Strong demand, precise accounting for profits (SunPower Q3 2022 conference call summary)

The following is a summary of the Sunshine Power 3Q report conference call. See "Profit Soars, Can Sunshine Power Regain Its Glory?" for a financial analysis.

1. Performance Report

1. The gross profit margin for Q3 was 25%, up from 23.2% in Q2. This was due to improvements in the inverter, energy storage, and wind power converter businesses. The reasons for the improvement are as follows: 1) Large storage uses formula pricing and some inverters have increased in price, achieving good price transmission and offsetting upstream price pressure; 2) Ocean freight rates have fallen from a high level, and the standard container price for the US West Coast has dropped from $10,000 to $5,000, improving large storage profitability; 3) Scale effects have driven a gradual decline in period cost rates.

2. Accounts receivable have increased, due to rapid Q3 revenue growth. Inventories have risen from CNY 10.7 billion at the beginning of the year to CNY 20.7 billion, which is used to cope with reasonable stocking and preparation for rapid market growth in Q4 and next year.

3. Even if the U.S. anti-inflation bill details are announced, local U.S. industry chains need to be built in 3-5 years. Chinese companies can prepare well and seize the golden window. The company's strategy over the past two years has been to digest and manage the cost of overseas production capacity, shorten the procurement time, and reduce logistics costs. Looking at future policy changes, the company is relatively cautious in terms of investment.

4. Regarding raw materials, the IGBT supply has been greatly alleviated, especially for single tubes and high-power modules, and medium-power devices are currently in short supply. The domestic ratio of CPUS is improving, and by the end of this year, most power single tubes will be produced domestically. Lithium carbonate and polysilicon prices are currently at high levels and will ease significantly after a period of time, bringing better profits to the power station business.

2. Q&A Section

1. The profit recovery of energy storage in Q3 is significant. Did Large Storage carry out lithium carbonate price transmission and what are the space prospects?

As a result of the formula pricing of Large Storage, lithium carbonate price transmission was carried out. The confirmation of energy storage is one quarter lagging behind, and the adjustment made in Q2 was confirmed in Q3.

In addition, more than 80% of the company's energy storage is exported overseas, and the decrease in ocean freight rates has brought about increased thickness. Especially with Large Storage exported to the United States, interest rate hikes and exchange rate changes have a positive impact.

Supplement: Formula quotation (a way of dynamically calculating the price by considering factors such as cost, transportation and installation fees, and self-profitability) can reduce certain risks, but if it exceeds the required IRR of investors, it will lead to a market stagnation. It is still necessary to communicate with investors on delivery time.

2. How do you view the growth rate of the energy storage industry? What is the potential of the Large Storage project in the United States and the company's energy storage target for next year? How is the company's profitability?

The growth rate of the American Large Storage and energy storage industries is very fast. Last year, global energy storage installed capacity was 20 GWH, and this year is expected to be 50 GWH. The energy storage market is expected to have a fast composite growth rate next year, conservatively estimated at 50%, or optimistically 100%-150%. Market estimates for growth rates have a large range, but there are two certainties: the rapid growth of the US large storage, and the overall capacity growth of home storage. European home storage growth is over 100%. Domestic battery cell production began in November and December, and with multiple small-scale household battery technologies, the development of energy storage has created favorable conditions. Large storage batteries are being released, and with expected customer price increases, they are expected to perform well. We remain optimistic about the energy storage industry next year.

Q3 gross profit margin has improved, and it is expected to be sustainable despite the pressure of upstream raw material prices. Next year, demand for inverters will be optimistic, with conservative forecasts of 350GW for AC and 400GW for DC. A highlight next year will be the thick accumulation of household and commercial markets, along with the explosion of ground-based power stations resulting from discounted silicon materials. The company's shipment targets may be raised. Many European clients are re-planning their green energy, and many will install systems first and batteries next year, so the European market may be larger than anticipated.

There are many players in the household storage market, including those for mobile power supplies, home appliances, and electric motors. The company has two methods for maintaining its gross profit: the diverse branding heritage and battery cells. The company's battery cells represent a strategy of diversity without purpose, and the company has numerous partners who can provide battery cells. The company's target for household users is 6GWH.

The change in exchange rates in Q3 should be viewed holistically with financial expenses and fair value changes, which amounts to around 400 million yuan. The company correctly judged that it did not need to hedge at the beginning of the year. Although there will be losses in the fair value changes in exchange rates, the overall result is still profitable.

The domestic energy storage market is still waiting for new business models and policies to be enacted. Two major issues were addressed last year in the energy storage market: 1) energy storage power stations are now independently accounted for; and 2) energy storage system engineering contractors are now responsible for safety. The expected auxiliary services policy has not yet been enacted, and the energy storage business model is in a precarious state. The increasing proportion of statutory obligations for installation has caused the market to expand, and energy storage standards are gradually being strengthened. This has improved the ecology and profitability of domestic energy storage projects.

Freight rates have decreased, and Q3 revenue has increased by 30% MoM. From a management perspective, the company has improved mechanisms for project management, implemented a negative list for each project, and added risk items. The company has standardized management and controlled costs throughout the process from order acceptance to delivery. The three fees have not increased significantly. Moreover, the company also implements refined management and monthly review mechanisms. Although overseas European channel construction, after-sales service, and global dealer construction have also been strengthened, the overall expense ratio is developing in a positive direction.

8. How about the supply and demand situation for inverters in the industry this year and in the first half of next year?

Next year, the overall supply will be tight, and the supply of inverter raw materials will also be tight. The main reason is that the market is developing too fast, and the supply of high-quality products cannot meet the demand. The main challenge next year is the high-power semiconductor device in the string-type inverter, which will be localized. It is expected that there will be an oversupply in the year after next.

Brands that do not do direct sales may face reshuffling.

The main risk of energy storage is still the high price of lithium carbonate, which is said to be at its highest level in March-April next year. However, if the expectations are consistent, people will hold off on purchasing and there will still be uncertain situations at the beginning of the year. Faced with the huge explosion of the new energy market, lithium carbonate is still the main contradiction. The supply chain is in tight balance, and the market space is very large.

9. What is the general expansion cycle for inverters and energy storage?

Usually 7-8 months.

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