CITIC SEC: Technological Upgrade and Resilient Demand Resonance, Leading Company in Photovoltaic Sector Deserves Attention.

CITIC SEC's research report states that the photovoltaic sector is worth paying attention to. It suggests looking at the photovoltaic sector from four dimensions: industry chain prices, industry demand expectations, supply side policies, and changes in industry details. The industry chain prices have bottomed out and are rebounding, supported by changes in business behavior. Demand is resilient under the guidance of the national renewable energy consumption target for 2030. Expectations for supply side reform policies support capacity reduction and product efficiency improvement. Technological upgrades are ongoing in the industry, with improvements in product quality and even the potential for some companies to undergo transformation. CITIC SEC recommends focusing on leading companies driving technological progress and industry chains, as well as leading companies with cost advantages. CITIC SEC's main points include: Positive outlook for the photovoltaic sector from four aspects. We believe that the photovoltaic sector is worth paying attention to and propose a positive outlook based on four dimensions: industry chain prices, industry demand expectations, supply side policies, and changes in industry details. Industry chain prices have bottomed out and are rebounding, with changes in business behavior supporting them. Under the guidance of the national renewable energy consumption target for 2030, demand is resilient. Expectations for supply side reform policies support capacity reduction and product efficiency improvement. Ongoing technological upgrades in the industry indicate improved product quality and the potential for some companies to transform in the future. With the impact of the above four aspects, we believe that the photovoltaic sector will undergo significant changes this year, bringing about noticeable investment opportunities. Industry chain prices bottom out and rebound, driven by changes in business behavior. Following the peak installation season, we have observed various degrees of price bottoming and rising in the photovoltaic industry chain. According to SMM, the price of distributed TOPCon modules has risen from 0.65 yuan/W to 0.71 yuan/W; the price of photovoltaic film has risen from 0.92 yuan/ton to 1.14 yuan/ton; and the price of photovoltaic glass has risen from 12 yuan/m2 to 14 yuan/m2. Since Q2 2024, photovoltaic industry chain prices have fallen below cash costs, significantly impacting the profitability of the entire industry chain. The continuing pressure on cash flow has changed business behavior within the industry. Since Q3 2024, most companies in the photovoltaic industry chain have implemented certain contraction strategies, such as controlling operating rates and reducing inventory, especially in Q4 2024 when the entire industry entered a phase of clearing inventory. With such business behavior, we anticipate that industry operating rates and inventories will remain relatively low in the near term, and marginal improvements in demand will bring noticeable price elasticity to the industry chain. Policy supports the photovoltaic industry, making demand resilient. In November 2024, the National Development and Reform Commission and other departments issued the "Guiding Opinions on Vigorously Implementing the Renewable Energy Substitution Action," proposing to achieve a national renewable energy consumption of over 1.1 billion tons of standard coal by 2025 and over 1.5 billion tons of standard coal by 2030. This translates to an annual increase in wind and solar installations of around 200GW from 2026-2030. In addition, the recent guidance on energy work for 2025 from the National Energy Administration indicates that the non-fossil energy power generation capacity ratio will increase to around 60% by 2025, and the proportion of non-fossil energy in the total energy consumption will reach around 20%. This policy is expected to continue to support the resilience of domestic photovoltaic demand. The global increase in photovoltaic installations is expected to maintain steady growth. If we further consider the possibility of rising oil prices, the demand for photovoltaics could increase at a faster rate. Supply side reform policies are expected to support capacity removal and efficiency improvement. Over the past two years, the biggest challenge facing the photovoltaic industry chain has been overcapacity. In response to this pressure, industry regulatory authorities and associations have held multiple meetings to address the industry's difficulties. From the supply side, it is possible to gradually eliminate outdated production capacity and implement certain supply side reforms through standardization in dimensions such as energy consumption, carbon emissions, and product efficiency. Furthermore, with the decline in photovoltaic industry chain prices over the past two years, the cash flow of the main photovoltaic industry chain has faced significant pressure, especially since Q2 2024, when industry chain prices fell below cash costs. Long-term pressure on cash flow has driven the exit of some production capacity and the restructuring of some small and medium-sized enterprises. Anticipated changes in the industry will involve many details, including technology and business models. We anticipate that there will be many detailed changes in the photovoltaic industry this year. Technological advancements will continue, with the penetration rate of BC cells expected to increase. Silver paste copper and copper replacement silver technologies are expected to be further promoted, as well as the diversified application of perovskite cells. The liberalization of electricity market transactions has emphasized the importance of product quality. Even incidents of quality issues will drive a shift in focus from extreme cost reduction to cost-effectiveness, leading to improved profitability for component products and related materials. Furthermore, the industry's recovery will accelerate the transformation of small and medium-sized enterprises, bringing about changes and opportunities for the industry. Risk factors: Unforeseen delays in the addition of photovoltaic installations, unexpected technological advancements in photovoltaics, and increased international trade barriers in the photovoltaic industry. Investment strategy: From four dimensions - industry chain prices, industry demand expectations, supply side policies, and changes in industry details - we are positive on the photovoltaic sector and recommend focusing on leading companies driving technological progress and industry chains, as well as leading companies with cost advantages.