CHINA SOLAR SECTOR：DEMAND TIPPING POINT VS POTENTIAL POLICY AID：OUR ASSESSMENT
Key Factors for Rating
Update on recent dynamics. Coming into April, PV value chain price quote started to show softness as the deadline of existing distributed generation (DG) policy (30 Apr) draws near. As the next deadline for utility-scale projects to enjoy existing deadline (31 May) is not far away, we believe further shipment decline is in sight in just a few weeks.
Along the value chain, solar glass segment is faring relatively better. Mainstream price quote is up by 21% compared to end-2024 levels. Major cost components such as soda ash and natural gas have been on downward trajectory lately, but offset by the surge in sodium pyroantimonate prices (now the largest raw material cost component for solar glass). However, the margin recovery has not been reflected in their share prices, which we deem is a sign of investor concern on demand sustainability.
Polysilicon segment, on the other hand, did not enjoy the same price appreciation due to the vast industry inventory. New contracts are scarce and pricing pressure already emerged in early April as this segment feels the demand softness earlier than others - also due to more difficult inventory management challenges. Polysilicon makers could only determine their optimal output level and strive to further reduce their cash costs as applicable.
Demand cliff vs supply cuts. Policy-driven rush installations are often followed by temporary demand drops, and we do not think this time will be an exception. We expect monthly module output to decline by ~20% in May-July, resulting in either 1) further cut in utilisation rate; 2) increase in inventory.
This may eclipse any possible policy efforts to curb industry output by imposing stricter controls on energy intensity benchmarks, etc. The industry is already running at a very low utilisation rate in response to the vast inventory problem, with low-cost producers faring slightly better. A policy-driven supply cut, possibly based on technical benchmarks, may force older production lines to retire, including those at leading manufacturers. Still, we expect the magnitude of supply-side reduction is unlikely to match the demand decline and relieve industry from mounting inventories.
Long-term outlook. As discussed earlier, we expect solar value chain to inflict further pains in 2H25, which will eventually lead to the exit of higher-cost capacities. Before that happens, along with global demand growing significantly above 700GW (may take a few years, in our view), we expect the solar PV manufacturing sector ROE will remain subdued
Valuation
We maintain NEUTRAL rating for solar sector and HOLD ratings for Xinyi Solar (968 HK), Flat Glass (6865 HK), JinkoSolar (JKS US) and Xinte Energy (1799 HK). We maintain BUY rating for Daqo (DQ US) as it is trading below cash value and its balance sheet will guarantee its survival into the next upcycle.