The Zhitong Finance App learned that Huatai Securities released a research report saying that driven by the “dual carbon” policy and the promotion of photovoltaic affordability, the photovoltaic industry has expanded rapidly in recent years, and new technologies have been iterated frequently. As the penetration rate of new PV installations increases, it is expected that the growth rate of new installed capacity will gradually decline. Considering the “second-order” characteristics of equipment, downstream production expansion will slow down or even decline, but it is also expected to promote marginal improvements in the PV supply and demand pattern in all aspects of the PV industry chain and promote the clearance of production capacity in the main PV industry chain. Segmentation, such as some lasers, coating, and string welding in TopCon batteries, iteration of photovoltaic technology is expected to bring large stock replacement or incremental space for some equipment. In this context, focus on equipment companies that still have the vitality of technological iteration in the segment, as well as photovoltaic equipment targets with rich business structures and strong resilience to risks.

The main views of Huatai Securities are as follows:

There was a divergence between the year-on-year profit growth rate of the 24Q1 photovoltaic equipment industry and the year-on-year growth rate of net operating cash flow

In 2023, the revenue of eight listed PV equipment companies, including PV crystals, chips, batteries, and modules, was +61.92% YoY; Net Profit to Mother +50.60% YoY; 24Q1 Revenue +41.60% YoY; and Net Profit to Mother +26.57% YoY. The overall net operating cash flow of the photovoltaic equipment industry in 2023 was 11.340 billion yuan, +124.40% year-on-year, and 24Q1 PV equipment net operating cash flow was 1.03 billion yuan, -160.67% year-on-year.

Huatai Securities believes that the divergence between the industry's 24Q1 profit growth rate and cash flow growth rate is mainly due to: 1) benefiting from the downstream expansion of production and technology iteration in the past, equipment companies' on-hand orders increased, driving revenue and profit growth in Q1; 2) due to excessive production expansion in the past, the industry's production capacity is under pressure to clear production. Downstream customer profits and cash flow will decline starting in 2024, and equipment companies' repayment pressure such as advance receipt/delivery payments will increase.

In 2023, the photovoltaic equipment industry contract debt/inventory increased year-on-year, and 24Q1 contract liabilities were under pressure

The revenue and performance of photovoltaic equipment companies are mainly driven by orders. With the exception of the consumables business, the revenue confirmation period for photovoltaic equipment is generally about 12 months from order signing to revenue confirmation. In 2023, the total inventory of PV equipment listed companies was 68.727 billion yuan, +92.31% year-on-year, and total contract liabilities were 48.971 billion yuan, +95.42% year-on-year. The total inventory of PV equipment listed companies in 24Q1 was 70,080 billion yuan, an increase of 1.97% over the end of 23. The total contract liabilities were 48.065 billion yuan, a decrease of 1.85% from the end of 23.

Adequate on-hand orders at the end of 23 are expected to drive revenue growth for most PV equipment companies in 24, but the weak performance of 24Q1 contract debt compared to the growth rate at the end of 23 shows the pressure on PV equipment companies to sign new orders in Q1 and repayment of pre-receiving/delivery payments. If contract debt continues to decline in subsequent quarters, there is a risk that the growth rate of PV equipment companies will fall or even decline in 2025.

Scale effects+new technology iterations drive the overall gross margin of the photovoltaic equipment industry to rise year-on-year

In 2023, the overall gross margin of PV equipment listed companies reached 34.92%, up 0.37pp year on year. In 2024Q1, the gross margin of PV equipment listed companies reached 34.24%, +0.20pp year on year. The improvement in gross margin is mainly due to: 1) technological iteration driving an increase in the share of revenue of high-margin products; 2) the overall gross margin improvement due to scale effects; 3) the price increase year-on-year due to factors such as equipment companies' consumables business, such as tight raw materials. Looking ahead to 24 years, Huatai Securities believes that the scale effect is still conducive to cost dilution for most equipment vendors, but technology iteration has entered a short-term watershed, and only some equipment products can still be expected to benefit from segmented technology iteration.

There was a divergence between gross margin and net margin changes in the industry in '23 and 24Q1, and the overall average ROE of the industry moved upward

In 2023, the total cost rate for PV equipment listing companies was 12.90%, +0.22pp year on year. The total cost rate for 24Q1 PV equipment listing companies was 12.66%, -0.04pp year on year. In 2023, the net interest rate of PV equipment listed companies was 19.71%, -0.42pp. The difference between net interest rate and gross margin changes: 1) Fee ratio slightly increased year on year; 2) Higher orders/revenue led to higher inventory/accounts receivable, and equipment companies' impairment accruals increased at the end of the year; 24Q1 PV equipment listing company's net interest rate 19.33%, -1.12pp. The difference between net margin and gross margin changes: 1) The share of revenue from other revenue such as government subsidies decreased slightly year on year. In 2023, the overall ROE of PV equipment market companies reached 24.58%, +4.70pp compared to the previous year, and the average ROE level of the industry moved upward.

Risk warning: Economic growth falls short of expectations, cash flow risk, and industry competition intensifies.