Has PV really bottomed out?

(The author of this article is Huang Dazhi, a researcher at Xingtu Financial Research Institute)

A-shares have come to a big reversal in a dramatic way.

After a series of favorable conditions such as the unexpected RRR cut, the full liberalization of personal pensions in the future, the requirement of the State-owned Assets Supervision and Administration Commission to strengthen the market value management of central state-owned enterprises, and the shouting of the China Securities Regulatory Commission, the A-shares on January 25 came up with a big counteroffensive under the leadership of Zhongzitou. Since the beginning of 2024, the black market has finally improved a little, and the value style has rebounded in an all-round way under the leadership of heavyweight stocks.

In contrast, the performance of new energy, photovoltaic and other growth tracks, which have been strong in the past month, has been relatively weak. However, judging from the market in the past month, PV has risen against the trend under the general decline of the main market index, and has a significant excess return compared with the market index.

As a once golden track, although the performance of photovoltaic has been poor in recent years, it still attracts the attention of many investors. The continuous rise has once again caused investors to ask: has PV really bottomed out?

In fact, the reasons for this round of PV rebound have many similarities with past rebounds, including the stimulus of short-term news, and the marginal improvement or no longer worsening of some long-term factors. If we look at the factors at the level of the photovoltaic industry, the recent photovoltaic fundamentals have shown two positive signals, one is that the price of the industrial chain has shown signs of stabilization. In particular, when module prices continue to be lower than RMB 0.9/W, the cost of PV integrated manufacturers with the lowest cost is approaching, and the market expects that module prices will continue to decline sharply and become less and less likely, and the price of the game will rebound. Second, the export value of inverters has been growing at a positive rate for two consecutive months.

These factors, which have been deteriorating for a long time, have improved in the short term, giving PV, which has been in the cold winter, a reason to rebound. At the same time, for photovoltaics, which have fallen for two and a half years and have fallen by more than 60%, whether it is institutional or floating capital or other funds, the chip structure in the field has been basically clean, which is very suitable for some short-term income funds to gamble, so there are indeed some funds that continue to flow in. From the perspective of the photovoltaic ETF (515790), the largest index fund tracking the photovoltaic industry index, from the end of 2023 to the present, the share of the fund has increased significantly, from 12.6 billion shares on December 27, 2023 to 13.2 billion shares on January 24, 2024, and there has been a continuous inflow of funds recently.

The continuous rebound of photovoltaics has not only attracted the attention of some markets, but also "exploded" the views of some institutions. Li Muyang, fund manager of Huatai Pineapple CSI Photovoltaic Industry ETF (515790), recently said on Weibo that "the price of the photovoltaic industry chain may be close to bottoming, the fundamentals have not yet reached the inflection point, and the stock price is not clear".

This view is also the same as many views in the market, that is, the market funds are more out of the over-falling PV and clean chip structure to win a rebound, and the market logic of short-term funds is greater than the logic of fundamentals.

Therefore, if it is only a short-term gain, the current risk of betting that PV can continue to rebound upward is increasing. Because the current photovoltaic track lacks both hot spots, stories, and policy encouragement, it is obviously not a hot concept. However, if we look at it from another angle, the current photovoltaic may already have significant long-term allocation value.

From 2021 to the present, the new energy track, including photovoltaics, has experienced two stages: tragic valuation and performance. In the first stage, the price of raw materials in the upstream of photovoltaic took the lead in peaking, oversupply superimposed on the slowdown in demand, although the performance of enterprises in the photovoltaic industry chain is still extremely good, but the stock price has peaked before the fundamentals, and the valuation continues to decline after the market expectation is reduced. The valuation of the PV industry index PETTM has fallen from a peak of around 60x to around 11x today (as of 20240124), a valuation drop of more than 80%.

Behind the decline in valuations is the decline in the earnings growth rate of the entire industrial chain. From the perspective of the photovoltaic industry, it is not only affected by the fierce competition brought about by the price war, but also benefits from the expansion of market share brought about by the price decline. From the perspective of the industrial chain, the rapid expansion of upstream polysilicon and silicon wafers has made the price competition of upstream raw materials fierce, and further led to a significant decline in the profitability of upstream enterprises.

On the other hand, the price war has brought about a downward trend in the prices of the entire industry chain, and the prices of downstream modules have also been further reduced, which in turn has stimulated the growth of downstream installed capacity, bringing an unexpected increase in installed capacity. However, from the perspective of the profits of the whole industry chain, the decline in prices has inevitably led to the decline in the profits of the whole industry. Many companies in the photovoltaic industry chain have moved from valuation to performance.

Whether PV has the value of long-term allocation depends on whether the valuation is attractive enough, and on the other hand, whether the industry level has bottomed out. At the valuation level, after a tragic valuation killing, the valuation is already at an all-time low, and the room for further downward movement is very limited.

And more importantly, whether the current pattern of oversupply and demand and sluggish demand in the photovoltaic industry has been alleviated, and when will the profitability of the photovoltaic industry bottom out.

For the former, the "worst moment" is likely to be over. The pace of PV capacity expansion began in the second half of 2021 and gradually accelerated under the expectation of price increases. However, since 2023, the fierce price war has gradually eliminated many high-cost production capacity, and with the tightening of refinancing IPOs in the A-share market, the compression of TOPCon cell profits, and the reduction of local government subsidies, the number of financing termination incidents in the PV industry has increased. Since the second half of 2023, the financing plans of many PV companies have been terminated. For example, Tongwei Co., Ltd., a leading photovoltaic silicon material company, terminated the fixed increase of 10 billion yuan, Gaojing Solar, a new silicon wafer manufacturer, withdrew its IPO application on the GEM, and AISWEI, an inverter manufacturer, also withdrew its listing application on the Science and Technology Innovation Board.

The tightening of financing has also led to the abortion of the planned expansion plan. Recently, even the leading companies in the industry have postponed or reduced the production of some cell and polysilicon projects, especially those new players who originally planned to enter the photovoltaic industry across borders, and many of them have terminated or reduced their investments. For example, from 2023Q3, a number of cross-border enterprises such as Royal Group and Sunflower will terminate or reduce investment in TOPCon/HJT and other projects, and it is expected that the actual implementation of some planned production capacity in 2024 may be lower than the expected plan.

On the other hand, module prices continue to fall, which has touched the cost line of the industry's lowest-cost manufacturers. Recently, there has been a jump price of modules lower than 0.8 yuan/W, which completely breaks through the cost line of the industry. If the price war starts, the industry's supply clearance will only accelerate further.

Therefore, as far as the supply side is concerned, the "worst moment" of the industry has passed, and the supply pattern will usher in a pattern of gradual improvement. Therefore, the price of the photovoltaic industry chain may be close to bottoming out, which has basically been agreed by the market.

As far as the fundamentals of PV are concerned, the bottoming out of the price of the industrial chain also indicates that the bottom of profitability is coming. Although it is not yet possible to foresee whether the PV price war will start on a large scale, in terms of profitability performance, the price of the industrial chain peaked in September 2022 and then gradually declined, and under the base effect, the PV profitability performance will improve significantly in the third quarter of 2024. Therefore, the bottom of PV profitability is not far away.

The bottom of valuations, coupled with the upcoming bottom of earnings, PV with chips basically cleared, although the market is still not good, but with a little patience, it may already be an excellent opportunity to pay attention to.

The future is bright, but the road is tortuous. This sentence is perhaps the best description of the photovoltaic market.

(The author of this article is Huang Dazhi, a researcher at Xingtu Financial Research Institute)

The views expressed in this article are solely those of the author.