Hanwha Solutions Focuses on Solar Power Except Polysilicon... What About Its Debt?

[Asia Economy Reporter Jang Hyowon] Hanwha Solutions recorded consolidated sales of 2.4517 trillion KRW and an operating profit of 30 billion KRW in the fourth quarter of last year. However, the loss from continuing operations before income tax expenses was 555.1 billion KRW, a 65% increase in the deficit compared to the same period last year. This was due to a large one-time expense of about 532 billion KRW. The largest one-time expense was an asset impairment related to the suspension of the polysilicon business, amounting to approximately 300 billion KRW.

On the 20th, Hanwha Solutions decided to discontinue its polysilicon business and announced a full withdrawal within this year. Hanwha Solutions (formerly Hanwha Chemical) invested about 830 billion KRW in 2011 to build a plant capable of producing 10,000 tons of polysilicon annually in the Yeosu Petrochemical Complex and officially started the business in 2014. In 2015, it invested an additional 130 billion KRW through process improvements to increase production capacity to 15,000 tons.

◆ Part of vertical integration in solar energy = The polysilicon business was one of the efforts to establish a vertical integration system for the solar energy business, which was overseen by Kim Dong-kwan, Vice President of Hanwha Solutions’ Strategy Division and eldest son of Hanwha Group Chairman Kim Seung-yeon.

In 2008, Hanwha Chemical declared its entry into the solar energy business, acquiring China’s Solar Power Holdings in 2010 to form Hanwha SolarOne, and acquiring Germany’s Q CELLS in 2012 to establish Hanwha Q CELLS. Although the ingot and wafer businesses have since been divested, initially both companies produced ingots, wafers, cells, and modules. With Hanwha Chemical adding the polysilicon business, the solar energy industry value chain was completed.

However, polysilicon prices continued to plummet. Polysilicon, which was around 400 USD per kilogram in 2008, had dropped to 20 USD by 2014 when Hanwha Chemical officially started the business. Since then, due to China’s low-price competition, prices have declined annually, recently falling to about 7 USD.

Accordingly, Hanwha Solutions has recognized impairment losses on related assets every year since 2015, the year after starting the polysilicon business. This means the expected cash flows generated from the polysilicon business assets have decreased annually.

Hanwha Solutions recognized impairment losses of 50.1 billion KRW in 2015, 49.8 billion KRW in 2016, 79.8 billion KRW in 2017, and 108.8 billion KRW in 2018 on the polysilicon plant. Last year, it wrote off 300 billion KRW at once, leaving about 10 billion KRW in related assets.

Although nearly one trillion KRW was invested in the business, the withdrawal from the polysilicon business is expected to have a minimal impact on Hanwha Solutions’ overall sales. Polysilicon sales are estimated to be around 100 billion KRW annually, about 1% of total sales. However, since the business has been operating at a loss every year, operating profit is expected to increase by approximately 50 to 80 billion KRW, equivalent to 12-21% of last year’s operating profit.

◆ Solar cells and modules as ‘core business’… Need for debt management = Even excluding polysilicon, the share of petrochemical sales in total revenue is gradually decreasing. As of the end of 2018, Hanwha Solutions’ sales by business segment were petrochemicals (44.5%) and solar energy (27.9%), but last year, the solar energy share rose to 37.4% while petrochemicals fell to 37.1%, reversing their proportions.

The profitability of the petrochemical segment is also declining. The operating profit margin of the petrochemical segment, which was 15.7% in 2017, dropped to 9.1% in 2018 and 5.0% last year. This is due to decreased demand for petrochemical products amid the US-China trade dispute.

Therefore, Hanwha Solutions plans to focus on the solar cell and module business as its core business going forward. Last year, the solar cell and module segment recorded an operating profit of 223.5 billion KRW, successfully turning around from a loss of 10.7 billion KRW in 2018. The operating profit margin also reached 6.3%, the highest among all business segments. This was thanks to a significant increase in the share of mono (monocrystalline) solar cells with higher power efficiency instead of multi (polycrystalline) solar cells, a drop in wafer prices, and strong demand in the US market.

Building on this momentum, Hanwha Solutions plans to increase investment in the solar cell and module segment. It intends to move beyond simple manufacturing and sales to provide module and energy storage system (ESS) packages and expand downstream businesses such as solar power plant development.

However, increasing debt is expected to burden investment expansion. As of the end of last year, Hanwha Solutions’ consolidated net borrowings stood at 4.8228 trillion KRW, an increase of 1.5485 trillion KRW (47.29%) from 3.2743 trillion KRW in 2017. This was due to increased borrowings for facility investments in the petrochemical and solar energy segments. During the same period, the debt ratio rose by 49.5 percentage points to 170.1%, and the net borrowing dependency also increased by 6.8 percentage points to 30.8%.

Song Mikyung, head of Corporate Evaluation Division 2 at NICE Credit Rating, said, “The continued decline in the performance of the core petrochemical business is a negative factor in terms of the company’s business and financial stability,” adding, “We plan to monitor whether the company manages its borrowing burden during investments in major business segments.”

This content was produced with the assistance of AI translation services.