Transforming into Comprehensive Energy Solution Provider
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
3Q21 OP forecast at KRW179.5bn (-19% QoQ)
We now expect Hanwha Solutions to post operating profit of KRW179.5bn (-19% QoQ) for 3Q21. Despite weaker spreads for major products, chemicals should generate solid earnings at operating profit of KRW224.5bn (-23% QoQ). Hanwha Q Cells will likely report slightly larger operating losses on a QoQ basis at KRW66.5bn for 3Q21, due to partial reflection of higher feedstock prices and rise in costs from freight rate hikes.
Meanwhile, operating profit should climb QoQ from: 1) advanced materials on improvement in earnings from photovoltaics (PV) and electronics materials; and 2) retail on the absence of property taxes and solid demand for luxury goods as well as home appliances. Equity method gains are likely to come in lower on a QoQ basis, weighed down by narrower spreads from rising naphtha prices and sluggish earnings from Hanwha Hotels & Resorts amid stricter social distancing restrictions.
Transforming into a comprehensive energy solution provider
Hanwha Q Cells continues to operate in the red due to high prices of key materials (polysilicon and wafers) and rising freight rates. However, we expect the cost burden to gradually ease going forward, with capacity additions expected for both wafers (2H21) and polysilicon (large-scale expansion through 2022). According to Bloomberg NEF (BNEF), global PV demand is forecast to reach 182GW (+26% YoY) in 2021. Solid PV demand will possibly lead to price hikes and margin gains for PV module makers.
Hanwha Solutions has decided to acquire renewable energy developer RES France, taking over the company's 5GW renewable energy project pipeline to raise its total to 15GW from current 10GW. The deal should help to accelerate downstream-driven growth with: 1) expansion of business areas from PV to wind power and ESS; and 2) diversification of target markets (previously limited to Spain/Portugal). We believe growth of the downstream business will lead to improvement in profitability and re-rating of valuation multiples as a renewable energy company.
Retain BUY for a target price of KRW60,000
We retain our BUY rating on Hanwha Solutions for a target price of KRW60,000. Shares have corrected over the past seven months with Hanwha Q Cells continuing to report sluggish earnings for an unexpectedly long period. Nevertheless, we point out that the mid/long-term directionality of the PV business remains positive, and believe earnings expectations will gradually increase upon improvement in module spreads and expansion of the downstream business. Despite weak short-term momentum, Hanwha Solutions shares are seen attractive at current valuations (12MF PER of 9x vs. global peer average of 25x) given strong mid/long-term growth potential.