Below is the summary of the phone meeting for the 1st half of 2022 of LONGi Green Energy.SH. Financial reports can be reviewed in LONGi's self-produced “balance art” in the photovoltaic industry.

Management Report:

LONGi shipped 39.6GW of silicon wafers in the first half of this year, sold 21.6GW of them, and shipped over 18GW of single crystalline module products, an increase of 80% from the previous half year, exceeding 70% of the total. LONGi implemented its leading product strategy for the first half of this year. R&D costs were CNY 3.67 billion, a YoY increase of 127%. Battery component R&D was a focus, with multiple technologies in reserve. Heterojunction and TOPCon set records and were successfully produced on a large scale. Looking ahead, the global energy shortfall and rising electricity tariffs will encourage growth in photovoltaic demand. With upstream supply pressures easing, the company aims to achieve the business objective set at the beginning of this year by the end of the year.

Q&A:

1) Business Situation

Q: The inventory scale has increased significantly, what is the reason? How will overall inventory evolve based on the orders and clients delivery status?

A: The inventory increase in the first half of the year is in the component segment. The main reason is that the second quarter's shipments in Europe were outstanding and orders were three times higher than before. However, the European settlement method is GGP, the logistics cycle is longer, causing an increase in transit of 5GW. Relative to the same period last year, stock turnover efficiency has improved, but due to the expansion of production scale, the absolute amount of inventory has grown. We believe that this is reasonable in terms of the company's current business model.

Q: What is the progress of the Ordos project and HPBC?

A: The XiXian 15GW project has achieved 30GW capacity through optimization, and Taizhou is also being planned, including other projects. Production will start in Q4 and the 30GW project will reach full capacity by the first half of next year. Ordos hopes to find a technology tailored to ground power plants. The R&D work is underway and will start the equipment installation at the end of Q2 next year. We still have some time, and we have not determined which technological route to take.

Q: Why is there a significant improvement in Q2 cash flow?

A: First, we improved the inspection and confirmation of the payment for the sale of components. All contracts require a closed period. We did not look into it too closely last year. Secondly, in terms of prepayments, there has been an increase in prepayments for long-term contracts. Previously, the bills were generally collected using a bill pool. This year, bank credit was used. When we receive the bills, we directly turn them over.

Q: How was capacity utilization arranged for Q3?

A: Silicon wafer capacity utilization rate is around 75%, and component capacity utilization rate is 70-75%. Future production arrangements will depend on the end user's acceptance of component prices.

Q: Why did the gross margin of components decrease?

A: The component orders delivered in Q2 were at the original contract price. The gross margin for Q3 is about the same as that of Q2. Q: How was the shipment of components in the distributed market in the first half of this year?

A: The distributed sector showed good progress in the first half of this year, becoming the main driver of installations during that period. The company's distributed component shipments were 7.1GW, accounting for 41% and a YoY increase of 10 percentage points. It is expected that the shipment will increase in the second half of this year.

Q: What is the reason for the lower growth rate of shipments in the first half of the year compared to the industry average and lower operating performance growth rate?

A: LONGi has made efforts to ensure supply chain security. Prior to this, LONGi signed guarantee agreements with major raw material suppliers, which accounted for 60% to 70% of the total output capacity. For upstream raw material companies, they hope to develop more customers and avoid excessive concentration of sales. Therefore, some agreements were exceeded. If LONGi wants to maintain a high production rate, it must grab materials from the market. The result is clear, so there is some restraint on silicon wafers. When the price of silicon is high, it is also a risk control measure.

Q: If there is a significant increase in demand for ground power stations, is it possible to adjust the component shipment guidance for this year and next year?

A: It is currently impossible to determine this year's situation. Next year, the company's battery sheet capacity will be significantly improved compared to this year. The part of our own production is still profitable, while the portion we purchase from outside is not profitable. The biggest damage to performance this year is due to the fact that the component is a futures business, and the actual orders are already signed. Profit always lags behind the rise in raw material prices.

2) Trend Analysis

Q: What is the market demand forecast?

A: Last year, it was predicted that this year's demand would be between 220-240GW, and during India's peak season in Q1 this year, the expected demand ranged between 250-260GW. Now, it appears that the total demand for this year will approach 300GW. Currently, the forecast for next year is between 380-400GW, and it is possible to reach 600GW by 2025. In the long run, we still believe that shortages are temporary, and surpluses are the norm.

Q: Is the demand forecast based on component or installation data?

A: The company uses component shipments as its basis.

Q: What is the expected shipment volume of HPBC next year?

A: Next year, the PERC capacity will be around 50GW, and the HPBC capacity will reach 30GW at full production, resulting in an actual shipment of 25GW for next year. Erdos' new technology will install equipment in the second quarter of next year, and there will be several GW-level productions by the end of next year.

Q: What is the trend of silicon prices?

A: Next year, there will be no shortage of silicon materials in the first quarter, and prices will fall in the second quarter. However, if there is a demand of 400-500GW next year, the prices in the second quarter will not fall.

Currently, Europe urgently needs goods, but there is a lack of installation capacity, resulting in a backlog of goods. Delayed domestic demand may also lead to an earlier drop in silicon prices.

Q: What is the specific investment return on silicon materials? What is the judgment on silicon material supply? A: We had equity partnerships with industry players and generated revenue of about 1.47 billion yuan in the first half of this year. In the second half, new silicon production capacity will be added in an intensive manner, and we anticipate that the silicon production capacity will reach approximately 1.35 million tons by the end of 2022, with an expected addition of approximately 1.5 million tons for the full year of next year, a 60% to 70% increase from this year's 900,000 tons, which is expected to greatly alleviate supply pressure.

Q: Profit premium for two new technologies next year? Expected duration?

A: We hope that our products can provide higher value to our clients, as well as thickening and enhancing the competitiveness of our company. I have not been authorized to disclose information on efficiency, cost, profit, or market strategy to everyone at this stage.

Q: Expected shipments and structure of components in the second half?

A: This cannot be too accurate to say, and presently, we have not modified the shipment plan for the beginning of the year. We also operate on a principle, which is that we will not care about short-term market share at this stage, and will instead focus on profit optimization and capacity building for the next stage. Based on the unmodified targets, the projected output for components in the latter half of the year is expected to be over 30 GW. The structure is predicted to be similar to that of the first half of the year, if there is no significant change in pricing. For the United States, it primarily relies on the enforcement rules of the customs, which decides whether or not our chain of evidence can be passed through. If it can, there will be better growth in the second half of the year as compared to the first half, but if it is hindered, projected shipments will not be significant. Order structure will also be determined by profit.

Q: Gross margins for Q2 components and silicon wafers? Expectations for Q3?

A: The gross margin for silicon wafers in Q1 was 24%, and it dipped slightly in Q2, primarily due to the cost of silicon materials. The Q2 gross margin for components was 12%, a decrease of approximately 6 percentage points from Q1, also due to discrepancies between delivery order prices and upstream prices. The Q3 gross margin is expected to be similar to that of Q2.

Q: Domestic pressure to consume new energy is high, energy storage policies are not yet clear, and feasible plans for large ground power stations in the future?

A: Energy transformation is divided into four phases.

Firstly, full use of non-physical price mechanisms, such as the deployment of flexible transformation of thermal power plants, has not yielded ideal results. Demand response is being pushed by the state and Germany's share of photovoltaic (PV) plus wind power is 42%, without the use of large-scale energy storage, due to their demand response. China's share of PV and wind power is currently just over 10%.

Secondly, there's a need to strongly develop pumped storage and refit it. Pumped storage is the most mature method, and the state is already aware of this and making adjustments, allowing for a 10-15 year period of lowered costs and scaled chemical energy storage prior to the large-scale introduction of chemical energy storage, which will support the new electric power systems. Coupled with the development of hydrogen energy, it might not necessarily involve filling in valleys by cutting peaks, but cutting peaks is achievable and will have a positive impact on the consumption of new energy.

Q: Distributed proportions next year, and advantages of HPBC?

A: Longi's technical route has been brewing for so long, there will certainly be a very good debut. It is indeed a very good product targeting distributed applications, and ground power stations also have strong competitiveness, but in terms of planning, distributed applications will no longer suffice and will not be provided to ground power stations. 3) Strategic Planning & Risk Response

Q: The company rarely makes its voice heard regarding the selection of new technology routes. How much technological leadership has been established?

A: The way we approach research and development is by implementing multiple technological routes simultaneously, and each route is leading the world in its own way. We need to conduct more comprehensive evaluations of each technological route, and these evaluations are also time-sensitive. Perhaps one route makes sense at a certain time, but another route may have a breakthrough in the near future.

LONGi is not too concerned about seizing opportunities, but about having long-term competitiveness. Delaying certain aspects for six months is not a big deal as long as we bring enough value to customers and enough competitiveness to the company.

HPBC is one of the technological routes we have selected, and we believe it still has room for improvements. Since LONGi has made this decision, we can definitely satisfy customers, bring value to them, and enhance LONGi’s competitiveness. Everyone will be able to see the product when it is launched.

Q: What is the core competitiveness of component companies?

A: a. The underlying technology, currently, the two-step progress is in battery technology. One is that monocrystalline silicon battery has reached 26%-27%, and the other is that the laminated layer can achieve over 30% efficiency in the medium to long term. We have invested strong research and development efforts in various technological routes, including laminated batteries. Our goal is to keep leading the industry.

b. In terms of applications, we have collaborated with Sentient and built great product capabilities on distributed PV systems. Especially in the integration plan with building products, we have strengthened the structure of the roof. This kind of insight is not only about distributed PV systems.

c. As for ground power stations, currently the electricity price of the power station is about 0.3 yuan per kWh. The operation costs are 2-3 cents per watt year, which is less than 10%. With the appearance of electricity prices over 1 cent in the future, operation costs of 2-3 cents will become a huge burden. It is also an important cost component in the life cycle of the power station. There is still much work to be done in ground power stations.

We oppose practices that may have little impact on value but bring reliability risks, such as extra-large-sized components and thinning of silicon wafers. We hold a cautious attitude.

Q: What is the patent layout of HPBC?

A: The company has complete assurance in this regard.

Q: What is the target market share for mid-term components, about 30%? What are the target market shares for silicon wafers and batteries? Would we expand to upstream production of silicon materials? What will be the shipping level of each link next year?

A: In the long term, we aim to anchor 30% of the market share in component production. We aim to build a secure and controllable supply chain system upstream, and to extend services and scenario-based solutions downstream. Currently, the silicon wafer production capacity is roughly 1.5 times that of component production capacity and 2 times that of battery production capacity. LONGi is also very willing to provide services to the entire industry in the silicon wafer sector, and we have some long-term customers who are willing to collaborate with us in this regard. Currently, the silicon wafer and battery production capacities are not enough for our planned future component production capacity. We haven’t planned to deeply intervene in the silicon material sector which we hold equity in Tongwei Co. It is believed that supply will be sufficient in the next two years. Q: What is your view on Tongwei's component production? Is the strategic focus of components on market share or profitability?

A: If Tongwei doesn't do it, someone else will, and we don't have any special feelings about it. The people who rushed into the photovoltaic industry from 2005 to 2008 made money because it was relatively scarce at the time. However, oversupply is bound to happen, but we don't know when it will happen. In this case, only by having sustainable business can we tell whether an enterprise's business is sustainable. For Longi, we plan to have long-term market share goals, but we don't consider it as a short-term goal. We consider profitability as an important goal, but our strategy in the long term is to make a 30% market share as the goal.

Q: How do you respond to potential inventory devaluation?

A: When the prices in the industrial chain rise, the entire industrial chain will benefit. When the price of silicon material falls, the entire industrial chain will be affected, including Longi. There are 2-3 days of inventory of silicon wafers, and we need to speed up the turnover and avoid forming management inventory burden when the prices in the industrial chain are high.

Q: How do new battery technologies respond to new challenges? In terms of management?

A: Longi attaches great importance to R&D, and we have a lot of time and experience in this area. Last year, we established the central research institute and built a complete and efficient research and development management system. We will pursue multiple routes together and come up with a fusion technology.

Everyone wants to find the 26%-27% low-cost route as quickly as possible, but until we find it, we will be cautious in every step. Whether it's half a year earlier or half a year later, the transition is not important. If you have more competitive products, release them later by half a year, and the market will still be yours. If the market pressure is too high, use the transitional technology to get through it first.

Q: Is the current profit margin per watt the bottom line we can accept? Are we not willing to make more profits?

A: If doing so can bring about more meaningful things such as changing the structure, we are willing to do it, but it is meaningless when there is a shortage of raw materials.

Q: How do we manage silicon inventory in the near future?

A: It's hard to accurately judge the price of silicon. If the market is close to 400GW next year, the silicon material shortage should be resolved in Q1 next year, and the price in Q2 is expected to fall. Of course, the forecast may also be inaccurate. If the demand is 500GW, it may not be tight. Now, the installation capacity in Europe is insufficient, and there are some pileups of products. In addition, the domestic market is difficult to start, and there may be insufficient demand at an earlier time, so it is difficult to say for sure. We are trying to reduce inventory on the silicon wafer side and hope to use contracts to constrain customers in executing orders during the industrial chain's downward price trend in the component side.

4) Technical and R&D issues

Q: What is your thinking and opinion on HJT technology?

A: We are constantly breaking through with the HJT route, including P-type heterojunction and PIN heterogeneous junction. Economically speaking, due to high equipment investment and high consumption of low-temperature silver paste, the production efficiency of Topcon and HPBC is not much higher than the transitional route, so overall, it still requires time to break through. Longi does not rule out which technology will be used finally, as well as the fusion of technologies. Ultimately, we will increase investment to achieve production routes with low cost and 26-27% efficiency. There are still problems with the investment return and economy of HJT at present.

Q: How do you view your competitors expanding Topcon and new technology routes?

A: The theoretical efficiency of monocrystalline silicon cells is 29.4%, which is limited to 28% in the laboratory. The maximum efficiency of mass production is 26-27%. In the past, Longi hoped to find technology that can achieve low-cost 26-27 cells. At present, these aspects are progressing normally. We evaluated that the Topcon technology route is about 1 point different from 26-27, which is a transitional route. The HPBC route should have room for improvement in the next generation, as well as good appearance and excellent power performance. Distributed energy will bring very high value.

Q: What is the leading capacity of new battery production next year?

A: This is also difficult to judge clearly. At present, we are confident, and how long it will last also depends on the research and development progress of peers.

Q: What are the ideas and directions to reduce the cost of silicon wafers? What measures can replace N-type doping?

A: The absolute gap between peers is narrowing. Size, thickness, and N/P are not problems for general silicon wafer companies, and are not revolutionary. There is not much room for silicon wafers to continue to reduce costs, and the impact on the cost of electricity is relatively small. Nowadays, single furnace feeding is more than 600 kg. The level of multiple rods is 3-4 tons. Doing more will also increase the risk. There is still room for improvement in silicon wafer quality, such as structural defects and impurity control.

There is no upgrading issue for N-type doping. Use higher purity raw materials and change the dopant to phosphorus, which is an upgrade, and it is even better to control than adding gallium.

5) Overseas Business

Q: How will the US market develop after the anti-circumvention landing?

A: The new anti-dumping regulations issued on June 21, including silicon powder, have provided evidence chains waiting for customs backtracking. In the future, overseas supply chains will be considered for the US market.

Q: What is the pricing strategy for new products overseas? Will the ratio of distributed energy continue to increase next year?

A: New products are indeed very good products for distributed energy. In fact, they also have strong competitiveness in ground power stations, but they may not be sold enough in distributed energy, so they cannot be distributed to ground power stations. In distributed energy, some PERC products will be replaced. PERC products will also be used in the low-end distributed energy market.

22. What indicators should be considered when building factories in the United States? Which links have higher competitiveness in building factories outside?

The United States are subsidizing the entire production chain, including green hydrogen. We have conducted research in multiple areas, but we cannot disclose it to everyone at present.

Q: What is the outlook for European demand in 2023?

A: The demand for energy in Europe is more urgent in the winter of the second half of the year. Europe has further raised its proportion of renewable energy targets, and it is expected that Europe will still maintain relatively rapid demand growth. Germany raised the on-grid power price of distributed projects in July. Q: What is your view on potential trade policies in Europe?

A: Considering the energy costs and other supporting factors, it may only be feasible to produce components in Europe. Therefore, the transfer to Europe is expected to be relatively slow. European demand is currently there, and there are agreements with US customers. Any costs incurred during the execution of the bill will be borne by the customers. Therefore, even if there are relevant bills, we will respond accordingly, and we will assure our customers that our supply chain is traceable.

Q: What are your plans for overseas expansion?

A: Subsidies in the United States are throughout the entire process, and green hydrogen also has subsidies.

Risk Disclosure and Statement for This Article: Dolphin Analyst Disclaimer and General Disclosure

Longi phone conference summary: "We won't be short of silicon materials in the first quarter of next year, and the prices will decrease in the second quarter."