Here comes the sun…

The Chinese Solar Industry has endured a miserable decade. A classic tale of overcapacity spurred by easy credit and government subsidies. In particular, the Renewable Energy Fund (REF) which was set up to help fund wind, solar & biomass projects found itself with an annual deficit of ~RMB80-90b, and its cumulative deficit reached >RMB140b (~AUD30bn). Due to this shortfall, subsidy payment by the REF to renewable energy projects suffered an average delay of ~2-3 years and culminated in the infamous “531 Policy”, named because of its release date on the 31st of May, 2018. In an attempt to reduce the Renewable Energy Fund’s growing deficit, China announced a number of measures aimed at restricting China Solar installations, including subsidy and tariff cuts, in some instances, without grandfathering. After peak of 53GW in 2017, it is expected that the final number for China Solar Installations in 2018, will be somewhere around the 44-45GW mark (-15%). The subsequent declines in solar component pricing was even more severe, with Polysilicon prices down 37%, wafer prices down 36-39% and modules down 25-27%, according to PVInsights.


Polysilicon Prices Trend (2018)

Source: PVInsights


However, there is light at the end of the tunnel. From a big picture perspective, it is important not to forget the Chinese Communist Party’s environmental push, with the word Ecology used 41 times in the 19th party congress speech by President Xi. Additionally, given the declines in component pricing and advancement in technology, it is estimated that Solar is only 2-3 years away from grid parity in China (the concept whereby an alternative energy source can generate power at a levelized cost of electricity that is less than or equal to the price of power from the electricity grid).

Source: International Energy Agency


More immediately however, a number of policy tailwinds are appearing. In late January, the National Development and Reform Commission issued an announcement, providing dispatch priority for solar and wind IPPs, in order to provide greater protection on procurement of renewable energy. In February, media ( reported that the National Energy Administration (NEA) has proposed all newly built solar power projects, which require subsidy in 2019, go through auction. The implication here being that the NEA wants to maximize the amount of solar projects built given a certain dollar value of subsidy. Clearly, the impacts of the 531 policy have been found too damaging to a strategically important industry (China commands >70% market share in Solar equipment). With that in mind, it is noteworthy that mono wafer producer LONGi, this week announced price hikes for its products, supported by strong near-term demand from overseas. Feedback from the largest Solar conference in Beijing last month suggests the consensus for 2019 installation sits between 35-44GW (ie flat to declining). In our view, that consensus looks conservative.

….anywhere you want it! It is one thing to generate clean and affordable energy. It is another getting it where it is needed most. After all, the economics of a Solar farm would look a lot different in Sydney versus Broken Hill (home to The Nyngan Solar Plant). Enter, Ultra-High Voltage (UHV) power lines (refers to those lines operating at greater than 800,000 volts…for reference, most transmission lines in the United States operate at voltages less than 395,000 volts). According to the State Grid in China, the UHV project that stretches from Zhundong, located in the remote Xinjiang of Northwestern China, to Wannan in East China will deliver 66 billion kWh of electricity per year with a transmission loss of only 1.5% per 1,000 kilometers. Similar to the 5G thematic we wrote about last month, China is leading the way with regards to deployment on a grand scale. So while companies such as Siemans and ABB in Europe also have the technology, the action is in China. In fact late last year, China’s National Energy Agency endorsed the construction of 12 new UHV power transmission projects, of which four have already been approved. These are estimated to yield somewhere between RMB170bn-RMB200bn in total investment and RMB43bn in major equipment investment. Large solar farms in the north of China, when combined with UHV lines transmitting energy to the East, could be a sustainable source of power without need of subsidy.


Source: NEA, UBS


A few names to follow…

GCL-Poly Energy Holdings (3800 HK). If a stock declines by 90% and survives, it is often worthy of attention (eg Amazon declined by 95% between 1999 and 2001). GCL Poly, satisfies the first criteria having declined by 92% from its peak in 2011 to its trough late last year, and is currently trading on 0.4x 2019 P/B. As the world’s largest producer of Polysilicon and wafer, it was caught in the industry downdraft described above. On the second criteria (survival), Polysilicon is a commodity product, and GCL-Poly sits squarely on the left-hand side of the cost curve owing to its scale. There is also some concern regarding its balance sheet, with ~RMB15bn in short-term borrowings, and only RMB9.4bn of cash on hand. However, it is already approved for bond issuance of Rmb7.5bn, and its parent company, GCL Group, also recently signed a strategic agreement with Bank of Dalian and Yingkou Coastal Bank for new bank facilities for a total of Rmb22bn. Finally, in June last year the company had reached a framework agreement to sell 51% of its subsidiary, Jiangsu Zhongneng Polysilicon Technology Development Co. to the state-owned utility company Shanghai Electric. While the sale never completed, it does show there remains some interest in the company’s assets. With valuation and expectations both severely depressed, the risk/reward looks asymmetric from here.

Henan Pinggao (600312 CH). The construction of 12 UHV lines will require roughly 100 knots (another name for Gas-insulated switchgears). There are four major suppliers in China, namely Henan Pinggao, China XD Group (601179 CH), New Northeast Electric Group (unlisted) and Shandong Electrical Engineering & Equipment Group (unlisted). Pinggao believes it can achieve roughly 40% market share of the orders, equating to around 20 knots each year in 2019 & 2020. At a selling price of around Rmb80m each, that is an incremental RMB3.2bn of revenue on an estimated RMB12bn revenue base in 2018. There is also the potential for margin expansion via innovation. Knots are heavy, at around 24-25 tonnes each. Pinggao has designed a new product which heralds similar functionality, but is much lighter at around 13 tonnes each… a raw material cost saving of 20%. The stock fell more than 80% from its 2015 highs to 2018 trough but is now bouncing off historical support levels on increasing volume alongside a recovery the power equipment capex cycle.


Pinggao’s 800kV GIS

Source: Pinggao Electric


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