Solar and Petrochemical Earnings Solid
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
Led by its solar and petrochemical domains, Hanwha Solutions’ 1Q20 OP beat consensus. While sluggish global demand will likely temporarily sap earnings at most of the firm’s divisions (including its solar module business), the company’s fundamentals are to remain intact.
1Q20 review: Solar and petrochemical earnings arrive solid
Hanwha Solutions announced posted 1Q20 OP of W159.0bn (+61.7% y-y, +430.4% q-q), led by higher-than-expected OP contributions from both the basic chemicals division and the solar division. As there is a short time gap between the purchase and input of raw materials at the basic chemical division, the division was able to enjoy low-priced raw material effects for 1Q20, stemming from an oil price plunge in March. Earnings at the solar division benefited from the absence of a one-off cost item (W43bn) booked in 4Q19, and OPM at the division reached 11% on increased shipments to North America.
Solar module shipments proved stable q-q, but ASP fell slightly on off-seasonality effects. Due to strong demand after the implementation of US Safe Harbor (tax credit system), the company’s portion of module shipments to the US and Europe widened, and its conversion to a multi-mono line system also helped in boosting profitability. However, module shipments will likely decline in 2Q20 due to lockdowns implemented in the US and Europe since March. Although ASP is expected to decline on the expected sharp drop in demand, postponed module demand should be released in 2H20 as the US Safe Harbor system is to continue through the end of the year.
Earnings in 2Q20 to be influenced by sluggish global demand
Looking at 2Q20, we expect Hanwha Solutions to show overall OP of W64.0bn. In detail, OP at the solar division is to be drained by a likely decrease in module shipments. Meanwhile, OP at the basic chemical division is to fall slightly on shrinking PVC demand in Southeast Asia (including India). But, we believe that LDPE and caustic soda spreads will remain solid. Turning to the processed materials and retail divisions, decreased demand due to Covid-19 is to become visible in 2Q20, in turn leading to a temporary shrinking in overall OP.
We point out that Hanwha Solutions’ subsidiaries (including YNCC, Hanwha General Chemical, and Hanwha Total) have relatively long intervals between the purchase and actual input of raw materials, a factor which led to equity-method losses in 1Q20 due to the input of expensive raw materials. We size combined inventory valuation losses for 1Q20 at roughly W200bn. Thus, while demand for products is to fall in 2Q20, the firm should enjoy equity-method gains thanks to the input of low-priced raw materials.