Tongwei Earnings: In-Line Results but Plan for Integrated Capacity a Surprise

Tongwei’s 600438 interim revenue of CNY 74.1 billion and net income of CNY 13.3 billion translate to CNY 40.8 billion revenue and CNY 4.7 billion net income in the second quarter. The 34% year-on-year and 46% sequential decline in net income in the quarter were well expected given the polysilicon price freefall. The plan to invest CNY 20 billion to add 32 GW integrated capacity covering ingot, wafer, and cell production, however, surprised us. We acknowledge that internalizing wafer supply should help reduce cost, but we are slightly concerned about dilution risk. To recap, Tongwei just announced a private share placement of CNY 16 billion in April to fund its polysilicon projects. As of June 2023, Tongwei had about CNY 40 billion cash and equivalents and CNY 34 billion long-term debt, and it plans to fund the integrated capacity with cash in hand and additional borrowings. While we do not see debt risk in the near term, we reason that an overly stretched balance sheet might necessitate a potentially dilutive fund raising in the future. Regardless, the planned move will make overcapacity worse in the solar wafer market. This is not good news for solar wafer suppliers such as LONGi and TCL Zhonghuan.

We marginally increase our revenue forecast to CNY 146.5 billion from CNY 142.1 billion and net income estimate to CNY 18.6 billion from CNY 17.8 billion in 2023 after raising our polysilicon and solar cell shipment assumptions. We estimate the value accretion by cost savings from the integrated capacity would be largely offset by the additional capital expenditure. Our fair value estimate hence remains CNY 35.90. The shares closed 12% below our fair value estimate on Aug. 22, but we prefer a higher margin of safety.