Sunshine Power: Growth in Scale without Worry, but Difficulty in Profit Improvement (Telephone Conference Summary)

Below is the summary of the conference call minutes for the H1 2022 of Sungrow Power, please refer to "How can Sungrow Power support a market value of 200 billion yuan without increasing profits?" for financial report analysis.

I. Performance Report

H1 2022 Performance:

1. Assets and liabilities: inventory of 16.7 billion yuan, a YoY increase of 6 billion yuan. Inventory increase of 1.2 billion yuan in new energy household photovoltaic materials, 0.9 billion yuan for ground power stations, 2 billion yuan for energy storage reserves, and 1 billion yuan for overseas inventory.
2. Sales expenses were 1.1 billion yuan, including an increase of 0.3 billion yuan in after-sales maintenance, mainly due to the growth of overseas energy storage business and an increase in maintenance costs for equipment under warranty. There will be maintenance costs of 100 million yuan for equipment under warranty in the next five years. The overseas sales layout has been expanded, and there are more than 200 after-sales service personnel for light energy storage, resulting in an increase in expenses.
3. Financial expenses: currency gain of 225 million yuan; interest expenditure of 80 million yuan.
4. Research and development expenses were 723 million yuan, a YoY increase of 42.5%, with an increase of 49% in R&D personnel, mainly in the areas of energy storage and hydrogen energy; overseas business accounted for 3% and is expected to further increase.

Reasons for the Low Gross Margin in 2022 Performance:

Green energy in Europe is accelerating its development, and global photovoltaic, energy storage and electric vehicle industries are maintaining strong growth. However, the tight supply and rising prices of upstream core raw materials such as IGBT and new power components have affected the delivery schedule due to the pandemic in April, and it basically returned to normal in June.

The decrease in gross profit margin is mainly due to: 1) high shipping costs, with domestic shipping costs rising in the second quarter due to the worsening epidemic; 2) the increase in the price of power devices and new energy materials has dragged down the gross profit margin; 3) confirmation of some deliveries in June may be delayed, which will have some impact on the Q2 performance.

Incremental Business Information:

1. The company's PV inverter delivery volume in the first half of the year was 31GW, accounting for 34% of the world's total installation capacity of 92GW. There was an increase of 1-2% compared to the previous year. The company has a cumulative installed capacity of 269GW worldwide.
2. 305,000 household installations were completed in the first half of the year; 45,000 households with energy storage PCS were completed, including 15,000 households with energy storage (expected to ship 80,000 units in the second half of the year); and 62,000 for commercial and industrial enterprises.
3. The energy storage system shipped 2GWh in the first half of the year, accounting for 11% of the global market. The Power series is in mass production.
4. 6GW of wind power inverters were shipped.
5. 28GW of power station investments and development were completed, with a profit of 100 million yuan in H1 2022.
6. The research and development investment has been increased, with an increase of 49% in R&D personnel (from 2108 to 3142), and an increase of 42.5% in R&D investment, from 508 million yuan to 723 million yuan. There were 2338 intellectual property applications and acquisitions, up from 1740.
7. Overseas business increased by 3 percentage points, channels increased by 5 percentage points, and it is expected to further increase in the second half of the year.

Other business developments:

1. Water surface photovoltaic: the files of the Ministry of Water Resources are somewhat lagging behind, and the profit and loss are basically maintained throughout the year.

2. New energy vehicle driving system: 220,000 units were shipped in H1, a year-on-year increase of 144%. In addition to SAIC-GM-Wuling, Chery Ice Cream and Dongfeng, the logistics vehicle market share is also among the top. The whole year is expected to be slightly profitable, or even turn losses around.

1. Charging pile: the business has been integrated into the Photovoltaic Energy Storage and Charging Group, focusing on overseas expansion. The 17KW European version of the charging pile has been recently released, and orders have also been received, firmly rooted in the Photovoltaic Energy Storage and Charging group.

2. Smart operations business: a total of 14GW of operations and maintenance, ranking first in the industry, and selected as a national leading enterprise this month.

Hydrogen energy business: further increasing investment and innovation, traditional/alkaline electrolytic cell, PEM hydrogen production system, and making significant progress.

Industry outlook:

1. The silicon material price may be eased in Q4 this year or Q1 next year, and the lithium carbonate price is still uncertain. IGBT is currently in a continuous tight supply situation, and it is expected that the output of small power single-tube devices in Q3 this year will be released quickly. The power device module is expected to be relieved until H2 next year, and the single device supply is expected to be greatly eased.

2. It is expected that by 2035, the cumulative installed capacity of photovoltaics in the world will exceed 7,200GW, wind power will reach 3,100GW, and energy storage will reach 5,200GWH.

3. The direct current side of photovoltaic power generation will exceed 400GW in 2023, and the alternating current measurement will be about 300GW. The AC side will exceed 400GW in 2024 and break through 500GW in 2025.

4. Energy storage will be more than 100GWh in 2023, more than 150GWh in 2024, and more than 210GWh in 2025. These numbers are relatively conservative.

5. The penetration rate of electric vehicles will be 15 million in 2023, 20 million in 2024, and 25 million in 2025.

II. Q&A session

1. The inverter gross profit margin has declined, and will the gross profit margin of the inverter increase in the second half of the year as distributed generation becomes more prevalent?

The increase in overseas shipments and distributed generation, including household shipments, will improve the gross profit margin in the second half of the year.

2. What is the transmission capacity and gross profit margin outlook for energy storage?

The new orders are basically executed according to the company's quoted contracts. The company's quotation is basically linked to upstream lithium carbonate prices. The overall gross profit margin is relatively certain. It is judged that the gross profit margin of energy storage in the second half of the year should be in a stable state with a tendency to improve.

3. Trends in the profit margin of domestic large-scale energy storage this year and next year?

It is difficult for domestic energy storage to be profitable. There is no profit model, and the country does not have guidance policies. The company no longer pursues performance in domestic energy storage, and maintains basic domestic installation volume based on the principle of basic survival. The main focus is on obtaining value overseas, and the company's goal is to occupy a market share of more than 20% in the global energy storage market. 4. In the second half of the year, the estimated shipment of energy storage is 80,000 units. Is this expected to be the sum of PCS and household storage, or the quantity of only PCS?

Due to the battery bottleneck, only 15,000 battery systems were shipped for household use in the first half of the year. The 80,000 hybrid inverters to be shipped in the second half of the year are much larger than this.

1. What is the market share target for photovoltaic AC measurement and energy storage next year?

Next year's plan is quite ambitious, with a target of 120-130GW for photovoltaics, 500,000 units for household storage (including batteries), and 20GWh for the whole household storage system.

1. What is the growth rate in China and abroad?

In the first half of the year, 31GW of inverters were shipped, with about 10GW in China and 21GW overseas, matching the market structure. In the first half of this year, China accounted for more than 30% of the global 90GWh, matching the market to some extent as well.

1. How is the gross profit margin distributed domestically and internationally?

The gross profit margin in European countries and the United States is 40-50%, while it is similar to China in Southeast Asia and India at 25%.

1. In the second quarter, there were more asset impairments and credit impairments. What are the prospects for such impairments in the second half of the year?

Asset impairments were about the same as last year in the first half of the year, and credit impairments decreased slightly. As the scale expands, accounts receivable will grow somewhat, so this area will improve slightly, and there is no bad debt or significant impairment risk found.

1. For the inverter sector, what is the quantity for household use?

For photovoltaic channel business, including household inverters, distributed inverters, and solar storage integrated machines, the target is one million sets this year and 1.5 million sets next year. This year, there were 150,000 energy storage inverters, among which 100,000 were used by customers, and 50,000 were sold overseas. In addition, next year's target is one million energy storage inverters, including 500,000 for personal use and 500,000 PCSs for external sale. It will be a year of explosion for household storage systems next year.

1. What is the price situation for PCS and household storage?

Due to the variety of channels and products, prices vary. However, one trend is clear: non-energy storage household storage is shifting towards energy storage household storage. Many new players will enter the market next year, and small batteries are still in short supply.

The system composed of small batteries is essential, involving the critical experience of SOC, BMS skills, software, and the balance of charging and discharging. Overall, the bottleneck of batteries and the ability of software are crucial next year. In the long run, the ability to be friendly with the power grid, match household appliances, and adapt to charging piles are all essential. It will gradually play a role in the combination of solar storage and flexible grids.

1. What is our advantage market mainly in Europe, and what is the layout in the United States and Japan?

The products in the United States and Japan have separate standards, and the threshold is relatively high. It is relatively rare for Chinese companies to enter the US household energy storage market. Previously, we were focusing more on big products and less on small in the United States. However, with policy support and promotion, we expect the US market to reach 50-60GW in the future. Based on this, we will increase our entry into the US market. Including MLPE, shutdown, and even charging.

Both the North and South American markets are incredibly important. Currently, the company has surpassed 9GW in the South American market, with the North American market having an absolute leading position. The typical characteristic of the American market is that high-power is large, and low-power is small. The company strives to make a breakthrough in small energy storage.

1. The power plant profit is still good, what is the outlook for this business for the year?

Firstly, there were fewer exchange losses in the first half of the year, and secondly, after last year's rectification, the compliance requirements for the project have become higher, thirdly, the income from the self-owned power plant has increased compared with last year, and fourthly, investment in household photovoltaics has increased.

The peak season for household photovoltaics is in the second half of the year, and the first quarter is usually a period with less installation due to the Chinese New Year. This year, the COVID-19 pandemic had a greater impact on household photovoltaics; however, things have been improving since June, and the profit in the second half of the year is mainly from household photovoltaics.

The domestic large power stations that do not have the conditions to start construction will not start construction, mainly because of the high price of components and the lack of subsidies. These power stations hope to be built next year, which will be our power station's new year. The overall profit in the second half of the year will be much better than that in the first half.

1. What is your view on and response to the U.S. policy of encouraging local production?

The future of the United States in the next decade: 1) tax offset policy, investors offset 30% of taxes; 2) direct equipment subsidies, subsidies of 2.6 trillion yuan over the next 10 years. Although the policy promotes subsidies, the intensity of subsidies is strong, and the supply chain and labor force in the United States are deteriorating. The United States needs at least 3-5 years to establish a supply chain market. We hold a cautiously optimistic attitude towards U.S. policies. The advantages of China's manufacturing industry are quite significant, and it is not easy for Europe and the United States to suppress the industrial chain advantages.

1. Should the safety standards be strengthened in the domestic distributed field, and what is the development trend?

Currently, safety issues in China's distributed system are advocated in the form of files to achieve fire prevention and safety shutdown. This is a recommendation rather than mandatory, and whether to install disconnect devices in the next 2-5 years is an excessive stage. In the end, mandatory installation is expected.

1. Three-phase energy storage inverters require a large amount of silicon carbide mos. What are the technical or supply chain arrangements for energy storage products?

Small power silicon carbide mos are the trend of the future. In small power products, silicon carbide mos products do not have cost advantages compared to IGBT. The price is higher, but they have advantages in switching frequency and loss. Every enterprise is laying out for small to large-scale production. At present, the price of domestic silicon carbide mos is not advantageous, but it is believed that after two or three years of optimization, silicon carbide mos will gradually become popular in small and medium power products, such as charging piles and cars. The company is also prepared.

1. What are the risks for new energy in the next two to three years?

Risk exists but is different from 531 and the 2012 crisis. Previously, the potential was huge, but the government's subsidy capabilities were insufficient. Now, new energy can be completely compared with fossil energy, and this type of policy risk does not exist.

Market level:

1. International trade risks. 80-90% of the global solar energy industry chain is in China. Large-scale trade wars are not very likely to occur, only partial trade wars such as carbon tax methods, etc. The company's main way of preventing such risks is to do a good job of ESG and commit to achieving carbon neutrality in 27 years. **2) Risk of Overcapacity: ** Many companies are engaged in making inverters and home storage, and most new entrants have no brand image and no overseas channels, so they start because of temporary shortages. Inferior products will definitely be overproduced.

**3) Technological Level: ** Whether there is disruptive technology, such as solid-state batteries, sodium batteries, etc. In energy storage, lithium batteries will continue to dominate for the next 10 years, with other sodium batteries complementing them, but not dominating.

In terms of lithium battery, the density is getting higher and the temperature adaptation range is getting wider, and energy storage is gradually moving towards intelligence, digitization, etc. There is still a risk of iteration in technology, and hydrogen energy will erode some of the lithium battery storage, but the mainstream will not change.

**Risk Disclosure and Statement of this Article: ** Dolphin Analyst Disclaimer and General Disclosure