A new silicon star?

Working with Shuangliang

If there’s one thing that companies and investors are learning about the global transition to net zero is that it’s turning out to be a very bumpy ride.

Both the electric vehicle (EV) and solar industry share a very similar problem. There aren’t enough of the raw materials being produced at one end of the supply chain to meet demand for the finished goods at the other.

Consumers want more EVs, for example, but miners can’t source and then dig lithium out of the ground quickly enough to produce the batteries to fuel them. Prices are soaring. The same is true of polysilicon, the highly refined form of silicon, which constitutes the key raw material for photovoltaic cells (PV) in solar panels. Lack of capacity expansion, combined with power constraints that shuttered production plants in Western China last year, created a supply shortfall.

Industry experts do not think this will be rectified until at least the end of the first half of this year. By then, Taiwanese market research company PVInfoLink estimates that China will have polysilicon capacity of 887,000 metric tonnes, up 26.3% from the fourth quarter of 2021.

Polysilicon prices have consequently surged, quadrupling since their nadir of around the Rmb59 per kilo mark in June 2020, although they have eased off slightly over the past month and are currently trading at just over Rmb230.

The knock-on effect has been a slowdown in new solar farm capacity. Liu Yiyang, president of the country’s photovoltaic industry association, had originally forecast that Chinese solar farms would install 65 gigawatts (GW) of new capacity every year until 2025.

However during 2021, they only managed 53 GW. This still represented a 13 GW increase over 2020, but the lower than expected total meant that China’s overall share of global capacity installations remained flat at 28.9% (138 GW came online in 2020 and 183 GW in 2021).

So far, this hasn’t stopped producers at the mid-point of the industry chain (solar wafer and cell manufacturers) from ramping up capacity. One company that’s currently drawing attention is Shuangliang Eco-Energy Systems. The Shanghai-listed group is a subsidiary of one of China’s largest private industrial conglomerates, Jiangsu Shuangliang.

It recently secured its largest ever order – 1.9 billion monocrystalline silicon wafers from China’s second-largest panel producer, Trina Solar. It has invested Rmb14 billion ($2.21 billion) to build a 40 GW factory in Inner Mongolia. The first phase was completed last September and full capacity is expected next year.

Kaiyuan Securities estimates that a dozen industry players have 299 GW of capacity expansion planned. The industry sub-sector is currently dominated by LONGi Green Energy and Tianjin Zhonghuan Semiconductor, which had respective wafer production capacity of 105 GW and 88 GW at the end of last year.

Shuangliang has been catching up in more ways than one. Its share price had a spectacular 2021, rising from Rmb3.81 at the beginning of the year to Rmb10 by the end (it peaked at Rmb13.36 in October). It’s now trading at 40 times EV/Ebitda, according to S&P Global Market Intelligence data.

That’s a premium to both LONGi and Tianjin Zhonghuan, which are trading around the 27 times mark. Both stocks saw their valuations drop off from the 40 times level in the final quarter of 2021 after instituting price cuts to try and stimulate end-user demand from struggling solar farms.

This is not how fund managers had expected it to play out. Back in January 2021 opinion was divided, as we wrote in WiC526. But the division was about how high valuations might go.

On one side Ningquan Assets argued that it wasn’t a good time to invest, while on the other Shennong Investment countered that if breakthrough industries like solar “aren’t allowed to form a bit of a bubble then what is?”

In the end 2021 provided a valuable lesson (again) about the short-term impact that supply chain dislocations can have on industries whose long-term success looks pretty assured.

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