longi a (601012 ch) · 2019. 7. 10. · 8 jul 2019 please read the analyst certification and...

CMB International Securities | Equity Research | Company Update

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR

China Solar Sector

Robin Xiao

(852) 3900 0849

[email protected]

Stock Data

Mkt Cap (RMB mn) 81,223

Avg 3 mths t/o (RMB mn) 710.78

52w High/Low (RMB) 25.60/9.51

Total Issued Shares (mn) 3,624.4

Source: Bloomberg

Shareholding Structure

Li Zhenguo 15.0%

Li Chunan 11.0%

Free float 50.4%

Source: Bloomberg

Share Performance

Absolute Relative

1-mth 2.2% -6.4%

3-mth -0.1% 4.2%

6-mth 54.4% 20.4%

12-mth 80.3% 55.8%

Source: Bloomberg

12-mth Price Performance

Source: Bloomberg

Auditor: RSM China

2.5

3.0

3.5

4.0

4.5

5.0

Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19

601012 CH SHSZ300 (rebased)(RMB)

BUY (Initiation)

Target Price RMB28.00

Up/Downside +24.9%

Current Price RMB22.41

1

8 Jul 2019

SUMMARY. LONGi is the world’s largest manufacturer of PV monocrystalline

silicon wafer, cells and module. The Company received well recognition from A-

share market, and has the largest market capitalization among global peers.

Based on close examination on market trend, product supplies and demand, we

believe LONGi will further enhance its leading market position and become a

solar giant in the solar farm grid-parity era.

Mono-Si demand is picking up with grid-parity trend. As non-module costs

for PV farm development is more significant in recent years, downstream PV

development calls for a suitable technology to offer higher. We believe mono-

Si cell is currently the best available technology to answer the call, with

efficiency up to 26.7%. Market data from CPIA and ITRPV confirmed the trend

favors mono-Si products, as mono-Si module had gained market share to 40-

45% in 2018.

Tight supply for high-efficiency mono wafer. We believe mono wafer

supply will likely be tight in 2019-20E, as market demand focus shifts to PERC

cells technology. We estimate mono-Si wafer demand to reach

69GW/88GW/109GW in 2019-21E, with PERC capacity reaching 100GW. We

expect PECR cells capacity will outpace mono-wafer supply, and that will lead

to tight supply in 2019-20E. As such, we expect leading mono-Si wafer

suppliers to maintain full production and sales in 2019-21E.

Second mover advantages and expanding at a good timing. We believe

LONGi is a rising star comparing with industry peers. Supported by 1)

declining upstream Poly-Si costs 2) stable product ASP outlook, 3) low costs

CAPEX for future expansion, we expect LONGi to enjoy good returns from

capacity growth with relatively stable ASP and GPM, and that will increase

LONGi’s earnings visibility.

Initiate BUY with TP of RMB28.0. We expect LONGi to deliver EPS CAGR

of 20.7% in 2019-21E, with EPS of RMB1.22/1.42/1.78 respectively. Given

LONGi’s leading product costs structure and sound financial supports for

future capacity expansion, we believe LONGi deserves a valuation premium

over peers’ average of 17.9x FY19E PER. We adopt 23.0x FY19E for

LONGi’S valuation with a TP of RMB28.0. Initiate coverage on LONGi with

BUY recommendation.

Earnings Summary

(YE 31 Dec) FY17A FY18A FY19E FY20E FY21E

Revenue (RMB mn) 16,362 21,988 29,821 44,139 61,302 YoY growth (%) 41.9 34.4 35.6 48.0 38.9 Net income (RMB mn) 3,565 2,558 4,102 5,164 6,461 EPS (RMB) 1.29 0.93 1.22 1.42 1.78 YoY growth (%) 50.0 (27.9) 31.6 16.5 25.1 P/E (x) 17.4 24.1 18.3 15.7 12.6 P/B (x) 3.1 3.8 3.4 2.8 2.4 Yield (%) 0.8 0.4 0.8 1.0 1.2 ROE (%) 18.1 15.8 18.4 18.0 18.8 Net gearing (%) NetCash 0.2 NetCash 3.7 NetCash

Source: Company data, CMBIS estimates

LONGi – A (601012 CH)

The world’s largest mono-Si manufacturer

8 Jul 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2

Contents

Focus Charts ............................................................................................ 3

The world’s largest monocrystalline product manufacturer ................ 4

Business coverage from monocrystalline rod to downstream solar farm .......... 4

Expansion roadmap & well located production facilities ...................................... 4

Mono-Si demand is picking up with grid-parity trend........................... 7

PV non-module costs is becoming more significant in recent years .................. 7

Mono-Si cell is currently the best available technology to answer the call ........ 7

Mono-Si has been gaining market shares from 2015 ............................................ 8

Competition landscape............................................................................ 9

Tight supply for high-efficiency mono wafer .......................................................... 9

Investment highlights ............................................................................ 11

Costs leadership ensure superior profitability .....................................................11

Second mover advantages and expanding at good timing ................................12

Sound financials and strong financing capability ...............................................14

Financials ............................................................................................... 15

We forecast revenue CAGR of 43.4% in 2019-21E ...............................................15

Resilient gross profit gross profit margin ............................................................15

Expenses rate to stay stable at ~10%....................................................................16

2019-21E net profit CARG to reach 25.5% ............................................................17

Healthy balance sheet supports future capacity expansion ...............................18

Financial Summary ................................................................................ 19

Valuation ................................................................................................. 20

Current valuation and historical valuation range.................................................20

Initiate BUY with TP of RMB28.0 per share ...........................................................20

Major risk factors ................................................................................... 22

8 Jul 2019


Focus Charts

Figure 1: CPIA forecast mono-wafer will expand market

shares in the coming few years

Source: CPIA, CMBIS estimates

Figure 2: Global PV installation demand will maintain

rapid growth

Source: IRENA, CMBIS estimates

Figure 3: We expect LONGi’s wafer GPM to recover in

2019E then decline slightly in 2020/21E


Figure 4: We expect LONGi’s module sales GPM to

remain stable at ~ 22% in 2019-21E


Figure 5: We project LONGi to have earnings CAGR of

25.5% in 2019-21E


Figure 6: LONGi’s EPS and ROE


8 Jul 2019


The world’s largest monocrystalline product manufacturer

LONGi Green Energy Technology Co., Ltd. (LONGi, 601012 CH) is the world’s largest

manufacturer of PV monocrystalline silicon wafer, cells and module. Founded in 2000,

LONGi has more than 19 years’ experience focusing on P-type monocrystalline PV

products. Through years of development, LONGi had built up technology edge in producing

low costs mono wafer and high-efficiency mono-modules, and successfully expanded

mono-wafer and mono-module production capacity to 28GW and 8.8GW, respectively, by

end-2018, seizing more than 40% mono-wafer market shares in the world. LONGi received

well recognition since listing on Shanghai Stock Exchange in 2012. The Company now has

a market capitalization of more than RMB80bn, ranking the top market capitalization

company among global PV peers.

Business coverage from monocrystalline rod to downstream solar

farm

LONGi’s mono-manufacturing business cover mono-rod, wafer, cells as well as high-

efficiency mono-modules. The Company also extended its business towards downstream,

namely ground-mounted and distributed solar farm development, EPC services, and PV

farm solutions. Mono-wafer and module manufacturing and sales are LONGi’s core

business, as both products sales total accounted for 87.4% of LONGi’s total revenue in

2018.

Figure 7: LONGi’s business coverage and core

businesses


Figure 8: LONGi’s historical revenue mix

Source: Company data,

Expansion roadmap & well located production facilities

Headquarters set in Xi’an, Shaanxi Province, LONGi started early business focus on silicon

based semiconductor materials, then transformed to PV mono-wafer manufacturing

through establishing subsidiary Ningxia LONGi in 2006. LONGi made several

breakthroughs in its expansion roadmap, including 1) located mono-rod and wafer

production facilities in low electricity costs areas; 2) established strategic long-term

partnership with crystal growth furnace manufacturers; and 3) first in the industry to

introduce diamond wire saw in mono-wafer cutting to increase wafer cutting efficiency

significantly in 2014.

8 Jul 2019


LONGi’s production capacity was then expanding rapidly to major areas in Xi’an, Ningxia,

Yunnan, Jiangsu, Zhejiang and Anhui in China and Kuching in Malaysia with specific

production layout design and sales purposes. Xi’an base is the headquarters focuses on

wafer cutting, PV cells and module manufacturing; Ningxia and Yunnan production bases

mainly focus on mono-rod and wafer manufacturing for utilizing low electricity costs;

Jiangsu, Anhui and Zhejiang production bases specialize in mono-module production for

utilizing convenient seaborne shipping; and Kuching, Malaysia was designed for avoiding

potential trade dispute for the overseas market. By end-2018, LONGi had established

28GW wafer, 4GW cells and 8.8GW mono module capacity. According to LONGi’s 3-Year

Development for 2019-21E, the Company targets to expand 1) mono-wafer capacity to

36/50/65GW respectively; 2) mono-cells capacity to 10/15/20GW respectively; and 3)

mono-module capacity to 16/25/30GW to enhance its leading mono product manufacturing

position.

Figure 9: LONGi’s production facilities distribution

Source: Company data, CMBIS

(Unit: GW) Rod Wafer Cells Module

Ningxia 16.9 8.0 - 0.5

Yinchuan 13.0 8.0 - 0.5

Zhongning 3.9

Yunnan 11.6 7.9 - -

Lijiang 5.3

Chuxiong 7.9

Baoshan 6.3

Shaanxi - 5.1 0.5 0.3

Xi’an 5.1 0.5 0.3

Xianyang -

Shanxi - - - 0.5

Datong 0.5

Anhui - - 0.7 -

Hefei 0.7

Chuzhou

Jiangsu - 6.6 2.6 4.0

Taizhou 2.6 4.0

Wuxi 6.6

Zhejiang - - 2.0 2.7

Hengzhou 2.0 2.7

Henan - - 2.0 -

Xuchang 2.0

Malaysia 1.0 1.0 0.7 0.9

Kuching 1.0 1.0 0.7 0.9

Total 29.5 28.6 8.5 8.9

8 Jul 2019


Figure 10: LONGi’s capacity expansion plan


Figure 11: LONGi’s capacity growth and 2019-21E targets


(Unit: GW) Rod Wafer Cells Module CAPEX Budget（RMB mn)

Ningxia 15.0 15.0 8.0 - 8,900

Yinchuan 15.0 15.0 8.0 8,900

Zhongning

Yunnan 12.0 10.0 - - 7,200

Lijiang 6.0 3,000

Chuxiong 10.0 1,200

Baoshan 6.0 3,000

Shaanxi - - - 5.0 2,550

Xi’an

Xianyang 5.0 2,550

Shanxi - - - - 0

Datong

Anhui - - - 5.0 1,950

Hefei

Chuzhou 5.0 1,950

Jiangsu - - - 5.0 2,400

Taizhou 5.0 2,400

Wuxi

Zhejiang - - - - 0

Hengzhou

Henan - - - - 0

Xuchang

Malaysia - - 2.3 - 1,797

Kuching 2.3 1,797

Total 27.0 25.0 10.3 15.0 24,797

8 Jul 2019


Mono-Si demand is picking up with grid-parity trend

PV non-module costs is becoming more significant in recent years

The trend was established under the background of rapid costs reduction from market

competition as well as series technological improvements. Multi-Si and mono-Si module

prices had declined with a pace of 28.2% and 27.6% respectively per year from 2015 to

2018. According NREL’s publication of US Solar PV System Costs in 1Q18, PV module

costs accounted for less than 50% and less than 30% utility-scale and commercial

distributed PV system in the US. The significant change urged PV industry to explore

means to further reduce overall system costs, and the answer of the key is efficiency. PV

development calls for a suitable technology to offer higher photovoltaic transmission rate

while maintaining costs-efficiency.

Figure 12: US Solar PV System Cost Benchmark

Source: NREL

Mono-Si cell is currently the best available technology to answer the

call

According to Fraunhofer ISE’s research, mono-Si cell and module offer the highest lab

efficiency at 26.7% and 24.4% respectively, comparing with multi-Si, CIGS and CdTe thin

film, and Perovskite technologies. For the past decade, market had put multi-Si module

and mono-Si module as close pair for comparison. According to IHS Markit, mono-Si

module had maintained 1-1.5ppt efficiency rate leading ahead of multi-Si module, while we

observed mono-Si products had achieved faster cost reduction pace from technology

breakthrough in the past five years, which kicked off a trend for high-efficiency mono-Si

product to replace traditional multi-Si module.

Figure 13: Development of Laboratory Solar Cell Efficiencies

Source: Fraunhofer ISE 2019

8 Jul 2019


Figure 14: We believe efficiency comparison of technologies suggests mono-Si is

currently the best available cost-effective high-efficiency solar technology


Mono-Si has been gaining market shares from 2015

As non-module costs become increasingly vital, the economic value of higher module

efficiency is obvious. Higher PV module efficiency represents higher power concentration

in a unit size of solar panel, and that helps solar farm investors save considerable costs

from balance-of-system (BOS), land or rooftop acquisition and lands, labor installation

costs, as well as some other overhead costs. According to our understanding, we believe

the higher non-module costs for a solar farm, the higher possibility that project owner will

select a mono-Si panel and more willing to pay for a premium for those extra power offered

by the high-efficiency products. According to PSE GmbH, mono-Si module had reversed

its shrinking trend since 2015, and exhibited significant market shares gaining thereafter.

CPIA and ITRPV’s estimates also suggest mono-Si module had a market penetration rate

of 40-45% in 2018, and mono-Si’s market share will expand further in 2019-21E to 53-55%.

Figure 15: Mono-Si module’s market shares exhibited a reverse from 2015


8 Jul 2019


Figure 16: CPIA’s market share forecast for different

types of wafers

Source: CPIA, CMBIS

Figure 17: ITRPV’s market share forecast for

different types of wafers

Source: ITRPV, CMBIS

Competition landscape

Solar wafer sales is currently operating in an oligopoly market structure after years of

market competition and consolidation. There are three key market players, namely LONGi,

Zhonghuan Semiconductor (ZHS, 002129), and GCL Poly (3800 HK, HOLD), and several

integrated solar module manufacturers such as Jinko (JKS US) and Canadian Solar (CSIQ

US) with their own wafer supply. LONGi and ZHS are key participants dominating duopoly

mono-Si wafer market, while GCL Poly focuses on multi-Si wafer manufacturing. We

estimate LONGi, ZHS, GCL Poly will have effective wafer output of 31.6GW, 25GW and

25GW respectively, and the other integrated module manufacturer will produce ~30GW

wafer output to fulfill internal module orders. As we expect global PV installation demand

will reach ~115GW in 2019, we believe solar wafer demand is largely fulfilled by those key

wafer manufacturers and integrated module, leaving considerable oversupply from those

traditional independent wafer manufacturers.

Tight supply for high-efficiency mono wafer

We are not particularly worried about the oversupply of solar wafer, however, as we believe

mono wafer supply will likely be tight in 2019-20E, especially when we shift demand focus

on PERC cells production capacity. PERC stands for Passivated Emitter and Rear Contact.

It is currently the costs effective high-efficiency PV cell technology, and has been adopted

in large scale since late 2017. According to our channel check, PERC production line

requires CAPEX at ~RMB300mn per GW. Given considerable pricing premium for mono-

Si products over multi-Si products, we expect PERC cells manufacturers to have

preference in selecting mono-wafer for their brand new PERC cells investment, and that

will boost mono-Si wafer demand.

In 2019-21E, we forecast global PV installation will reach 115/133/153GW, representing a

demand CAGR of 13.7% from 2018-21E. Based on the assumption of ~10% pipeline PV

module inventories as well as mono-Si wafer penetration rate of 55%/60%/65% in 2019-

21E, we estimate mono-Si wafer demand to reach 69GW/88GW/109GW in 2019-21E,

respectively, representing a 2018-21E CAGR of 34.3%. In the PERC cells manufacturing

end, however, PERC capacity had reached ~60GW by 2018, and market expects the figure

will likely to reach above 100GW by end-2019, significantly higher than our mono-Si wafer

demand projection. We expect PECR cells capacity outpace mono-Si output growth will

also boost mono-Si wafer demand and lead to tight supply in 2019-20E, and undersupply

8 Jul 2019


may be ease as upstream output is to be released in 2021E. Therefore, we expect leading

mono-Si wafer suppliers to maintain full production and sales in 2019-21E.

Figure 18: Our assumptions and forecast for wafer demand


Figure 19: Global PV installation demand

Source: IRENA, CMBIS estimates

Figure 20: China PV installation demand

Source: NEA, CMBIS estimates

Unit: GW 2018 2019E 2020E 2021E

Global PV Installation - (GW) 103.9 114.6 133.3 153.1

Global PV demand including pipeline inventory at 10% 114.3 126.1 146.6 168.4

Mono-wafer market share 39.5% 55.0% 60.0% 65.0%

Implying market size - GW 45.14 69.33 87.98 109.47

Estimated output by key mono-wafer suppliers

LONGi 18.6 31.6 42.3 56.8

ZHS 15.1 25.0 30.0 35.0

Subtotal 33.7 56.6 72.3 91.8

Estimated output by other wafer suppliers

GCL Poly 24.0 25.0 25.0 25.0

Implying other mono-wafer supply 11.5 12.7 15.7 17.7

Implying demand from other key wafer suppliers 56.63 44.46 49.33 51.66

PERC cells capacity 60.0 >100 >100 >100

8 Jul 2019


Investment highlights

Costs leadership ensures superior profitability

We believe LONGi’s continuous focus on costs leadership is a key leading to the

Company’s superior profitability and long-term success. We summarize four key aspects

of LONGi’s costs control measures, including:

1) locating mono-Si rod production facilities in low electricity costs areas: LONGi was one of first movers to set up mono-Si rod and wafer production in Ningxia and Yunnan to utilize low electricity costs in those areas;

2) forming strategic partnership with major production equipment suppliers to lower capacity expansion costs as well as unit product depreciation;

3) continuous R&D investment brought successful technology breakthrough, which led diamond wire saw wafer cutting revolution in 2015, and laid a solid foundation for mono-Si products’ expansion; and

4) making long-term capacity expansion plan to increase economic of scales: LONGi started formulating its rolling 3-year capacity expansion plan since 2018 and we expect LONGi’s ambitious capacity expansion target will help the Company enhance it costs leadership through economic of scales, as well as setting higher entry barriers for any new entrants to the industry.

Backed by successful costs improvement measures, we observed two significant costs

reduction phase from LONGi’s mono-Si wafer non-silicon costs movement. The first phase

was in 2014-2016 when LONGi introduced DWS cutting for mono-Si wafer which

substantially increased wafer production efficiency. We estimate non-silicon production

costs were reduced by 38.9% from RMB3.15/piece in 2014 to RMB1.92/piece in 2016. We

expect the second phase accelerating costs reduction is still ongoing from 2017 to 2021E,

as LONGi announced to make aggressive capacity expansion. The economies of scale for

capacity expansion has started to appear, as we estimate LONGi’s non-silicon wafer

manufacturing cost in 2018 declined by 31.2% YoY to RMB1.16/piece, and we expect the

non-silicon costs will continues to fall to RMB1.01/0.96/0.94 per piece wafer in 2019-21E

respectively.

Costs leadership had helped LONGi obtain superior profitability. According to peers

benchmark with ZHS and GCL Poly, LONGi had significantly higher gross profit margin,

even during demand shock caused by NEA’s “5.31” policy brake. Given rapid declining

Poly-Si price in 2019, we expect LONGi’s mono-Si wafer gross profit margin to resume

28.0% in 2019, and decline slightly in 2020-21E due to further wafer ASP decline.

Figure 21: LONGi’s non-silicon production costs for

mono-Si wafer


Figure 22: LONGi’s gross profit margin for mono-Si

wafer


8 Jul 2019


LONGi’s mono-Si module business was developed through acquisition of Zhejiang Leye

PV Science & Technology Co., Ltd in 2014. Different from mono-Si wafer’s costs leadership

strategy, we believe LONGi’s module business development focuses on product

photovoltaic transmission efficiency side. Given supports from low costs in-house

manufactured wafer, LONGi Leye module exhibited rapid costs reduction in 2015-17, as

we estimate non-wafer production costs declined by 36.9% from RMB1.76/watt in 2015 to

RMB1.11/watt in 2017. We estimate non-wafer costs to have slight increase in 2018 as

LONGi adopts more mono-Si PERC cells for high-efficiency modules. As market is in favor

of high-efficiency solar modules with considerable pricing premium, however, we believe

the slight increase in non-wafer costs was justified. LONGi’s mono-Si module sales also

exhibited superior profitability, as the Company’s module sales recorded higher than peers’

gross profit margins during the past few years. Looking forward, we expect LONGi’s solar

module gross profit margin to relatively be stable.

Figure 23: LONGi’s non-wafer production costs for

mono-Si module


Figure 24: LONGi’s gross profit margin for mono-Si

module


Second mover advantages and expanding at good timing

LONGi is a rising star comparing with industry peers. Given rapid technical iteration

characteristic of PV module development, we believe second mover will be in a better

position to select more competitive technologies and invest with a substantially lower costs.

LONGi’s CAPEX cycle started in 2015 and accelerated from 2017. As a second mover of

the solar industry bring in revolutionary DWS wafer cutting technology, we believe LONGi

has substantially less borrowings and historical investment burden, allowing the Company

to seize a favorable position at time entering into solar farm grid-parity era. Moreover,

rapidly developing PERC cells technology further expands market demand for LONGi’s

mono-Si wafer, since mono-Si and PERC cell combo offer significant efficiency

improvement, which we see vital to further reduce solar farm investment costs.

In the upstream material end, Poly-Si is the most important raw material for LONGi’s mono-

Si rod and wafer production. LONGi’s Poly-Si sourcing used to rely on import with relatively

high pricing fluctuation due to trade dispute. Thanks to domestic Poly-Si manufacturers’

aggressive expansion aiming at import substitution, Poly-Si price exhibited significant

decline during the past two years, and LONGi also secured its Poly-Si supply through

signing long-term procurement contracts with leading Poly-Si suppliers. As we expect there

will be massive new Poly-Si capacity to release in 2019-20E, we believe Poly-Si price will

likely to decline and stay low with reasonable GPM at 20-30%, representing pricing at a

range of RMB70-80/kg for mono grade Poly-Si. As such, we expect LONGi will have stable

upstream material costs structure in 2019-21E.

8 Jul 2019


In the mono-Si product sales perspective, as we believe current solar farm development is

getting very close to mass grid-parity in majority areas in the world, we expect solar module

price will tend to stabilize. We do expect solar module ASP to decline further in the future,

but we don’t expect product pricing to have significant shuffle as past few years. As such,

we believe LONGi will be able to enjoy good returns from capacity growth with relatively

stable ASP and GPM, and that will increase LONGi’s earnings visibility.

Figure 25: Poly-Si price movement

Source: Bloomberg, CMBIS

Figure 26: Solar wafer price movement


Figure 27: Solar cells price movement


Figure 28: Solar module price movement


8 Jul 2019


Sound financials and strong financing capability

LONGi listed on Shanghai Stock Exchange in 2012. The Company received well market

recognition in China through its technological focus on mono-Si products, excellent costs

control, as well as prudent financial management. Management maintained low gearing as

major financial management strategy, and mainly used equity financing as funding source

to support LONGi’s massive CAPEX plan. As such, LONGi is able to maintain its low

indebtedness level leading ahead of solar peers. Listing in the A-share market, LONGi is

able to reach continuous equity financing as A-Stock investors are willing to pay for long-

term future. Therefore, standing at the gate of grid-parity era, we believe LONGi has

stronger financing capability comparing with peers listed in Hong Kong and US capital

market.

Figure 29: LONGi’s gearing level leading ahead of peers


Remark: * CMBIS estimates based on wafer production and shipment measure by piece multiply by 5.2w/piece.

Figure 30: LONGi’s equity and CB financing in recent years


Remark: * CB’s conversion price is based on adjusted conversion price announced by LONGi on Apr 30, 2019.

2018 1Q19

Company TickerWafer

Production*

Wafer

Shipment

Module

Shipment

Net

gearing

Liabilities to

assets ratio

% % GW GW GW % %

LONGi 601012 CH 22.2% 23.5% 18.6* 10.0 5.99 0.22% 57.6%

Zhonghuan 002129 CH 17.4% 15.9% 15.6* 15.2 n/a 34.2% 63.2%

GCL Poly 3800 HK 6.9% n/a 24.2 24.8 n/a 221.4% 76.1%

Jinko JKS US 14.0% 16.6% 9.7 1.2 11.17 Net Cash 76.4%

Canadian Solar CSIQ US 20.7% 22.2% 5.0 N/A 6.82 41.9% 74.0%

Gross profit margin

2018 2018

Date TypeEquity issue

number

Issue/

conversion

price

Funding/Equity

raisedRemark

(mn) (RMB) (RMB mn)

29-Apr-19 Rights issue 833 4.65 3,875 10 for 3 rights issue

20-Nov-17Convertible

bond*150 18.66 2,800

Interest rate for year 1 - 6: 0.3%, 0.5%,

1%,1.3%,1.5%, and 1.8% respectively

8-Sep-16 Placement 210 14.20 2,980 Private placement to 8 shareholders

12-Jun-15 Placement 128 15.30 1,960 Private placement to 8 shareholders

Total 11,615

8 Jul 2019


Financials

We forecast revenue CAGR of 43.4% in 2019-21E

LONGi’s sales growth was impressive in 2013-18 with a revenue CAGR of 57.3%. On the

back of mono-Si wafer and module sales volume growth driven by strong market demand

and capacity expansion, the Company recorded revenue growth of 64.6% in 1Q19. Given

high solar module order visibility from overseas market, we expect LONGi’s strong sales

growth trend to continue in 2Q and 3Q19. Based on NEA’s recent development rules for

solar farm projects in 2019, we expect solar module demand in China to concentrate in

2H19, and we expect that will likely support LONGi’s wafer and module sales as well as

product ASP.

We forecast LONGi’s revenue to increase by 35.6%/48.0%/38.9% YoY in 2019E-21E,

respectively, mainly driven by 66.4% module sales CAGR and 11.1% wafer revenue CAGR

during the period. We expect mono-module’s revenue contribution will increase as new

capacity release output, and module sales mix will change from 59.5% in 2018 to

51.7%/63.7%/69.7% in 2019E-21E. Mono-wafer’s revenue contribution will boost up in

2019E due to faster capacity expansion pace than mono-module. We estimate mono-wafer

sales revenue contribution mix to increase from 27.8% in 2018 to 38.7% in 2019E, then

decline to 28.2%/23.2% in 2020-21E.

Figure 31: LONGi’s sales revenue


Figure 32: LONGi’s revenue mix


Resilient gross profit gross profit margin

LONGi’s overall gross profit margin follow a similar track as the Company achieved

technology breakthrough with DWS wafer cutting and gaining economies of scale through

capacity expansion. Gross profit margin increased from 12.3% in 2013 to multi-year high

at 32.3% in 2017, then suffered a sharp decline to 22.2% in 2018 due to Chinese

Government’s “5.31” policy brake, which caused solar price to tumble in 2H18. Looking

forward, based on 1) stable upstream Poly-Si price outlook, 2) wafer and module ASP

decline in a mild pace, and 3) LONGi’s continuous costs reduction measures, we forecast

LONGi’s mono-module gross profit margin to be resilient at 22.2%/21.2%/21.1% in 2019-

21E respectively, while mono-wafer gross profit margin to rebound to 28.0% in 2019E, then

decline gradually to 26.0%/23.0% in 2020E/21E. We expect gross margin decline to be

driven by ASP decline slightly faster than production cost reduction. We expect LONGi’s

overall gross profit margin to also stay resilient at 24.9%/22.8%/21.5% in 2019-21E,

respectively.

8 Jul 2019


Figure 33: LONGi’s gross profit


Figure 34: LONGi’s gross profit composition


Figure 35: LONGi’s wafer sales GPM


Figure 36: LONGi’s module sales GPM


Expenses rate to stay stable at ~10%

LONGi’s major operating expenses include 1) business taxes and surcharges, 2) selling

expenses, 3) administrative expenses, 4) R&D expenses and 5) impairment losses. The

Company’s operating expenses to revenue ratios were largely stable at ~10%, except 2016

and 2018 when LONGi recognized substantially high inventory impairment loss due to

product price tumble. Looking forward, as LONGi’s wafer and module sales is scaling up,

we expect LONGi will have increasing inventory impairment exposures. However, as we

expect solar product ASP will tend to be stable in the future together with management’s

inventory management, we expect inventory impairment will be in good control. Overall,

we forecast LONGi’s operating expenses rate to decline from 12.2% back to its normal

level at 10.3% in 2019, and stay stable at ~10% in 2020/21E.

8 Jul 2019


Figure 37: LONGi’s OPEX and OPEX rate vs. revenue


Figure 38: LONGi’s Impairment loss and impairment

loss rate vs. revenue


2019-21E net profit CARG to reach 25.5%

LONGi’s net profit CAGR during 2013-2018 was outstanding among solar manufacturing

peers at a stunning figure of 104.8%. Net profit surged from RMB70.9mn in 2013 to

RMB2,558mn in 2018. LONGi reported 1Q19 net profit of RMB611mn with YoY earnings

growth of 12.5%, slower than revenue growth as 1Q19 had a substantially different market

pricing and gross profit margin structure comparing with 1Q18. However, given 1) stable

material costs and product ASP outlook, 2) resilient gross profit margin projection, and 3)

significant sales volume growth boost by capacity growth and thrilling increasing mono-Si

market demand, we expect LONGi to maintain strong bottom line growth performance. We

forecast net profit to reach RMB4,102/5,164/6,461mn in 2019-21E with earnings growth

YoY of 60.4%/25.9%/25.1%, respectively. Our estimate suggests LONGi’s earnings CAGR

in 2019-21E to reach 25.5%.

From EPS growth perspective, though LONGi had significant equity financing during past

few years, the Company still delivered an EPS CAGR of 48.2% in 2013-18. The Company

just raised RMB3.9bn through rights issues in Apr 2019. We estimate LONGi will have a

2019-21E EPS CAGR of 20.7%.

Figure 39: LONGi’s net profit and net profit margin


Figure 40: LONGi’s EPS & ROE


8 Jul 2019


Healthy balance sheet supports future capacity expansion

LONGi has prudent financial management on balance sheet. The Company has

maintained net cash position for years, and turned net gearing to 0.2% in 2018 as with

massive capacity investments. Management adopts 60% liabilities to assets ratio as the

major controlling measures for indebtedness level, and LONGi adopts equity financing

through rights issue and placement as major funding source for CAPEX. Given LONGi’s

low borrowing level, we believe the Company also has plenty room to gear up through debt

financing to support future CAPEX needs, and that may help LONGi to balance the

concerns for EPS dilution and gearing control.

LONGi exhibited an inventory turnover days jump from 59.2 days in 2017 to 71.1 in 2018,

receivable and payable turnover days also experienced a hike in 2018 as the Company

expanded its capacity and sales. Management explained inventory building in 2018 was

mainly due to changing geographic sales structure, since LONGi shifted module sales

focus from domestic market to overseas, and it took longer time for overseas sales with

longer shipping and warehouse storage cycle. We believe LONGi is still in its learning

phase for overseas inventory management, and we project inventory turnover days to

increase further to 78.6 days in 2019E, and then improve to 71.3 and 72.0 days in 2020/21E,

respectively.

Figure 41: LONGi’s total borrowing level


Figure 42: LONGi’s liabilities to assets ratio


Figure 43: LONGi’s inventory level


Figure 44: LONGi’s inventory turnover days


8 Jul 2019


Financial Summary

Income statement Cash flow summary

YE Dec 31 (Rmb mn) FY17A FY18A FY19E FY20E FY21E YE Dec 31 (Rmb mn) FY17A FY18A FY19E FY20E FY21E

Revenue 16,362 21,988 29,821 44,139 61,302 Net income 3,565 2,558 4,102 5,164 6,461

Mono-module 9,175 13,091 15,420 28,118 42,702 DD&A 802 1,129 1,523 1,921 2,085

Wafer 5,753 6,116 11,528 12,461 14,217 Working capital change 1,680 (1,558) (752) (1,740) (2,577)

Others 1,434 2,781 2,873 3,560 4,384 Tax adjustments (83) 85 39 111 133

Others (4,635) (1,040) (1,116) (2,076) (2,489)

COGS (5,280) (4,892) (7,416) (10,047) (13,199) Net cash from operation 1,328 1,173 3,795 3,380 3,613

Gross profit 5,280 4,892 7,416 10,047 13,199

Capex & investments (7,447) (3,652) (7,088) (6,002) (2,657)

Operating expenses 1,688 2,687 3,057 4,443 6,126 Others 3,673 483 10 - -

Taxes & Surcharges 152 117 240 333 428 Net cash from investment (3,774) (3,169) (7,078) (6,002) (2,657)

Selling expenses 664 1,017 1,267 1,903 2,695

Admin expenses 500 623 835 1,236 1,716 Equity raised 685 - 3,851 - -

R&D expenses 164 202 298 441 613 Change of debts 3,937 769 2,049 2,049 1,049

Impairment loss 207 728 417 530 674 Dividend paid (200) (359) (362) (615) (775)

Operating profit 87 61 - - - Others 249 (143) 37 41 45

Net cash from financing 4,672 267 5,575 1,475 319

Other income 27 142 89 132 184

Investment income 582 794 570 570 570 Net change in cash 2,227 (1,728) 2,291 (1,148) 1,276

Asset disposal gain/(loss) - (4) - - - Cash at the beginning 5,185 7,356 5,665 7,956 6,809

Finance expenses, net - - - - - Exchange difference (56) 38 - - -

Others 22 - - - - Cash at the end of the year 7,356 5,665 7,956 6,809 8,084

Non-Operating Income, net (2) 15 12 8 Less: pledged cash 1,190 2,043 2,684 3,972 5,517

4,018 Cash at the balance sheet 8,546 7,708 10,640 10,781 13,602

Profit Before Tax 468 2,867 4,651 5,849 7,311

Income tax (15) 301 512 643 804

Less: Minority Interest 3,565 9 37 41 45

Net profit 16,362 2,558 4,102 5,164 6,461

Balance sheet Key ratios

YE Dec 31 (Rmb mn) FY17A FY18A FY19E FY20E FY21E YE Dec 31 FY17A FY18A FY19E FY20E FY21E

Non-current Assets 13,956 16,758 22,377 26,535 27,197 Sales mix (%)

Fixed Assets 10,804 13,260 17,991 22,354 22,582 Mono-module 56.1% 59.5% 51.7% 63.7% 69.7%

Construction in Progress 1,355 856 1,311 671 671 Mono-wafer 35.2% 27.8% 38.7% 28.2% 23.2%

LT Deferred Expenses 643 959 1,243 1,498 1,728 Others 8.8% 12.6% 9.6% 8.1% 7.2%

Others 1,154 1,683 1,832 2,011 2,217 Total 100.0% 100.0% 100.0% 100.0% 100.0%

Current Assets 18,927 22,901 30,666 40,548 55,006 P&L ratios (%)

Cash & Equivalents 8,546 7,708 10,640 10,781 13,602 Operating margin 22.0% 10.0% 14.6% 12.7% 11.5%

Account Receivables 6,131 8,453 11,183 16,687 23,244 Pre-tax margin 24.6% 13.0% 15.6% 13.3% 11.9%

Inventories 2,380 4,283 5,368 7,945 11,034 Net margin 21.8% 11.6% 13.8% 11.7% 10.5%

Others 1,870 2,457 3,474 5,135 7,126 Effective tax rate 11.7% 10.5% 11.0% 11.0% 11.0%

Current Liabilities 12,340 14,878 18,885 25,711 33,009 Balance sheet ratios

Account Payables 7,350 8,507 10,437 14,566 19,004 Current ratio (x) 1.53 1.54 1.62 1.58 1.67

Advanced Payment 772 962 1,845 1,994 2,275 Inventory turnover days 59.2 71.1 78.6 71.3 72.0

Short-term Borrowings 1,612 688 979 1,184 1,289 Creditor's turnover days 116.3 131.6 115.9 103.4 99.9

Current Portion of LT Debt 560 1,137 1,469 1,776 1,934 Debtors turnover days 111.1 121.1 120.2 115.2 118.9

Others 2,046 3,585 4,155 6,191 8,507 Liabilities/Assets (%) 56.7 57.6 53.8 56.6 57.6

Net debt / equity ratio (%) N/C 0.22 N/C 3.71 N/C

Non-Current Liabilities 6,299 7,956 9,660 12,284 14,375

Long-term Payables 645 1,306 1,491 2,207 3,065 Returns (%)

Long-term Borrowings 1,656 2,659 4,045 5,582 6,368 ROE 25.11 15.55 17.03 18.03 18.83

Bond Payables 3,148 3,262 3,300 3,300 3,300 ROA 10.84 6.45 7.73 7.70 7.86

Others 850 729 823 1,196 1,642

Per share

Total net assets 14,244 16,825 24,498 29,088 34,820 EPS (Rmb) 1.29 0.93 1.22 1.42 1.78

Minority Interests 49 373 410 452 497 DPS (Rmb) 0.18 0.10 0.17 0.21 0.27

Shareholder's equity 14,195 16,452 24,088 28,636 34,323 BVPS (Rmb) 7.12 5.89 6.65 7.90 9.47


8 Jul 2019


Valuation

Current valuation and historical valuation range

LONGi is trading at FY19E PER of 18.3x, based on our FY19E EPS estimate of RMB1.22

per share. LONGi’s valuation is in line with sector average of 18.2x FY19E PER.

Historically, LONGi traded with a 1-year forward PER range between 7.6x and 68.4x during

the pasted five years, with a 5-year average PER of 17.4x. LONGi’s valuation was traded

up to +1 standard deviation to 24.8x during Jul 2017 to May 2018 as the Company gained

significant cost advantages and expanding mono-Si market shares. Valuation tumbled after

NEA’s “5.31” policy brake in Jun 2018, then resumed quickly as market perceived LONGi’s

resilient earnings performance.

Initiate BUY with TP of RMB28.0 per share

We initiate with BUY rating on LONGi with a TP of RMB28.0 per share, based on 23x

2019E PER. Our target multiple is derived based LONGi’s historical up cycle as well as

28.5% valuation premium over sector peers average valuation. On the back of solar farm

demand to resume and concentrate in 2H19, we expect mono-Si demand and ASP to be

solid, and that will likely intensify market sentiment towards the solar manufacturing sector.

Moreover, given LONGi’s leading product costs structure as well as capability to expand

capacity output to meet grid-parity demand with sound financing supports, we expect

LONGi to further enhance its leading position ahead of peers. As such, we believe LONGi

deserves a valuation premium, and our valuation target is justified.

Figure 45: 12M forward P/E band


Figure 46: 12M forward P/B band


8 Jul 2019


Figure 47: Peers’ valuation


Market cap

Stock

price TP Rating EPS-CAGR PER PBR

Ticker Company (Rmb, mn) (Rmb) (HK$) 18A 19E 20E 18-20E 18A 19E 20E 18E 19E 20E

Polysilicon & cell

600438 CH TONGWEI CO-A 54,159 13.95 n/a NR 0.52 0.83 1.05 34.9% 15.9 16.8 13.3 3.6 3.0 2.5

Mono Silicon Wafer

601012 CH LONGI GREEN EN-A 81,223 22.41 28.0 BUY 0.93 1.13 1.44 24.8% 29.3 19.8 15.6 4.5 3.6 3.0

002129 CH TIANJIN ZHONG-A 27,044 9.71 n/a NR 0.23 0.37 0.59 51.0% 38.5 26.2 16.5 2.3 1.9 1.7

Module

002506 CH GCL SYSTEM INT-A 33,227 6.56 n/a NR 0.01 0.03 0.03 54.2% 149.0 205.0 234.3 7.9 8.7 8.4

002218 CH SHENZHEN TOPRA-A 3,993 3.23 n/a NR 0.07 0.01 N/A N/A 44.5 323.0 N/A N/A N/A N/A

300393 CH JOLYWOOD SUZHO-A 4,223 11.76 n/a NR 0.35 0.61 1.15 64.8% 32.0 19.4 10.3 N/A 1.4 1.2

002623 CH CHANGZHOU ALMA-A 2,392 14.95 n/a NR 0.50 0.37 0.44 N/A 47.4 40.1 34.4 N/A 1.1 1.0

Inverter

300274 CH SUNGROW POWER -A 13,663 9.37 n/a NR 0.56 0.75 0.94 27.8% 17.6 12.5 10.0 1.8 1.6 1.4

601877 CH ZHEJIANG CHINT-A 52,705 24.5 n/a NR 1.68 1.98 2.35 17.7% 16.0 12.4 10.4 2.4 2.1 1.8

002334 CH HENZHEN INVT-A 4,153 5.51 n/a NR 0.30 0.41 N/A N/A 18.5 13.4 N/A N/A N/A N/A

603063 CH SHENZHEN HOPEW-A 4,645 10.78 n/a NR 0.13 0.59 0.83 100.6% 118.1 18.27 12.99 N/A N/A N/A

Machine & equipments

300316 CH ZHEJIANG JINGS-A 16,043 12.49 n/a NR 0.46 0.61 0.81 29.3% 27.5 20.4 15.5 3.9 3.4 2.9

300724 CH SHENZHEN SC NE-A 9,373 29.29 n/a NR 1.15 1.39 1.79 20.3% 25.5 21.1 16.4 7.2 3.3 2.8

601908 CH BEIJING JINGYU-A 7,063 3.54 n/a NR 0.23 0.30 N/A N/A 26.4 11.8 N/A N/A N/A N/A

EVA

603806 CH HANGZHOU FIRST-A 19,378 37.08 n/a NR 1.44 1.37 1.67 10.8% 22.4 27.0 22.2 3.3 3.2 2.8

Diamond Wire

300554 CH NANJING SANCHA-A 1,589 16.98 n/a NR 0.40 N/A N/A N/A 42.8 N/A N/A N/A N/A N/A

PV Farm development

000591 CH CECEP SOLAR EN-A 9,923 3.3 n/a NR 0.29 0.45 0.49 25.7% 11.7 7.3 6.7 0.8 0.8 0.8

601222 CH JIANGSU LINYAN-A 8,437 4.8 n/a NR 0.43 0.55 0.66 22.8% 11.0 8.7 7.3 0.8 0.8 0.7

Average 37.3% 38.6 47.3 30.4 3.5 2.7 2.4

Average exclude module & Solar farm 35.2% 33.2 18.2 14.8 3.6 2.8 2.4

EPS

8 Jul 2019


Major risk factors Substitutional PV technology breakthrough

LONGi placed PV technology focus on mono-silicon, and made heavy investments in

mono-PERC technology combo across its key product lines from monocrystalline-rod,

wafer, cells and all the way towards high efficient mono-modules. The Company had

established technology leadership through high efficient mono-PV cell over traditional

multicrystalline products. As technology would never stop evolving, however, we believe

LONGi will face risks from substitutional technologies, such as 1) cast-mono wafer, 2)

larger size wafer without chamfer, 3) PV cell focus shift from PERC technology to HIT PV

Cell technologies, and 4) perovskite solar cell. Any technology breakthrough through those

technologies will significantly increase substitutional risks to LONGi’s mono-wafer and

module products.

Policy risks in China and overseas markets

We still see policy uncertainty a key market risk in China for LONGi, albeit market demand

in the country was eventually released from a freeze due to “5.31” policy brake. We’ve

noticed that NEA took unusually long time to finalize PV project development rules in China

for 2019, indicating difficulties to balance needs from different stakeholders. Going forward,

as PV power has now becoming a more significant energy source, we expect NDRC and

NEA China to establish a more sophisticated system to promote and govern renewable

energy applications. We believe the processes will be bumpy, and that will likely bring

uncertainties to LONGi’s business in near term.

LONGi has increasing business exposures in the overseas market as the Company

expands its mono-product capacity and shipments. We believe LONGi has mature

experience in handling trade dispute such as setting overseas production facilities in

Malaysia to avoid additional tariff. However, given LONGi’s increasing overseas sales

exposure with major production facilities in China, we believe LONGi could still suffer from

potential trade dispute in short term.

Exchange rate risk

LONGi turned product sales focus to overseas market after “5.31” policy brake. According

to management, overseas market sales accounted for more than 70% of total revenue in

4M19, and overseas sales were mainly settled with US$. RMB appreciation would be

unfavorable to LONGi’s profit margin as major production costs are settled in RMB.

8 Jul 2019


Disclosures & Disclaimers

Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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longi a (601012 ch) · 2019. 7. 10. · 8 jul 2019 please read the analyst certification and...

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