CITIC SEC: Reform on the supply side of the photovoltaic sector is expected to accelerate, and the sector's sentiment may usher in a turning point on the right side.

CITIC SEC published a research report stating that the worst time for profitability of photovoltaic companies has passed. With the performance, fundamentals, and valuation/sentiment of the photovoltaic sector hitting a triple bottom, demand is expected to gradually recover and grow steadily, while the supply side is expected to benefit from administrative constraints, self-discipline production cuts, market-oriented clearance, and potential reform policies. The industry is expected to see a recovery in fundamentals and a turning point in sector sentiment. Key points from CITIC SEC: Photovoltaic sector is at a multi-bottom, with strong safety cushion Performance bottom: According to the 2024 performance forecasts released by various companies in the photovoltaic main chain, most companies are facing increased loss pressure in Q4 of 2024, mainly due to the decline in profitability caused by the inversion of product prices and costs, as well as significant provisions for inventory write-downs and impairments of long-term assets. However, considering that the industry chain prices stabilized in December 2024, and impairment provisions are relatively sufficient, the worst time for profitability of photovoltaic companies is already behind. Fundamental bottom: Currently, the photovoltaic industry is at a low point in demand after the Chinese New Year holiday and industry chain production lows. Although inventories have temporarily risen due to holiday stockpiling, as tail-end production capacity continues to exit, and with the industry expected to resume full production in mid to late February, inventories are likely to further decline, supporting the industry chain prices entering an upward channel and leading companies' profitability is expected to recover first. Valuation/sentiment bottom: After a 2.5-month pullback, the current photovoltaic equipment index has retraced to near the starting point of the rebound in September 2024. As supply-side reforms and clearance of outdated production capacity continue to progress, sentiment in the sector is expected to reach a turning point. Photovoltaic value chain is starting to recover at the bottom, supply-side reform is expected to accelerate Since mid-2024, government authorities, industry associations, and enterprises have issued policies, self-discipline initiatives, and production reduction measures to alleviate the industry's supply-demand imbalance, mitigate "internal competition" pressure, promote inventory reduction, and stabilize value volume. Progress has gradually emerged. According to third-party organizations such as SMM and Solarzoom, the operating rate of the domestic photovoltaic silicon industry has dropped to 35%-40%, component inventories have decreased by over 15% from the peak in Q3 of 2024, and photovoltaic glass production capacity has dropped by 23% from the peak in June 2024. At the same time, the transaction price of photovoltaic silicon materials and silicon wafers has rebounded by 10%-15% from the low point before the end of 2024, and the national standardized price of photovoltaic modules at a centralized procurement market has seen its first increase in nearly two years since December 2024. With industry inventories expected to continue to decrease, it is estimated that in the next 1-2 months, prices of photovoltaic silicon materials, glass, and other primary and secondary materials are likely to continue stabilizing. In addition, as government authorities continue to raise technical, energy, water, and carbon emission requirements for photovoltaic products, driving the integration and clearance of outdated production capacity, the reform of the photovoltaic supply side is expected to accelerate, and it is recommended to actively monitor potential policy catalysts. Photovoltaic development is entering a new phase, focusing on new technologies, markets, and business models New technologies: With the advancement of technology and market expansion, new products such as BC cells and silver-free pastes are expected to experience accelerated growth, driving demand for equipment, auxiliary materials, and other links. Differentiated products with significant advantages, such as crystalline silicon, are also expected to maintain rapid growth, promoting profit recovery and valuation enhancement. New markets: With the substantial reduction in the cost of photovoltaic products, new photovoltaic applications such as balcony photovoltaics and building-integrated photovoltaics have broad potential. With policy support and improved economic feasibility, related markets are expected to accelerate promotion. New business models: As the global photovoltaic market continues to expand and countries increase their requirements for energy supply chain security, the decentralization and localization of photovoltaic production capacity, as well as the increasing proportion of direct exports in the middle and upper reaches of the industry chain such as silicon materials, wafers, and cells, have become new trends in the globalization of the photovoltaic supply chain. The Chinese photovoltaic industry is entering the "going global 2.0" phase. At the same time, the core competitiveness of enterprises is gradually shifting from product supply to service and sales capabilities, and it is recommended to focus on the advantage of leading companies in global market system solution capabilities. Investment strategy: 1) Turning point in quantity and price: With the continuous advancement of supply-side reform and market-oriented clearance, industry inventories are expected to gradually be absorbed. With the catalysis of steady demand recovery, the overall recovery of industry chain prices and production and sales is expected, and low-cost, new technology leading manufacturers are expected to benefit from optimization, achieving the first profit turnaround. 2) From 1 to 10 in new technologies and markets: With the promotion of technological upgrades and market expansion, new products such as BC cells, silver-free pastes are expected to experience accelerated growth, driving demand for equipment, auxiliary materials, and other links. Differentiated products with significant advantages such as crystalline silicon are also expected to maintain rapid growth. Risk factors: Photovoltaic installed capacity growth is lower than expected; intensification of market competition; policy implementation falls short of expectations; increase in overseas trade barriers; industry clearance progress is slower than expected.