Industrial: Can the photovoltaic industry reverse the bottom in the "anti-burnout" series?

One, the photovoltaic industry is bleeding heavily under the price pressure The domestic photovoltaic industry is intensifying its internal competition, with product prices rapidly declining. Starting from 2023, driven by factors such as global carbon neutrality, energy security, and local government industrial competition, domestic photovoltaic production capacity is rapidly expanding, with market share in various segments all exceeding 80% globally. However, the demand for photovoltaic installations has not kept pace with the expansion of production capacity, and disruptions in overseas trade policies have created barriers to the export of photovoltaic products. Currently, the photovoltaic industry is facing a severe problem of overcapacity. As of 2024Q3, the utilization rate of production capacity measured by the turnover rate of fixed assets (including construction in progress) accelerated to below the median level since 2010. In the sub-industries, the utilization rate of silicon materials and inverters has dropped to low levels. With supply and demand imbalance, the industry chain is escalating, and product prices are rapidly falling. Currently, prices of various categories have fallen to historical lows since 2014. In early 2025, there was a slight increase in the prices of photovoltaic products (represented by polycrystalline silicon), but the fundamental structure of supply and demand has not undergone fundamental changes, and the extent and sustainability of the price increase are doubtful. Price wars have significantly squeezed the profit margins of the industry chain, causing major photovoltaic manufacturers to bleed heavily, with tail-end companies facing bankruptcy and liquidation. The gross profit margin of listed companies in the photovoltaic equipment sector has been declining for six consecutive quarters, with only the gross profit margin of inverters remaining at relatively high historical percentiles, while other sectors have already reached their lowest levels. With thin profit margins, photovoltaic companies are forced to endure a period of time fighting to survive. We estimate the length of time that the industry can sustain daily operations using the book value cash (average net cash increase over the past four quarters). Among the 66 listed companies in the photovoltaic equipment industry, approximately 18% of companies can barely sustain normal operations for less than two years with only book value cash, and 8% of companies may not last a year. In terms of sub-industries, the loss-making operation of silicon materials has reached an extreme state, with book value cash only sufficient for 7.11 quarters of use, and the majority of companies also have high asset-liability ratios of around 60% or higher, facing significant pressure for liquidation in the future. Two, the photovoltaic supply side sounds the horn of "anti-internal competition" policy In 2025, China will make efforts to implement the reform tasks of the Third Plenum of the 20th Party Congress, with a focus on guiding the healthy and orderly development of new energy as a priority. Related measures are expected to be gradually implemented in 2025. In July 2024, the Third Plenum of the 20th Party Congress pointed out the need to "improve the development policies and governance system for strategic industries such as the new generation of information technology, artificial intelligence, aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology, guiding the healthy and orderly development of emerging industries." The Central Political Bureau meeting in the same month and the Central Economic Work Conference in December of the same year clearly mentioned "anti-internal competition" and listed "comprehensively rectifying 'internally competitive' behavior and regulating the behavior of local governments and enterprises" as one of the key tasks for 2025. Under the guidance of top-level meetings for "anti-internal competition," the photovoltaic industry has taken multiple measures, including policy constraints and industry self-regulation, to guide the industry chain back to healthy competition. After the establishment of the policy tone for "anti-internal competition," intensive supply-side policies in the photovoltaic industry were introduced. In November 2024, the Ministry of Finance and the Taxation Bureau announced a policy to reduce the export tax rebate rate for battery modules to push for price corrections; in the same month, the Ministry of Industry and Information Technology issued the latest version of the "Normative Conditions for the Photovoltaic Manufacturing Industry" and its management measures, setting entry thresholds for new and expanded photovoltaic production capacity. On the other hand, the photovoltaic industry association held several industry seminars in 2024 to discuss improving industry self-regulation mechanisms, and in October of the same year, it released data on the lowest cash cost for modules, emphasizing the need for lawful and compliant competition. The photovoltaic industry has launched multiple initiatives, showing a high degree of attention to the task of "anti-internal competition." It is expected that subsequent policies and self-regulation efforts will continue to intensify, aiming to quickly break the vicious cycle of the industry chain of "low prices - low profits - low technological development." At the same time, with fundamentals, valuations, and institutional holdings reaching bottom levels, the photovoltaic sector has entered a phase where it is less sensitive to negative news and more sensitive to positive news. Once there are policy implementations that exceed expectations, the repair space and slope of the entire sector are considerable. As the fundamentals weaken, valuations of some sub-sectors of the photovoltaic industry have fallen to bottom levels. As of the latest data, the PE (TTM) of the Photovoltaic Equipment Index is 34.2x, at a moderately low level compared to 33% of historical levels since 2010. Looking at various sub-sectors, valuations of photovoltaic auxiliary materials, photovoltaic processing equipment, and photovoltaic inverters have also fallen to low levels. Since 2023, institutional holdings in the photovoltaic equipment sector have been declining continuously. In the fourth quarter of 2024, the proportion of active equity funds (excluding industry funds) invested in the photovoltaic equipment sector was 3.29%, at a relatively low percentile level of 21.0% over the past five years; over-allocated proportion was 1.91%, at a relatively low percentile level of 26.3% over the past five years. After continuous decline, the photovoltaic sector is now in a phase where it is less sensitive to negative news and more sensitive to positive news. In 2024, the photovoltaic sector significantly underperformed the overall market, but with significant positive stimuli, the sector can also show a substantial rebound in the short term. The average increase in the five trading days following the release of four positive news was 9.65%, outperforming the CSI All Index by an average of 7.81%. Looking ahead, once there are policy implementations beyond expectations that can alleviate or even reverse the market's pessimistic expectations, the potential for recovery in the entire sector is substantial in terms of space and slope. Three, the bottom of the photovoltaic sector's inventory and production capacity cycle is clear The enthusiasm for production in the photovoltaic sector has weakened, with a firm attitude towards destocking. As of 2024Q3, the year-on-year growth rate of inventories of listed companies in the photovoltaic equipment sector has turned negative, reaching the bottom 3% percentile since 2010. Looking at different sectors, the year-on-year growth rate of inventories of modules and processing equipment has also bottomed out, while auxiliary materials have fallen to relatively low levels since around 2010. Driven by weakened profit expectations and supply-constraint policies, capital spending in the photovoltaic industry has also noticeably slowed down, indicating that the future supply landscape of the photovoltaic sector will gradually improve. To break it down, we consider a portion of capital spending in the sector after excluding depreciation and amortization as expansionary capital spending. As of the first half of 2024, the year-on-year growth rate of expansionary capital spending in the photovoltaic equipment sector has continuously declined to the mid-low range of around 39% since 2010, in terms of fundamentals. Looking at various sub-sectors, the valuation levels of photovoltaic auxiliary materials, photovoltaic processing equipment, and photovoltaic inverters have also fallen to low levels. In addition, both also fell to historical median levels. Further observation of the current capital expenditure structure reveals that sector capital expenditure/depreciation amortization is also starting to decline.Fourth, photovoltaic technology iteration boosts industry cost reduction and efficiency improvement. BC and HJT technologies are already in the early stages of quantitative transformation, expected to drive cost reduction and efficiency improvement in the photovoltaic industry. Currently, new photovoltaic cell technologies mainly include TOPCon, BC, and HJT, among which BC and HJT have a 20%-30% power increase compared to the same type of TOPCon single component. TOPCon has been in mass production since 2023, while the capacity expansion of BC and HJT is still in the early stages. With the gradual smoothing of the mass production path, new technologies are expected to guide the industry to continue to reduce costs and improve efficiency, thereby bringing about a rebound in industry profitability. Shaanxi Province has launched a new round of "Photovoltaic Leading Plan," which can be seen as the vanguard of a new round of accelerated iteration of photovoltaic technology. 1) Looking back on history, in June 2015, the Ministry of Industry and Information Technology and other departments issued the document "Opinions on Promoting the Application of Advanced Photovoltaic Technologies and Industrial Upgrading," initiating a three-year "Leading Plan for Photovoltaics." By setting technical indicators and introducing electricity price bidding mechanisms, it promoted the rapid outbreak of PERC technology, thereby to some extent solving the problem of supply-demand mismatch in the photovoltaic industry at that time. 2) Currently, Shaanxi Province has launched a new round of "Photovoltaic Leading Plan," with a total scale expected to reach around 2GW by the end of 2025, accounting for 20% of the total index of wind and solar projects. If other provinces can follow Shaanxi's lead, they may accelerate the completion of capacity iteration in the photovoltaic industry. Leading companies have already started to deploy BC and HJT production capacity and are expected to benefit from incentive policies, leading a new wave of technological iteration. Currently, LONGi Green Energy Technology and Shanghai Aiko Solar Energy are mainly deploying BC production capacity, while Huasheng, Risen Energy, and Tongwei Co., Ltd. are leading the mass production conversion of HJT cells.