Leading Photovoltaic Auxiliaries Navigate Industry Cycles

Unlike the industry-wide losses in the photovoltaic (PV) main industry chain, some leading companies in the PV auxiliary materials sector can still maintain profitability and even achieve growth.

In fact, PV encapsulants and PV glass have already gone through the baptism of capacity expansion and clearance.

Looking at performance, leading auxiliary materials companies can still maintain profitability and even positive growth during the industry's low period, showing strong risk resistance.

In the first half of 2024, Trina Solar achieved operating income of 10.764 billion yuan, net profit of 928 million yuan, and non-IFRS net profit of 899 million yuan, respectively increasing by 1.35%, 4.95%, and 9.2% year-on-year; JinkoSolar achieved operating income of 10.696 billion yuan, net profit of 1.499 billion yuan, and non-IFRS net profit of 1.48 billion yuan, with year-on-year growth of 10.51% and 38.14%.

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Unlike the industry-wide losses in the PV main industry chain, some leading companies in the PV auxiliary materials field, such as electronic silver paste, PV glass, PV encapsulants, and inverters, can still maintain profitability and even a certain degree of growth.

Relatively speaking, PV auxiliary materials have better risk resistance.

On one hand, it is relatively independent of the main industry chain; on the other hand, the competitive landscape of PV auxiliary materials is better, and the cost advantages of relevant leaders are significant, showing stronger profitability and development momentum during the industry's downturn.

With the global PV demand growth rate declining year-on-year and the rapid release of manufacturing capacity, the PV industry has encountered difficulties in the first half of the year, with prices quickly falling below the cash cost of the first echelon companies in the main industry chain.

According to statistics, the net profit margin of representative companies in the PV main industry chain quickly fell from around 10% in the third quarter of 2023 to the first loss quarter of this PV downcycle in the fourth quarter of 2023; at the same time, the utilization rate of PV capacity fell from 74%-98% in the middle of 2023 to 53%-62% in the middle of 2024.

By the middle of 2024, the main industry chain companies entered the stage of comprehensive loss of cash cost.

According to the estimate of Huaxin Securities, most companies' cash flow can only support a maximum of 2 years of loss.

The situations faced by each link in the PV industry chain are different.

In the second quarter of 2024, the gross profit margin of the silicon material, silicon wafer, and cell segments turned negative, among which the silicon material and silicon wafer basically entered the state of breaking through the gold cost, and profitability was significantly under pressure; some companies in the cell segment, due to technological and product advantages, have controllable losses; integrated component companies are generally near the break-even point, mainly benefiting from overseas high-profit market shipments; while the leading companies in the PV glass and encapsulant segments maintain a large gross profit margin gap with second and third-tier companies, and the competitive landscape is stable.

Auxiliary material leaders have strong risk resistance compared to the main industry chain.

The competitive landscape of PV auxiliary materials is better, and the cost advantages of relevant leaders are significant, showing stronger profitability and development momentum during the industry's downturn.

Although there has been a lot of new production capacity in the industry in recent years, the market position of industry leaders is still unshakable.

Trina Solar's PV encapsulant product shipments in 2023 were 2.249 billion square meters, a year-on-year increase of 70%, accounting for nearly half of the global market share; Xinyi Solar and JinkoSolar's production capacities are 23,200 tons/day and 21,400 tons/day, respectively, accounting for 38% of the PV glass industry's production capacity, and other companies' market shares are all less than 10%, and the industry's duopoly pattern remains stable.

Due to scale advantages, self-made equipment, long-term technological accumulation, cost advantages brought by self-supplied raw materials, and excellent cost control capabilities, the profitability of auxiliary material leaders has significantly widened the gap with second and third-tier enterprises.

For example, Trina Solar has advantages such as product formulation accumulation, process and equipment linkage development, and long-term accumulated production control experience, with high raw material utilization rate and product yield, effectively controlling production costs, and unit costs are at the leading level; in terms of production equipment, Trina Solar is one of the few high-tech enterprises in the industry with the ability to independently develop complete sets of equipment, only customizing parts from suppliers for assembly lines, with investment costs lower than competitors who purchase complete lines; in terms of raw material procurement, Trina Solar has a certain price advantage due to its large volume and sufficient funds.

In addition, due to the early establishment of long-term cooperative relations with overseas large petrochemical enterprises, against the background of tight EVA resin supply and rapid price increase of domestic EVA resin in 2020-2021, Trina Solar's resin price advantage was magnified, and the unit direct material gap was increased to 1.4-1.5 yuan/square meter; in the second half of 2022, as the EVA resin price entered the downward range, Trina Solar's procurement advantage narrowed, but in 2023, the unit material cost gap still had 0.26 yuan/square meter.

In 2023, the gross profit margin gap between Trina Solar and second and third-tier enterprises in the encapsulant business increased to 12.4 percentage points, and it still maintained a relatively stable high gross profit margin against the background of the general decline in profitability or even loss of second and third-tier enterprises.

JinkoSolar belongs to the PV glass industry, which is characterized by large fixed asset investment and high proportion of raw material costs.

JinkoSolar started the production of thousand-ton furnaces from 2017, and due to the significant investment cost advantage of large furnaces compared to small furnaces, less raw materials and energy are required, coupled with a high proportion of self-supplied raw materials such as quartz sand, JinkoSolar has significant cost advantages.

Although most of the newly added furnaces in the industry in recent years are above 1000 tons/day, and the trend of large-scale is obvious, JinkoSolar still has a gap of about 10 percentage points in gross profit margin with second and third-tier enterprises.

In 2023, the single furnace scale of JinkoSolar's newly announced projects has risen to 1600 tons/day, which may further expand the cost gap with second and third-tier enterprises.

The Matthew effect in the industry is becoming more and more obvious.

Trina Solar has a certain pricing power for encapsulant products based on market share and cost advantages, specifically by adopting a low gross profit margin strategy to increase share and suppress the expansion of second and third-tier enterprises.

For example, before 2014, Trina Solar's gross profit margin was basically above 40%, and after taking the initiative to reduce prices, it fell to about 30%, driving the share to increase to 40%-50%; in 2016, it took the initiative to reduce prices again, and the gross profit margin fell to 20%-30%, and the market share remained stable; from 2020, the industry expanded rapidly, and Trina Solar controlled the gross profit margin around 15% in 2022-2023, suppressing the expansion of second and third-tier enterprises.

Since the policy requirement for the implementation of the capacity risk early warning mechanism in May 2023, the management of the PV glass industry has become increasingly strict, leading to the postponement of most under-construction projects, especially the pass rate of second and third-tier enterprises and new entrants with fewer planned production lines and small production scales is far lower than that of leading enterprises.

In addition, under the scale advantage and lean management, the cost control ability of auxiliary material leaders is excellent, and the period cost rate is at a lower level in the industry.

In recent years, Trina Solar's period cost rate has been maintained below 5.5%, with an advantage of more than 2.5 percentage points over second and third-tier enterprises; JinkoSolar's period cost rate in 2023 was 7.6%, which is at a lower level in the industry.

In fact, PV encapsulants and PV glass have already gone through the baptism of capacity expansion and clearance.

At the end of 2020 to the beginning of 2021, the PV glass industry went through a period of rapid expansion due to the attraction of high profits, and the capacity in the industry grew rapidly.

According to statistics from Zhuochuang Information, the domestic PV glass production capacity at the end of 2020-2023 was 29,500 tons/day, 41,300 tons/day, 75,900 tons/day, and 99,500 tons/day, respectively, with year-on-year growth of 16%, 40%, 84%, and 31%.

The PV encapsulant industry was affected by Trina Solar's pricing strategy, and since 2022, the profitability of second and third-tier encapsulant enterprises has been under pressure, and there are signs of slowing down in the industry's expansion.

With the slowdown in the expansion of second and third-tier enterprises, it is expected that the industry's supply and demand will gradually improve.

Looking at performance, the two leaders can still maintain profitability and even positive growth during the industry's low period, showing strong risk resistance.

According to the IEA's forecast, the global new installation in 2024 is about 402.3GW, and to achieve the goal of net-zero emissions by 2030, the PV installation volume needs to reach 6101GW, that is, it needs to add about 682.97GW every year, and the average growth rate needs to reach 14.16%.

For the PV glass industry, unlike other auxiliary material segments facing the risk of reducing energy consumption in the process of cost reduction and efficiency improvement, it is difficult to achieve both thin PV glass and large-scale components under the trend of component large-scale due to the performance limitations of glass.

Guojin Securities pointed out that as the thickness decreases, the impact resistance and bending strength of the glass gradually decrease, and large-scale will lead to an increase in the bending moment of the glass, so the combination of the two will have a greater impact on the performance strength of PV glass.

In downstream applications, many centralized ground stations need to cope with harsh climates such as strong winds, large temperature differences between day and night, hail, and heavy snow, and the requirements for glass strength are high, so there is limited room for further thinning.

In addition, with the increase in the penetration rate of double-glass components, the demand for glass will continue to grow.

According to Zheshang Securities, due to the double-glass structure, which can improve the anti-corrosion and wear resistance of PV components and greatly reduce the possibility of PID decay, the market share is continuously increasing, and the market share of double-glass components reached 67% in 2023.

Under the condition of combining with double-sided batteries, the power generation of double-sided double-glass components is 10%-30% higher than that of single-sided power generation components.

It is expected that the market share of double-glass components will continue to rise steadily, stimulating the growth of PV glass demand.

As for PV encapsulants, although the proportion of encapsulant costs in the production costs of downstream PV component manufacturers is relatively low, as a key encapsulation material, PV encapsulants need to maintain stable performance in various complex environments.

Compared with the rapid technological iteration of the battery segment, PV encapsulants as encapsulation materials have stronger demand stability.

The unit consumption of encapsulants is related to the power and area of components.

Although the increase in component power leads to a decrease in the unit consumption of encapsulants, according to Guojin Securities, the demand growth rate of PV encapsulants is slightly lower than that of component demand due to the decrease in unit consumption, and it is expected that the global demand for encapsulants in 2024-2025 will be 6 billion square meters and 7.1 billion square meters, with year-on-year growth of 25% and 17%.

According to Zhongyuan Securities, the demand for PV encapsulants in 2030 is expected to exceed 10 billion square meters, and the market space continues to expand.Additionally, Zhongyuan Securities pointed out that with the application of 0BB technology, the industry has given rise to new demand for film categories, such as the increased demand for carrier films in the 0BB lamination solution, thereby bringing new value increments.