TCL Zhonghuan Earnings: Decent Profitability Despite Falling Solar Wafer Prices

TCL Zhonghuan’s 002129 first-half result met our expectation. Although revenue in the second quarter declined by 6% year on year due to falling solar wafer prices, net income rose by 42% year on year to CNY 2.3 billion boosted by higher wafer shipments and decent profitability. We increase our 2023 net income estimate to CNY 10.3 billion from CNY 9.8 billion after raising our unit profit assumption for solar wafers. Our fair value estimate remains CNY 25.70. We see Zhonghuan as fairly valued and suggest investors wait for better entry points to allow for some margin of safety.

Solar wafer shipment reached 52.6 GW in the first half, up 55% year on year. We estimate wafer shipment exceeded 27 GW in the second quarter. As we expect higher solar installation in the second half, we keep our full-year shipment assumption at 121 GW. Management expects N-type wafers to account for more than 30% of total shipments in the third quarter and even more in the fourth quarter, which should help lift profitability. The sharp decline in the polysilicon price also mitigates the profitability pressure from the falling wafer price. As such, we raise our gross profit assumption per watt of solar wafer by 7% to CNY 0.12 for 2023.

The solar wafer market is getting increasingly fragmented. Zhonghuan expects its capacity share to fall to 18% by December 2023 from 23% in June. At the same time, due to various trading barriers in the U.S. and potentially in Europe, Chinese solar wafer producers must add overseas capacity to support their customers’ sales into the developed and often more profitable markets. These factors are likely to weigh on long-term profitability. We assume gross profit per watt of solar wafer to decline to CNY 0.07 by 2027.