Source: MEGA WAVE

Author: Hu Mo

Not long ago, there was a piece of news, roughly saying that due to the extremely cheap photovoltaic modules produced in China, Europeans have begun to use photovoltaic components to replace garden walls and fences. When the component price drops to 0.6 yuan per watt, the cost of photovoltaic is indeed cheaper than fences.

The so-called bystanders watch the bustle, while the insiders look at the doorway, meaning that while others may think this is a joke, for professionals in the photovoltaic industry, it is an extremely harsh reality.

Looking at the deep retracement of this round of photovoltaics, every link has a large amount of excess capacity that is difficult to resolve, and all enterprises are experiencing deep internal turmoil. This is a scene that the photovoltaic industry has never faced before.

Currently, the capacity utilization rates of silicon materials, silicon wafers, batteries, and modules are 56%, 49%, 54%, and 50% respectively, and most segments are facing cash deficits. In the first half of this year, the leading photovoltaic company $LONGi Green Energy Technology (601012.SH)$Please use your Futubull account to access the feature.$TCL Zhonghuan Renewable Energy Technology (002129.SZ)$Please use your Futubull account to access the feature.$Tongwei Co.,Ltd (600438.SH)$ The net income was -5.257 billion yuan, -3.176 billion yuan, -3.64 billion yuan respectively.

Recently, the photovoltaic sector in the capital markets suddenly became active. Longi, Tongwei, and TCL中环 saw their stock prices rebound by more than 50% in the last month. The conclusion that the photovoltaic industry is about to hit a bottom and rebound has been continuously mentioned in the market.

"巨潮WAVE" believes that in the context of a deep retracement in the photovoltaic sector, the short-term rebound in stock prices mainly reflects the game of funds and the adjustment of future expectations. However, the short-term excess capacity is difficult to be effectively consumed, and leading companies pursuing integrated development will also extend the industry's bottoming time. It may still take some time before the turning point of the photovoltaic industry at the industrial level is truly improved.

From past cycles, the combined efforts of policies, technology, and funding are key drivers of the photovoltaic sector. Currently, with overcapacity, the impact of policies and funding is limited, and technological innovation may become the key to opening the next cycle of the photovoltaic industry.

Sharp Rise

The result of multiple factors working together.

Similar to many stock market trends, the stimulation and rebound of the photovoltaic sector are directly influenced by the spread of "small articles".

Rumors suggest that the photovoltaic industry will introduce energy consumption restrictions. If implemented, it is expected to accelerate capacity clearing, alleviate overcapacity issues, and increase product prices. Although the accuracy of the news cannot be confirmed, objectively speaking, these rumors have a certain industry basis.

In July of this year, the Ministry of Industry and Information Technology detailed the energy consumption of existing and new projects in various sectors of the photovoltaic manufacturing industry in the "Normative Conditions for the Photovoltaic Manufacturing Industry (2024)" (Draft for Solicitation of Comments). It requires that the existing and new comprehensive electricity consumption of polycrystalline silicon be less than 60kwh per kilogram, 57kwh, and that the average comprehensive electricity consumption of silicon components, thin-film component projects be less than 0.025 million kilowatt hours/MWp, 0.4 million kilowatt hours/MWp.

Stricter energy consumption policies are conducive to driving capacity clearing. The current policy trend continues to focus on reducing energy consumption at all levels of the photovoltaic industry. The elimination of backward capacity is expected to become the main theme, and faster capacity clearing is also conducive to the photovoltaic industry's ability to withstand deflation, allowing product prices at all levels to return to a reasonable range.

Also in October of this year, the China Photovoltaic Industry Association calculated the current cost of modules, concluding that without considering depreciation, the taxed production cost of modules containing silicon wafers, silicon ingots, and solar cells is 0.68 yuan/W.

This means that if the bidding for photovoltaic modules is lower than 0.68 yuan/W, it may be considered illegal if it wins the bid.

In fact, the "People's Republic of China Tendering and Bidding Law" has clearly stipulated that the contract price of the winning bid must be higher than the cost. However, the lack of authoritative institutions defining the cost prices of various industries in the photovoltaic industry has made it difficult for the law to be truly implemented.

Now that the China Photovoltaic Industry Association has standardized cost prices, component quotations are gradually rising. For example, in the opening bidding of the 2024 photovoltaic module framework agreement of China Energy Conservation, 13 companies participated in the bidding for 2.5GW of N-type TOPCon dual-side modules, with an average bid price of 0.694 yuan/W, showing a certain degree of increase compared to mid-September.

Regulators' control over energy consumption and associations promoting the healthy development of bidding are expected to improve the endless internal competition in the photovoltaic industry.

On the international policy front, according to the official website of the United States federal government, the U.S. Department of Commerce has initiated a review of the situation. Considering the partial withdrawal of anti-dumping and countervailing duties on Chinese crystalline silicon photovoltaic cells, the products involved are certain small, low-wattage, and off-grid polycrystalline silicon photovoltaic cells, inviting relevant parties to express their views.

In the global photovoltaic market, the U.S. market is not only a blue ocean, but also a "money-maker", with component prices even reaching more than twice that of the Chinese market. However, due to policy risks, many domestic entrepreneurs are not willing to take risks to seek opportunities. The loosening of U.S. Department of Commerce policies may not immediately restore confidence in going to the U.S., but at least it can make some Chinese companies start to consider it.

From the perspective of installed capacity, China's new installed capacity in September was 20.89GW, an increase of 32% year-on-year and 27% month-on-month, indicating that the industry seems to have returned to a state of seasonal recovery in terminal demand.

Finally, since 2021, various sectors of the photovoltaic industry in the capital markets have undergone a very deep adjustment. Capital is always profit-driven, and low-cost participation in the game is the law of the capital market.

It can be seen that the strong increase in the photovoltaic sector in the recent period does indeed have logical rationality at all levels.

Bottoming out?

The sharp rise reflects expectations.

The biggest issue in the current solar industry is overcapacity, and the imbalance between supply and demand will lead to severe cash losses in most parts of the chain.

Currently, in segments such as silicon materials, silicon wafers, cells, modules, only the module segment can achieve a meager profit. In the silicon material segment, the industry faces a cash loss of 0.01 million/ton, in the silicon wafer segment, the industry faces cash losses of 7-8 cents/w, and in the cell segment, the industry faces cash losses of 2-3 cents/w.

Looking at the indicator of operating rates, the operating rates for silicon materials, silicon wafers, cells, and modules are 56%, 49%, 54%, and 50% respectively, all at historically low levels.

Affected by this, most photovoltaic companies are facing a dilemma of losses. Industry leaders like Longi, tcl zhonghuan renewable energy technology, and Tongwei had net losses in the first half of this year of -5.257 billion yuan, -3.176 billion yuan, and -3.64 billion yuan respectively.

tcl zhonghuan renewable energy technology even mentioned in its interim report that the competition in the photovoltaic industry is shifting from full cost competition to cash flow competition. This means that in the fierce price war, the competition is no longer just about cost capabilities but about who has enough money to last till the end.

With the gradual exit of enterprises without cost advantages in the context of the national restrictions on the expansion of low-end production capacity, the supply side of the photovoltaic industry is gradually improving. According to the statistics of the China Photovoltaic Industry Association, the number of newly commissioned, started, and planned production capacity projects in the first half of this year has decreased by 75% compared to previous years, with over 20 projects already announced to be delayed or terminated.

At the same time, the volatility of the capital markets is also affecting the financing of the photovoltaic industry, leading to the postponement or termination of some new photovoltaic projects, forcing companies to shut down or seek acquisition. In the primary market, companies such as Zhongrun Power, Runyang Co., Ltd., and Yidao New Energy have already terminated their IPOs. In the secondary market, $Trina Solar Co., Ltd. (688599.SH)$Please use your Futubull account to access the feature.$JinkoSolar (JKS.US)$ Some companies have also suspended their issuance projects. Of course, there are also cases of companies exiting the market, such as special treat Lingda and special treat Jiayu have announced bankruptcy or entered restructuring procedures.

Against the backdrop of continuous contraction on the supply side, does this mean that prices of products in various links of the photovoltaic sector will stabilize, indicating that the industry sector has reached its bottom? Or in other words, which link in the photovoltaic sector will lead the industry towards recovery first?

Some industry insiders believe that due to the longest expansion and recovery cycle in the silicon material segment, it will take approximately one and a half to two years, much longer than the silicon wafer, cell, and module segments. Additionally, the silicon material segment requires significant capital expenditure, and even after shutdown, it still requires substantial maintenance costs. Therefore, the silicon material segment is likely to reach the bottom first, before shifting the overall overcapacity situation of the photovoltaic industry chain.

Some analysts believe that based on the current supply-demand imbalance, price elasticity, discourse power in the upstream and downstream games, and operational leverage, the module segment is likely to be the first to reach the bottom in the photovoltaic industry chain.

Previously, many leading enterprises have started integrated construction, and with the support of capital, once product prices show slight improvement, it will trigger the introduction of many new production capacities, prolonging the bottom phase. This also fades the traditional rules of industrial operations, which is also reflected in industries like pig farming and the dairy industry.

In summary, the valuation bottom is expected to appear before the performance bottom. The sharp rise in the photovoltaic sector reflects the market's anticipation of a future industry reversal, but a complete reversal of the industry's fundamentals may still take some time.

Next round.

What will trigger the next solar cycle?

In fact, the expected "reversal" in the rebound market has basically remained at the level of industry returning to reasonable profits and businesses being able to survive.

Looking back over the past decade, whether in the industry or in the capital markets, the solar industry has created one after another rich myth, once the industry emerges from its difficulties, a new round of significant development will always occur. In other words, investors have reason to have more expectations for the new next round of solar industry development, rather than just staying at the "survival" level.

Taking a lesson from history, we can review the preconditions for the opening of each major solar cycle in the past.

In 2004, Germany revised the Renewable Energy Act, increased government subsidies for the solar industry, adopted a price of 0.54-0.62 euros/kWh for the purchase of solar electricity into the grid, which was three times the retail electricity price at that time, and guaranteed purchases for 20 years, starting the global solar industry's development in turmoil for twenty years.

At that time, Chinese enterprises represented by Wuxi Shangde, relying on various factors such as flexible response, reliable quality, rapid production expansion, and affordable prices, gained favor in the German market. In 2004, Wuxi Shangde achieved annual revenue of 0.71 billion, a 514% increase from the previous year, propelling China to become the world's fourth-largest producer of solar components.

From 2011 to 2013, in response to the harm caused by the "double reverse" policies of Europe and the United States to the Chinese solar industry, the Chinese government introduced a series of policies to encourage the development of domestic solar enterprises. Compared to the 2012 "Twelfth Five-Year Plan for Solar Power Development", the installation targets for 2015 and 2020 were further raised to 21GW and 50GW.

At the same time, the Chinese solar industry has embarked on a comprehensive innovation in technology routes, production processes, terminal applications, etc., such as Tongwei's "Fishery-Light Integration" and Longi's deployment of diamond wire cutting technology, promoting the development of monocrystalline silicon.

After 2019, the grid parity of photovoltaics has gradually been achieved, and in 2020, the 'dual carbon' has risen to the national strategic level, driving the photovoltaic industry into a highly prosperous development stage. China's photovoltaic industry has embarked on an unprecedented expansion wave. By 2021, the output value of the photovoltaic manufacturing sector once exceeded 750 billion yuan.

Overall, policies, technology, and funding are the key factors affecting the photovoltaic industry. As the country increasingly emphasizes environmental protection and capital markets face an asset shortage, the next round of the photovoltaic cycle is likely to be driven by technological changes, although people still cannot clearly define what this technological change will be.

From the current situation, it seems that the photovoltaic industry has not yet discovered a disruptive innovative technology that can lead the industry into a new cycle. Although many are hopeful about HJT battery technology, the theoretical efficiency limit of HJT batteries is 27.5%, and the theoretical efficiency limit of TOPCon batteries under surface passivation technology is 27.1%, the advantage is not significant in comparison.

Moreover, the equipment cost of HJT batteries is expensive, and the high investment costs have deterred many new market players, to some extent limiting the promotion of HJT batteries.

There is also a difference of opinion in the industry regarding TOPCon and HJT batteries, with jinkosolar, trina solar, $JA Solar Technology (002459.SZ)$ When manufacturers firmly choose TOPCon, $Risen Energy (300118.SZ)$ are more bullish on HJT technology, Longi and $Shanghai Aiko Solar Energy (600732.SH)$ choose to improve using BC technology.

Some people judge that the next major cycle of the photovoltaic industry may have to wait until the emergence of third-generation solar cells like perovskite. Perhaps this will eventually come true, or maybe it will be much ado about nothing. However, the history of many industries has proven that only true technological breakthroughs can open up the sealed ceiling for the industry and secure larger profit margins for companies within the industry.

Editor/Rocky