YoY since LONGi reclassified shipping costs in COGS. Net profit was RMB8.6bn in 2020, up 62% YoY. The Company declared final dividend RMB0.25 per share with a scrip issue of 10 for 4 bonus share.
- Wafer and module to face margin squeeze in 2021E. LONGi delivered 58GW/24.5GW mono-wafer/module with GPM of 30.5%/20.6% respectively in 2020. All those figures were leading peers, and the Company became the largest module supplier in the world. In 2021, LONGi is facing challenging operating environment since 1) price hike of poly-si and other auxiliary materials outweigh price cut from PV glass; and 2) downstream solar developers have limited room to assume higher costs due to grid-parity pressures. LONGi was able to pass-through poly-si costs in the wafer end, while GPM of module was squeezed by 5ppt to ~15% in 1Q21. Mgmt. admitted difficulties to pass-through costs pressures as some low price orders are pending to be delivered in 1H21. We think LONGi’s margin pressure will likely to sustain in 2Q-3Q21E.
- Strategy remains steady. LONGi guided 2021E revenue outlook of RMB85bn with wafer/module shipment target of 80GW/40GW, respectively. Mgmt. is prudent on recent abnormal poly-si pricing and decided to reduce some wafer capacity utilization in view of material supply competition. Mgmt. decided to put 2,000 crystal growing furnaces offline as rivals are paying aggressive terms for poly-si supply. We think LONGi will suffer short term pressures for wafer manufacturing, but in the longer term outlook, we believe LONGi’s decision will bring more flexibility when poly-si supply ramps up in 2022.
- Cost advantage helps to cross the bumpy wave. We think recent chaotic supply chain fluctuation is mainly caused by structural poly-si supply shortage and weaker-than-expected downstream PV installation demand. We expect both problem will be eased as new poly-si supply released in 2022. Compared with peers, LONGi has significant higher margin buffer in both wafer and module sales, which will help the Company perform better in recent challenging environment.
- Maintain optimistic outlook for long term. We believe global solar development is an irreversible trend under the backdrop of carbon-neutrality development. Given costs leadership and technology advancement, LONGi will be one of the key picks of the solar development boom. We think short term fluctuations do not hinder overall rapid growing trend. We cut our FY21E earnings outlook by 9.9%, and lift FY22E earnings by 7.5%. Based on 31x FY22E P/E, we lift LONGi’s TP by 22.2% to RMB110. Maintain BUY.
