Tao Jin: How to understand the investment logic of the photovoltaic industry

　　Zhongxin Jingwei client August 17 title: "Tao Jin: how to understand the investment logic of the photovoltaic industry"

　　Author Tao Jin (Deputy Director, Macroeconomic Research Center, Suning Institute of Finance)

　　Since 2021, the new energy sector has continued to be hot, and the photovoltaic sector related to this has also become a hot topic at present. In 2018, before the "double carbon" target was proposed, the photovoltaic industry began to be recognized by the market, and the Wind photovoltaic index has fluctuated upward since it bottomed out in October 2018, and after April 2021, the index has risen in a straight line. So, what is the long-term investment trend of the photovoltaic industry? Are there still opportunities for entry in the future?

Figure 1 Fluctuations of the photovoltaic index from 2009 to 2020

　　Changes in the photovoltaic industry

　　Photovoltaic, also known as photoelectric volts, full name solar photovoltaic power generation system, refers to a new type of power generation system that uses the photovoltaic effect of solar cell semiconductor materials to directly convert solar radiation energy into electrical energy. Photovoltaics were first used in satellite solar cells in the 1950s. With the advancement of technology, photovoltaics have long entered the field of industrial and residential electricity, and are now everywhere. Due to the use of renewable solar energy, there is no pollution, and photovoltaic power generation and wind power together are considered to be the most promising areas of power generation.

　　China's large-scale development of photovoltaic industry was in 2001. Since then, the photovoltaic industry has entered a period of rapid development, but with the support of industrial policies, the explosive growth of production capacity is significantly faster than the growth rate of demand. By 2008, domestic photovoltaic companies were "two ends outside", neither mastering raw materials nor core technologies, and after the withdrawal of overseas policy subsidies, the development was in trouble. This is mainly caused by overcapacity, cost pressure, the speed of technological progress, the reduction of foreign demand, and the withdrawal of domestic and foreign industrial policies. However, it is precisely because of the changes in the above factors that the photovoltaic industry seems to have shown cyclical changes after 2008. It is worth noting that this cyclical change is not consistent with the economic cycle, but is more affected by many factors in the industry itself.

　　Roughly speaking, the development process of China's photovoltaic industry can be divided into three stages:

　　The first stage: from 2010 to 2015, market demand broke out. With the decline of the European photovoltaic industry, China began to expand production in 2010, and since 2013, the demand of Major Powers in China, the United States and Japan has risen, and the manufacturing industry has rapidly concentrated in China, and China has become the main market for global photovoltaics and has begun to appear in influential enterprises around the world.

　　The second stage: from 2016 to 2018, the problem of subsidies appeared. In 2016, the pressure of subsidy funds spread to the entire industry chain. At the same time, the construction of power grid channels is lagging behind, and the situation of power rationing is grim, which affects the construction of photovoltaic power plants. In 2018, the state issued the "531 New Deal" to optimize the scale of development and reduce subsidy dependence. The development of photovoltaics has entered a trough, and the industry has undergone a wide range of reshuffles.

　　In the third stage, since 2019, due to the continuous decline in costs, the price of photovoltaic power generation has gradually approached that of thermal and hydropower. The policy also clarifies the mode of coexistence between bidding and parity, and the results of domestic bidding and parity in 2020 exceed expectations, and the global carbon emission reduction target is enhanced, which strengthens the confidence in photovoltaic development. The outbreak of new technologies is driving the photovoltaic sector to rise sharply.

　　In 2021, the domestic photovoltaic parity grid, it is expected that the cyclicality caused by subsidy changes will gradually fade, the industry will gradually change from a trend of large and small years to a growth industry with steady growth, the industry growth center has an upward basis, and the compound growth rate in the next five years is expected to reach 20%. After years of development, due to domestic technological progress and market expansion, the dependence on overseas demand has gradually decreased, which has also weakened the cyclical characteristics of the photovoltaic industry and made the growth characteristics more obvious.

　　Market demand size and structure: Long-term demand is no longer a big problem

　　The downstream demand of the photovoltaic industry can be roughly divided into two categories: one is industrial and commercial, residential and other household photovoltaic power generation, and the other is centralized power generation, which is used for photovoltaic power generation for grid-connected operation. Historically, both types of demand have experienced rapid growth. Driving the development of the photovoltaic industry first comes from the first type of demand, and then by the second type of demand relay, in recent years, the first type of demand due to the improvement of technology and sustained growth, industrial and commercial buildings, residential roofs have a lot of space to install solar power generation systems. From a regional point of view, in addition to domestic power generation demand, demand from abroad can not be ignored.

　　In addition, the "double carbon" target and environmental protection policy are expected to greatly increase the demand for solar energy, and the demand for photovoltaics is driven by this factor, and the prospects for expansion are considerable. More importantly, the "double carbon" goal and environmental protection policy have opened the distance between the photovoltaic market and the traditional energy market, and the competition from other similar industries is decreasing, and the demand shows a strong independence.

　　Technical characteristics of the photovoltaic industry: Moore's Law and economies of scale

　　The photovoltaic industry is a typical technology, capital and labor-intensive industry, which is behind the continuous progress of technology and the continuous exertion of economies of scale. The industrial chain of photovoltaics is long and the links are complex. The imbalance between supply and demand in the industrial chain is an important reason for the performance and stock price fluctuations of the photovoltaic industry in recent years, such as the fluctuation of supply in many links such as silicon materials, cells, photovoltaic glass, etc., resulting in price fluctuations and the increase of related downstream costs, which are eventually transmitted to the stock prices of relevant listed companies.

　　The photovoltaic industry also has a pan-Moore's law, almost every two years, the production of cell module technology will be a breakthrough, the corresponding cost will be reduced, while silicon production capacity is also continuing to increase.

　　Market structure: concentration and differentiation

　　After decades of development, the photovoltaic industry has theoretically entered a mature period, but with the outbreak of demand and the growth of "events", it can still be regarded as a growth industry. However, from the perspective of the market competition pattern, with the gradual improvement of the competitive environment, leading enterprises have formed a certain monopoly position in the subdivision field, and the degree of market concentration is relatively high. At the same time, the market value performance of different enterprises is quite different, and the degree of differentiation is also very high. Behind this is mainly the problem of market share, technical level and cost control caused by the advantages and disadvantages of competition.

　　Competitive strategies and their market feedback

　　From the changes in the photovoltaic industry, we can find out why it is called a cyclical growth industry. The growth of the photovoltaic industry comes from the growth of the demand side, reflecting the continuous expansion of space, especially the excellent companies that can achieve market share increase; the cyclical presentation is the large fluctuation of its profitability, which has both the impact of the demand side and the impact of the supply side. How to resist shocks? Relying on the reduction of costs, when the cost is low enough, the degree of erosion of profits by upstream fluctuations is limited.

　　In the market with better growth space, it also depends on who can get more of the cake. In the photovoltaic market, there seems to be no "eating up", Moore's Law and economies of scale effects of so large that there is not even a minimum optimal scale in the industry, the larger the scale, the more likely the cost is lower. The key factor behind leading companies is cost. Some have greatly expanded production, because they have formed economies of scale and have confidence in their own cost advantages; some have carried out vertical integration, with strong economic effects in scope, and can also reduce unit costs. At the same time, vertical integration is also hedging risks, such as rising silicon prices, which is beneficial for integrated enterprises. Therefore, when we pay attention to photovoltaic listed companies, we must compare the costs of each link. (Zhongxin Jingwei APP)

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