Tongwei Co., Ltd: Silicon material production capacity expansion shows no signs of slowing down, concern over massive asset impairment, forecast that P-type batteries will lose mainstream status this year | Direct hit on performance meeting

This article is translated from "Securities Star", authored by Zhao Zixiang. In 2023, the competition among photovoltaic companies is fierce, with technological upgrades causing many cross-industry companies to suffer heavy losses. At the same time, as a large supply is released, prices in the industry chain have significantly dropped, especially the price of silicon materials has "collapsed", leading to a decline in the sales gross profit margin of many leading silicon material companies. Securities Star has noted that as a representative of integrated enterprises, Tongwei Co., Ltd (600438.SH) achieved a revenue of 44.799 billion yuan last year in the "high-purity crystalline silicon, chemical and related businesses", a year-on-year decrease of 27.57%, and the gross profit margin also decreased by 21.87 percentage points year-on-year. In addition, Tongwei Co., Ltd achieved a revenue of 19.57 billion yuan in the first quarter of 2024, a 41.13% year-on-year decrease; with a loss of 780 million yuan, turning from profit to loss. On May 15th, Tongwei Co., Ltd held a performance briefing for the fiscal year 2023 and the first quarter of 2024. Faced with intensive questioning from investors, Chairman Liu Shuqi and several senior executives responded to questions about "long-term prospects of the photovoltaic industry," "overseas construction of component capacity," and "whether to slow down the expansion of silicon material capacity." Expansion of silicon material capacity "not slowing down" Regarding the situation of the high-purity crystalline silicon business last year, Tongwei Co., Ltd stated in its annual report, "In 2023, the high-purity crystalline silicon segment saw a peak in new capacity release, the supply-demand relationship quickly shifted from tight to loose, and product prices dropped significantly... Overall, companies in the industry are under pressure, with significant differentiation, some companies experiencing product unsaleability, operating losses, and investment projects being forced to postpone or cancel." Data from InfoLink Consulting shows that by the end of 2023, the average selling prices of high-purity crystalline silicon, silicon wafers, cells, and modules had decreased by 80%, 58%, 60% and 45% respectively from the beginning of the year, and the prices of silicon wafers, cells, and modules in the fourth quarter had reached historic lows. As of last week, the price of N-type silicon materials was 43,000 yuan per ton, a decrease of 4.44% compared to the previous month, with a total decrease of 40% since March; and the price of N-type granular silicon was 37,500 yuan per ton, a decrease of 6.25%, with some companies starting to shut down for maintenance in the face of the sluggish market. In recent years, Tongwei Co., Ltd has made several expansions in silicon material capacity. In response to a question from investors at the performance briefing about whether there are plans to slow down the expansion of silicon material capacity given the recent significant price decline, the company responded, "All of the company's current projects and investment plans have undergone long-term assessment and comprehensive verification, so the Yunnan Phase II 200,000-ton and Baotou Phase III 200,000-ton high-purity crystalline silicon projects will be put into operation as scheduled this year, with the Yunnan Phase II project already igniting and operating recently, and the Baotou Phase III project expected to be put into operation in the second half of this year." Furthermore, the company has previously announced the Inner Mongolia ERDOS Resources 400,000-ton high-purity crystalline silicon project, to be carried out in two phases, with the first phase of 200,000 tons expected to be put into operation by the end of 2025 at the earliest, and the second phase of 200,000 tons starting at a later date. As for the question of how the management evaluates the turning point of silicon material prices and what price strategy will be adopted next, Tongwei Co., Ltd replied, "The recent rapid decline in silicon material prices is partly due to imbalances in supply and demand in the silicon material segment and an increase in industry inventory, while downstream silicon wafer segments are more cautious in silicon material procurement. As for the price turning point, from the perspectives of supply and demand, there are still many variables." Regarding price strategy, the company stated that with current silicon material prices, the entire industry is facing significant operational pressure. Looking at previous cycles, the company believes that there is limited room for further decline in multicrystalline silicon prices. The company will actively maintain shipments, control reasonable inventory, and adjust prices according to market conditions. Explanation of the high asset impairment in the previous year In 2023, Tongwei Co., Ltd recorded a high asset impairment of 6.236 billion yuan. This included provisions for inventory impairment of 1.305 billion yuan, and fixed asset impairment losses of 4.391 billion yuan. In the annual report, Tongwei Co., Ltd explained that the above measures were based on the principle of prudence and involved impairment of assets related to the main PERC battery products. At the performance briefing in response to investor inquiries, the company further explained the reasons for the impairment. The company stated that in 2023, a total of 47.3 billion yuan was set aside for fixed asset and technological renovation project impairments throughout the year, most of which corresponded to the company's existing PERC battery production capacity. Since 2023, the profitability of PERC battery cells has continued to decline, with TOPCon CECEP Solar Energy battery cells becoming the mainstream demand in the market, leading to significant uncertainties in the future profitability and survival space of PERC battery cells. Therefore, based on prudency, the company conducted asset assessments on PERC CECEP Solar Energy battery cell production lines during the middle and end of the year in 2023 and provisioned for fixed asset impairment where the estimated recoverable amount was lower than the carrying amount. Furthermore, as of the end of 2023, the company had essentially recorded a provision for fixed asset impairment for PERC battery equipment that could no longer be upgraded or renovated into TOPCon technology. Looking ahead, the company has indicated that it does not expect any significant fixed asset impairment or scrapping in 2024. Regarding the future trend of the N/P product price spread and when P-type products are expected to exit the market, Tongwei Co., Ltd believes that based on historical experience of single crystals replacing multicrystals and 182 and 210 silicon wafers replacing 166 silicon wafers, it is not ruled out that a "tail effect" may occur at the end of the product lifecycle for P-type products.Type P products may have a higher price than type N products, so in fact, it is quite difficult for type P products to completely exit the market in the short term."Even today, there are still a few 166 components trading in the market, it can only be said that the market share of P-type products will decrease significantly this year, losing the position of mainstream products in the industry," added Tongwei Co., Ltd. This year will accelerate the development of the overseas component market. In 2023, among China's main photovoltaic export products, the export volume of silicon wafers is 70.3GW, a year-on-year increase of 93.6%; the export volume of cell slices is 39.3GW, a year-on-year increase of 65.5%; the export volume of components, which previously had the highest demand in overseas markets, is 211.7GW, also a 37.9% increase year-on-year. Overseas expansion of photovoltaic companies has been a hot topic in the past two years. Some investors have stated, "We have seen that some integrated component companies have completed overseas component production capacity layout, and have achieved some good results in the past two years. I wonder if the company has a plan to build component production capacity overseas?" In response, Tongwei Co., Ltd stated, "Tongwei began large-scale layout of the component business in the second half of 2022, with a short-term focus on the domestic market as the core, because we need to quickly ramp up production in the component sector and enhance brand influence; at the same time, we are also expanding into the overseas market, preparing in advance for the long-term changes in industry demand structure, but our focus in overseas layout is on the market end. In the past two years, we have achieved comprehensive coverage of overseas top customers." Regarding this year's plans, Tongwei Co., Ltd stated, "This year, we have also raised higher expectations for the overseas marketing team of the component within the company, hoping to accelerate the development of the overseas component market." Furthermore, Tongwei Co., Ltd stated that they are also synchronously monitoring the dynamic changes in the global market, trade situation, and policy adjustments in overseas production capacity construction, fully demonstrating the feasibility of expanding the company's component production overseas in the future. (This article was first published on Securities Star, author: Zhao Zixiang) This article is reprinted from "Securities Star," author: Zhao Zixiang.