On December 21, 2023, the stock price of A-share photovoltaic bracket supplier Qingyuan Co., Ltd. suddenly closed strongly, and since then the market has continued to rise and fall for 6 consecutive trading days.

Since entering this year, against the backdrop of a sharp decline in A-shares for many days, Qingyuan Co., Ltd. has continued to rise strongly. Up to now, the stock has doubled its growth rate.

Qingyuan Co., Ltd. is only one of the leading speculations in the photovoltaic industry recently. In fact, in the past month, as large amounts of capital began to flow back into the PV industry chain, the PV sector has also shown a very obvious upward trend, with a cumulative increase of nearly 8%.

This clearly shows that the valuation logic of the photovoltaic industry is quietly undergoing some changes.

01

Funding returns to focus on photovoltaics

On December 28 of last year, there was an amazing scene in the A-share photovoltaic sector. Nearly 20 concept stocks rose more than 10% on the same day. Among them, Longji Green Energy, which is the first PV company, strongly blocked the rise and fall. Tongwei shares and Sunshine Power also rose more than 10% at one point, and a large number of individual stocks also rose more than 5%, making it the strongest performing sector for A-shares on the same day.

As for the reason for this surge, market analysts say that since the year-end settlement period has reached, some new energy funds previously needed to make up the asset allocation share of the new energy industry chain, and some products have claims to make up their positions.

There seems to be some truth in this, but it is probably not the real reason for the significant return of capital.

The main reason may be that the PV industry itself has now begun to highlight the cost performance ratio, which has become a priority choice for capital under the current A-share style change strategy.

Recently, there has been an unusually obvious decline in the A-share market, and at the same time, there has also been a clear divergence between industry sectors. As for the reason for the decline in A-shares, it currently seems that the regulatory authorities have gradually loosened the net sales of funds recently, resulting in some funds requiring short-term sales of funds to be used for redemption.

In a game between all parties, after the capital is sold, it is necessary to choose assets that are more cost-effective or have a higher safety factor to avoid risks.

Among these, traditional energy companies, such as coal and electricity, have become a key allocation direction for capital because of their steady growth in performance and very impressive high dividend performance. Since this month, coal ETFs have accumulated a cumulative increase of more than 6%, significantly outperforming the 2.75% decline of the Shanghai Index and the 7.4% decline of GEM.

As a common energy concept, these traditional energies continue to be sought after, and capital has gradually begun to focus on the new energy sector after a long period of sharp decline.

Therefore, we have seen that in addition to integrated leaders being sought after, the recent market is also very enthusiastic about individual stocks in photovoltaic equipment, cells, and modules. For example, supporting companies such as Jinchen Co., Ltd., Saiwu Technology, Elken Technology, King Kong Photovoltaics, and Maiwei Co., Ltd. have also increased significantly by more than 10% in the past 10 days.

Not only is domestic capital beginning to return in large amounts, but the data shows that in the past month, with an overall net outflow of only 10 billion dollars, the cumulative net purchase of photovoltaic equipment has exceeded 2.6 billion yuan, second only to the electricity sector (net purchase of 2,769 billion yuan), which is significantly higher than banks and the consumer electronics sector, which has surged due to the new wave of AI.

These funds are mainly purchased by integrated leaders such as Longji, Tongwei, and TCL Zhonghuan, as well as core suppliers at key points in the industrial chain such as Aixu Co., Ltd., and Sunshine Power.

Obviously, domestic and foreign investors are gradually agreeing on their attitudes towards the photovoltaic industry.

02

Expected changes in valuation logic

Stock prices in the photovoltaic industry chain fell so much before. The main reason boils down to the fact that changes in the supply and demand relationship caused the valuations of enterprises in the industrial chain to decline markedly.

Until now, the photovoltaic industry is still facing price wars due to the collective release of supply capacity, as well as concerns about possible changes in the attitude of Europe and the US towards China's photovoltaic industry.

The 2023 operating data situation also confirms these concerns.

From January to November 2023, China's exports of photovoltaic silicon wafers (larger than 15.24 cm monocrystalline silicon), cells, and modules continued to increase sharply by 44.24%, 31.68%, and 24.84%, respectively, over the same period last year, but in terms of export prices, they fell by 32.67%, 38.42%, and 18.65%, respectively.

Obviously, this is where the entire market has entered a competitive process of exchanging price for volume.

However, domestic demand for PV installations has maintained a very strong growth trend. From January to October 2023, China added 142.56 GW of PV installed capacity, an increase of 144.8% over the previous year.

According to agency forecasts, domestic installed capacity is expected to be 180 GW for the full year of 2023, and the volume will continue to rise in 2024 with major base projects, etc., and there is still plenty of room to rise in demand. It is estimated that 210 GW will be added in 2024, and there is still a 17% growth rate.

At the same time, the European and American markets, which have high expectations for China's PV exports, have gradually regained significant strength. Last year, under Europe's energy policy and green transformation, many countries already raised their PV installed capacity targets. With the implementation of the IRA Act and the continued rise in PPA electricity prices in the US, demand for installed PV installations in the US is also growing.

Even in the Middle East and Africa, which is one of the regions with the highest solar radiation exposure in the world, domestic demand for photovoltaic energy has also been growing rapidly in recent years with the support of the “Belt and Road” cooperation. Some agencies predict that the Middle East and Africa will add no less than 16 GW of new PV installations in 2024. And most of the suppliers of this new demand are Chinese photovoltaic companies.

Currently, Europe and the US are in high demand for photovoltaics, and there is also a clear demand for local photovoltaic production capacity support. However, their photovoltaic industry, whether it is silicon wafers, cells, components, accessories, etc., has basically no advantage, and the PV industry technology has not been completely stable over the past few years, and they don't dare to bluntly promote large investment in heavy assets in the local photovoltaic industry.

In other words, at least in the short term, Europe and the US will continue to choose to cooperate with us, such as purchasing support or allowing our photovoltaic companies to go out to build factories, which is still a more suitable choice for them. Therefore, with the revival of the overseas photovoltaic industry now, domestic export dividends will continue to exist.

And these dividends will go more to integrated industry leaders with advantages of scale and technology.

However, due to the uncertain situation until now, the market's concerns about the exports of Chinese PV companies have led to very adequate valuation discounts for related companies.

The more advantageous industry leaders are, the higher the valuation discount margin.

For example, Tongwei shares currently have a dynamic price-earnings ratio of only 5.45 times, and a static price-earnings ratio of only 4.3 times.

Up to now, the valuation of the PV index, which represents the photovoltaic industry chain, has even fallen below its lowest point since the A-share boom in 2018. The overall difference in valuation confidence is surprisingly low.

However, objectively speaking, although the photovoltaic industry has entered the competitive stage of “volume for price,” under this strategy, their revenue and performance management are still showing a steady growth trend.

According to the 2023 Q3 financial report, most of the leading companies in the photovoltaic industry chain maintained significant profit growth. Even if the growth rate of Tongwei shares declined, it was only due to excessive base growth in the previous period (profit soared 3.14 times in Q3 2022).

In other words, although the competitive environment in the photovoltaic industry has deteriorated over the past year, and the valuations of related companies have also been drastically revised accordingly, the revenue and profit situation of the vast majority of leading companies can still maintain a relatively healthy state of development due to the continuous increase in industry concentration.

Take Tongwei as an example. The current single-digit valuation level, combined with continued steady profit growth, highlights a large valuation safety cushion.

Meanwhile, according to reports from several brokerage agencies, the photovoltaic industry chain in 2024 has already fallen to a record low valuation level against the backdrop of upstream raw materials, modules, and other supplies close to the cost line, and it is expected that the new installed capacity at home and abroad will continue to increase markedly this year, and the industry is likely to usher in a valuation repair window.

In the current stock market environment where confidence still needs to be boosted, this is certainly a rare and valuable sector that also has safety pads and room for repair.

03

How to lay it out?

Now that we have determined the logic that the photovoltaic industry will enter a new window of valuation repair in 2024, how can we better allocate it?

Judging from the current funding style, segments such as photovoltaic equipment, TopCon batteries, and photovoltaic brackets are already being discussed, but for ordinary investors, it is very difficult for investors to choose individual stocks. If you are optimistic about the photovoltaic industry, you might as well study photovoltaic ETFs and use ETFs to allocate them to earn beta money in the industry.

For example, the PV 30 ETF (560980) is the only fund product that tracks the PV Top 30 Index among many A-share PV ETF related products.

Compared with the PV 50 (PV industry) index, the average market value of the PV 30 index constituent stocks is larger, and the leading effect is more significant. Looking at industry segments, the PV 30 Index has a higher allocation weight in terms of photovoltaic equipment.

Comparing the historical performance of the index, compared with the PV 50 Index, from 2017 to 2023, the PV 30 Index outperformed all the rising years and had higher excess returns in some years. It slightly outperformed or outperformed in the declining years. As can be seen, the PV 30 Index has certain comparative advantages in terms of yield, elasticity, and Sharpe ratio.

Therefore, if you are optimistic about the photovoltaic industry, you might as well study this more expressive product.