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The reversal signal has finally arrived?

27 Comments 2024-07-28

After another grueling month, A-share investors have finally welcomed a glimmer of hope.

On August 29th, A-shares experienced a "miracle day" after nearly a month, although the Shanghai Composite and the CSI 300 Index performed poorly, the overall market had a strong money-making effect, with over 4,000 stocks across the market rising. The average stock price of the Wind All A (8841719.WI) increased by 1.59%. Bank stocks, which had been setting new highs, underwent a significant adjustment, with the China Securities Bank Index plummeting by about 3.3%, marking the largest single-day drop in over three years. The overall market trading volume also saw a rare surge, exceeding 600 billion yuan.

Among the sectors, the photovoltaic (PV) industry led the gains, with the PV Industry Index (931151.CSI) rising by 3.81%, the largest single-day increase since the index adjustment after May 22nd. Within this, the PV inverter, which has the most competitive landscape within the industry chain, led the gains.

Both the PV industry index and the industry itself have shown some very special signals recently, which brings us back to the most critical question: Is it time for a reversal in the PV sector's trend?

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The resurgence in the PV index may be due to several pieces of news.

Firstly, a major player in the PV industry announced a price increase, signaling a potential turning point in the fiercely competitive PV industry. On August 27th, Longi Green Energy began communicating to its customers about the price increase for silicon wafers, raising the price of the N-G10L product from 1.06-1.08 yuan to 1.15 yuan, and the N-G12R product price from 1.2-1.23 yuan to 1.3 yuan. TCL Zhonghuan followed suit, announcing an increase in the price of silicon wafers. After TCL Zhonghuan's price adjustment, the G10N is 1.15 yuan per piece, the G12RN is 1.3 yuan per piece, and the G12N is 1.5 yuan per piece.

As soon as the news broke, the PV market showed unusual movements, and the market began discussing the possibility of a bottoming and reversal in the PV trend.

Secondly, the mid-year financial reports of listed companies in the PV industry have been largely disclosed, with most of the expected earnings bombs detonated. However, there are still bright spots in the industry chain, with the inverter being the most competitive. The inverter leader, Sungrow Power, has grown against the PV trend, making the inverter segment the best-performing sub-sector in the PV industry chain.

Thirdly, industry consolidation has begun. On August 13th, Tongwei Co. announced plans to acquire Runyang Shares' equity for no more than 5 billion yuan. After the transaction, Runyang Shares will become a subsidiary of Tongwei Co. In the current competition for market share, the final circle of players in the PV industry continues to shrink. Although this acquisition plan does not substantially reduce existing capacity, the increase in industry concentration will to some extent reduce price competition, and the intensity of competition will gradually ease.

Fourthly, as we enter the third quarter, the PV industry welcomes its traditional peak season, and the market may engage in some anticipatory speculative trading. Analyzing from a retrospective perspective, we can now identify some logic behind the surge in PV, which is not an immediate novelty and merely provides the possibility of a significant increase in PV.In terms of the judgment of the photovoltaic (PV) market, I remain optimistic in the long term, but with the current market conditions, it may still be premature to talk about a "turnaround" in trading.

The situation of overcapacity in the photovoltaic industry has not been fundamentally alleviated. Although the overall capacity of the PV industry is contracting, the oversupply pattern remains unchanged, and the equilibrium point of supply and demand balance has not yet been reached, so the reasons to support price increases are not sufficient.

Regarding installation capacity, the growth rate of new domestic photovoltaic installations in 2024 has slowed down. In the first half of the year, the national new photovoltaic installation was 102.48GW, a year-on-year increase of 30.7%, of which the new photovoltaic installation in June was 23.33GW, a year-on-year increase of 35.6%. Demand has not become the main concern of the market; the problem in the photovoltaic industry is still on the supply side.

Under the absolute oversupply pattern, the capacity utilization rate of the photovoltaic industry chain is continuously setting new lows. The operation rate of photovoltaic silicon materials and wafers has already declined to the lowest level in nearly a year, and data from July shows that the operation rate is still setting new lows.

The oversupply brings endless price wars, and the main material prices of the photovoltaic industry chain are falling all the way. According to data from Infolink, the price of silicon wafers has been falling since September 2023. As of the end of July 2024, the average price of monocrystalline silicon material in the polysilicon segment was 39.0 yuan/kg, unchanged from the previous week. The average price of 182mm monocrystalline silicon wafers was 1.25 yuan/piece, unchanged from the previous week. The price of 182mm TOPCon double-glass modules was 0.83 yuan/W, unchanged from the previous week.

What does the price of photovoltaic silicon material below 40,000 yuan/ton mean? We can look at it from the cost of silicon material.

Taking the current market mainstream Siemens method as an example, the production cost of photovoltaic silicon material mainly includes the cost of industrial silicon raw materials, electricity costs, labor costs, auxiliary materials, steam, water consumption, etc. Among them, electricity costs and industrial silicon raw materials are the two largest proportions. Theoretically, the cash cost of polysilicon includes industrial silicon, electricity, labor, and auxiliary materials.

Industrial silicon is the main raw material for producing polysilicon, and the cost of producing 1 ton of polysilicon is about 15,000 yuan;

Electricity costs include the consumption of electricity in the synthesis, electrolysis of hydrogen, rectification, reduction, tail gas recovery, and hydrogenation processes. Taking the Xinjiang region with higher capacity as an example, the electricity cost for producing 1 ton of polysilicon is about 18,000 yuan;

Labor costs, taking a leading company as an example, the labor cost for producing 1 ton of polysilicon is about 5,000 yuan;Other auxiliary materials, water consumption, steam consumption, etc., are assumed to be 0.5 ten thousand yuan/ton;

Therefore, for silicon materials, their cash cost is as high as 4.3 ten thousand yuan/ton. Silicon materials below this price enter the "negative cash flow" phase where production leads to losses.

These data can also be seen from the financial reports of listed companies. According to the main industry chain enterprises disclosed in the photovoltaic industry's semi-annual report forecast, most enterprises are in a state of net profit loss; compared with the first quarter, the expected loss of most main industry chain enterprises in the second quarter has intensified.

Therefore, the reason for the price increase of Longi Green Energy and TCL Zhonghuan this time is more likely to come from the industry's entry into the "negative cash cost" phase, superimposed on the upcoming peak season, which is a last resort. Based on the statistics of 36 listed companies in the main industry chain of photovoltaic stocks, the cash on hand has seen a significant decline in operating cash flow and has entered a very dangerous cash flow crisis phase.

Looking at the current situation of industry financing, it is no longer likely to support enterprises in the industry to continue to compete in debt, so enterprises in the industry must and have to alleviate the pressure of cash flow through various means.

Therefore, constrained by the current situation of absolute overcapacity and weak demand growth, this round of silicon wafer price rebound may not be sustainable. The current change in the business strategy of leading enterprises is more like a correction to the excessively low price. The space for short-term price weakness is relatively limited, but the upward momentum in the long term is still insufficient, and the optimization of the supply and demand pattern is needed to reverse the situation.

In the short term, it is difficult to say that the photovoltaic silicon wafer industry has reversed. As for when the photovoltaic industry will bottom out, the conclusion given by Goldman Sachs in a recent report is 2025. This conclusion may not be correct, but what can be determined is that the supply and demand balance point of the current industry has not yet arrived.

It should be noted that the changes on the industry side and the capital market will not always be synchronized. The capital market trades on expectations, and good expectations are the reason for the rise. In the article "This industry, the bad news has been exhausted" in May, the author also analyzed that based on factors such as asset impairment provisions and changes in the base period, the bottom of the photovoltaic industry's performance may appear in the second half of 2024. The bottoming out of performance, coupled with the guidance of government policies, the integration of the industry, and the stimulation of the industry's mergers and acquisitions, and the irregular stimulation of news such as overseas capacity, will not affect the short-term rebound of the photovoltaic index.

From the perspective of industrial competitiveness, photovoltaics may be one of the industries with the most competitive advantages in China. Looking at the four major main materials of the photovoltaic industry chain, silicon materials, silicon wafers, battery cells, and components, the market share of Chinese photovoltaic enterprises accounts for about 90% of the global share, and some links even account for more than 95%. It is an industry with an unquestionable advantage.

Looking at the demand for photovoltaics, under the global goal of "carbon peak and carbon neutrality," photovoltaics is also one of the few industries with very certain demand growth. In the long term, at the 28th United Nations Climate Change Conference, more than 100 countries worldwide reached a consensus to triple the global renewable energy installation capacity before 2030. According to the "Renewables 2023 Analysis and Forecast to 2028" released by the International Energy Agency in January 2024, it is expected that the proportion of photovoltaic and wind power generation will exceed hydropower in 2024, the proportion of photovoltaic power generation will exceed nuclear power in 2026, and the proportion of photovoltaic power generation will exceed wind power in 2028. There may be fluctuations in the middle, but under the 2030 and 2035 goals set by various countries, the growth of new photovoltaic installations is undoubtedly the minimum growth target for the development of the industry.In recent years, the decline of photovoltaic (PV) in the capital market is not due to a significant contraction in demand, but rather, it has even seen growth that repeatedly exceeds market expectations. However, during the "great opportunity" phase of PV capacity growth in the past few years, the expansion was simply too exaggerated, which inevitably led to a bumpy road for capacity clearance. With the distortionary support of policies in some places, it further slowed down the exit of inefficient enterprises, preventing the industry's capacity from returning to the market equilibrium level in a timely manner.

Now, the industry has entered the worst phase of cash cost losses, with bankruptcies and delistings already occurring, and the curtain of industry mergers and integration has been raised. Coupled with the government's restrictions on endless "involution," the endgame for industry clearance is approaching, with the only difference being the timing of its arrival.

Although the author is optimistic about the long-term development of photovoltaics, both the current market risk preference and the supply and demand pattern of photovoltaics may not support a reversal in the PV index.

Of course, for the photovoltaic market, whether it is the current speculation on mid-term report performance bombs and rebounds after oversold conditions, or buying on dips based on long-termism, it is also a rare opportunity.

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