[Into the Stock]"The Sun Shines" Hanwha Solutions... Only Upside Left

[Asia Economy Reporter Lee Seon-ae] The stock price of Hanwha Solutions, which rose to 58,740 won on January 11 this year, has been on a continuous downward trend. It closed at 43,750 won on the 10th and opened at 43,850 won on the 11th. Compared to the steady rise last year, this is essentially a disappointing stock price trend. However, experts generally believe that Hanwha Solutions will show a different trend in the second half of the year. It means that sunlight will gradually seep in. The securities industry unanimously sees Hanwha Solutions' target stock price above 60,000 won.

◆ Q CELLS' Second Half Performance Improvement... Era of Annual Operating Profit of 1 Trillion Won = Since the second half of last year, the cost burden of Hanwha Solutions' solar business division (Hanwha Q CELLS) has been increasing. This is because the pressure from the U.S. on Chinese Xinjiang polysilicon and the withdrawal of non-Chinese polysilicon companies have caused a sharp rise not only in polysilicon but also in wafer prices. Lee Dong-wook, a researcher at Kiwoom Securities, said, "In the second quarter of this year, despite the declining trend in glass prices, the rapid performance improvement in the Q CELLS division is expected to be limited," adding, "However, from the second half of this year onwards, elastic performance improvement is expected due to Hanwha Solutions' expansion of downstream sales, a surge in solar installations, and the impact of wafer manufacturers' capacity expansions," maintaining a target stock price of 68,000 won.

Lee Jin-myung, a researcher at Shinhan Financial Investment, said, "Hanwha Solutions' second-quarter operating profit is expected to be 288.8 billion won (+14% QoQ), with further profit improvement anticipated. The chemical division's operating profit is expected to be 269.8 billion won (+6% QoQ), marking the highest quarterly performance," but analyzed, "However, the Q CELLS division is expected to perform poorly as the impact of rising wafer and logistics costs is partially reflected despite turning profitable." He added, "However, since downstream sales are likely to be reflected from the second quarter, additional performance improvement is expected. After the first half's bottom, raw material price declines and demand recovery are expected to lead to a rebound in second-half performance." The target stock price suggested by this researcher is 70,000 won.

Daishin Securities, which proposed a target stock price of 65,000 won, also described the second half as the 'main game.' Han Sang-won, a researcher at Daishin Securities, analyzed, "The target stock price corresponds to a 12-month forward price-earnings ratio (PER) of 10.5 times," and "The performance momentum of the solar business is expected to strengthen further as the second half progresses."

Meanwhile, Hanwha Solutions is expected to challenge its first annual operating profit of 1 trillion won this year. The petrochemical cycle in 2021 shifted to an unprecedented super-strong phase, especially with expanded construction and infrastructure investments and supply disruptions. As a result, the main product PVC hit the highest price point in the past decade, and PE also increased its profit contribution due to high profitability. Noh Woo-ho, a researcher at Meritz Securities, forecasted, "Operating profit will exceed 1 trillion won for the first time ever due to the petrochemical super-strong market in 2021 and the monetization of new solar downstream businesses." Meritz Securities set Hanwha Solutions' target stock price at 63,000 won.

◆ Expansion in China is a Crisis... Securing Mid-to-Long-Term Competitiveness is Essential = Due to aggressive capacity expansions by Chinese competing cell and module companies, there are market doubts about the limitation of volume increases for Hanwha Solutions. Therefore, securing market share in key markets based on technological competitiveness is expected to be the variable that determines mid-to-long-term competitiveness and stock price premium.

Hanwha Solutions plans to maintain its market share in its main markets, the U.S. and Europe, while expanding its current module production capacity of about 11GW to 16GW by 2025 through efficiency improvements.

National carbon dioxide (CO2) reduction policies are a race against time, and solar installation demand this year is expected to reach or exceed 150GW. The recent rise in cell and module prices is a one-time pass-through reflecting strong polysilicon and wafer prices. Mid-to-long-term price-setting power depends on whether efficiency improvements are achieved through the development of next-generation solar cells. Noh Woo-ho of Meritz Securities said, "Hanwha Solutions plans to commercialize from N-type to perovskite tandem cells," adding, "Future competitiveness in the solar business will depend on price-setting power derived from technological superiority rather than achieving economies of scale as in the past."

Lee Dong-wook of Kiwoom Securities said, "Hanwha Solutions is expected to produce new N-type modules (Q.Tron) this year, which have superior price and performance compared to P-type," and "They also announced shortening the mass production timeline of perovskite tandem cells, which they are intensively researching, by about 1 to 2 years compared to the original schedule. If commercialization is completed, a rapid paradigm shift in the solar market is expected."

◆ Revaluation of Solar Business Needed = There are also views calling for a revaluation of Hanwha Solutions' solar business. The solar power plant and distributed power projects announced by Hanwha Solutions in February are regarded as the best way to overcome the limitations of sales growth. First, the composition of solar sales is planned to change from 100% cell and module in 2020 to 40% cell and module + 40% power plants + 20% distributed power by 2025. The estimated solar sales amount will increase from 3.7 trillion won in 2020 to 12 to 13 trillion won in 2025, growing at 28% over five years. Since they secured power plant projects worth 5 to 6 trillion won in 2020 alone, the feasibility is high.

Profit guidance also shows that power generation and distributed power (OPM 7~13%) outperform modules (OPM 6~9%), and the actual profit margin of power generation projects is expected to greatly exceed this. This is because the power generation cost (P) of coal and gas power plants remains stable, while technological developments in the solar industry (cost reduction, C) directly lead to profit margin expansion. Also, battery companies cannot make electric vehicles, but solar companies can expand their business into power plants.

Furthermore, as of last year, 72% of U.S. coal power plants (239GW) have higher power generation costs than new solar and wind power. Solar power has already surpassed the generation cost of coal and gas, and technologies such as bifacial, N-type, and perovskite are expected to be developed and applied annually. It can produce electricity cheaper than existing power plants, so profit margins can continue to increase.

Jeon Woo-je, a researcher at Hanwha Investment & Securities, said, "The disappointing aspect of the solar industry is the view that sales growth is limited compared to secondary batteries, due to already high solar penetration in new power sources, energy supply stability, and land shortages," adding, "However, Hanwha Solutions has presented solutions to overcome this, so immediate re-rating is necessary," newly suggesting a target stock price of 61,000 won.

The basis for the target stock price is that Hanwha Solutions is enjoying the greatest benefits from the upcycle in the chemical sector, the Biden administration's solar policy announcement (150GW expansion over five years) is anticipated, and long-term simultaneous growth in sales and profit margins through solar power generation business is expected. He emphasized, "The target stock price was calculated by applying a target PER of 10 times to the average EPS (6,150 won) for 2021-22, and valuation will further rise depending on the progress of solar power generation and new products."

◆ Revaluation of Equity Stakes and Investment in Hydrogen Value Chain = The securities industry agrees that the value of Hanwha Solutions' equity-method affiliates needs to be viewed more aggressively. The book value of YNCC, in which Hanwha Solutions holds a 50% stake, is about 370.1 billion won, but YNCC maintains its position as the third-largest NCC company in Korea (ethylene production capacity of 2.3 million tons) with capacity expansion completed this year. Additional expansion of the cracker (No.3) is also under consideration.

Also, Hanwha General Chemical (36.05% stake, book value 535.5 billion won) holds a 50% stake in Hanwha Total, which expanded its ethylene production capacity to 1.53 million tons with capacity expansion completed this year. Lee Dong-wook of Kiwoom Securities predicted, "The listing of Hanwha General Chemical is expected to lead to a revaluation of Hanwha Solutions' stake."

It is also positive that Hanwha Solutions is investing in the hydrogen value chain with high growth potential by mobilizing all business divisions. Hanwha Solutions is investing across the entire hydrogen value chain from production to storage, distribution, and charging by utilizing all its business divisions. The Q CELLS division supplies power through solar, ESS, and wind power, the chemical division produces green hydrogen using water electrolysis technology, and the advanced materials division stores it in tanks developed by them. The equity-method affiliate Hanwha General Chemical signed a contract in March to acquire PSM and ATH, which have hydrogen co-firing modification technology, from Ansaldo Energia. Hydrogen co-firing power generation technology has the advantage of being more economical than fuel cell power generation because it can use low-purity hydrogen.

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