Hanwha Solutions: After the rain comes the beautiful

The author is an analyst with Shinhan Investment Corp. He can be contacted at [email protected] – Ed.

OP forecasts for 3Q21 at KRW179.5 billion (-19% QoQ)

We now expect Hanwha Solutions to post an operating profit of KRW 179.5 billion (-19% qoq) for 3Q21. Despite lower spreads for major commodities, Chemicals is expected to generate solid profits with operating profit of KRW224.5 billion (-23% QoQ). Hanwha Q Cells Likely To Report Slightly Larger Operating Losses On A QoQ Basis At KRW66.5 Billion For 3Q21 Due To Partial Reflection Of Higher Commodity Prices And Rising Costs Due To Rate Hikes freight.

At the same time, operating income is expected to rise in QoQ from: 1) advanced materials thanks to improved revenues from photovoltaics (PV) and electronic materials; and 2) the retail trade on the absence of property taxes and a strong demand for luxury goods as well as household appliances. Equity method gains are expected to decline on a QoQ basis, weighed down by narrower spreads due to rising naphtha prices and weak earnings at Hanwha Hotels & Resorts amid tighter social distancing restrictions.

Transform into a complete supplier of energy solutions

Hanwha Q Cells continues to operate in the red due to high prices for key materials (polysilicon and wafers) and rising freight rates. However, we expect the cost burden to gradually ease in the future, with capacity additions expected for both wafers (2S21) and polysilicon (large scale expansion until 2022). According to Bloomberg NEF (BNEF), global PV demand is expected to reach 182 GW (+ 26% year-on-year) in 2021. Strong PV demand may lead to price hikes and margin gains for PV module manufacturers.

Hanwha Solutions has decided to acquire renewable energy developer RES France, taking over the company’s 5 GW renewable energy project pipeline to bring its total to 15 GW from the current 10 GW. The agreement is expected to help accelerate downstream growth with: 1) expansion of business areas from photovoltaic to wind and ESS; and 2) diversification of target markets (previously limited to Spain / Portugal). We believe that the growth of the downstream business will lead to improved profitability and a reassessment of valuation multiples as a renewable energy company.

Keep BUY for a target price of KRW60,000

We are retaining our PURCHASE rating on Hanwha Solutions for a target price of KRW 60,000. Stocks have corrected over the past seven months, with Hanwha Q Cells continuing to report sluggish earnings for a surprisingly long period. Nonetheless, we stress that the medium / long term directionality of the PV business remains positive and believe that earnings expectations will gradually increase as module spreads improve and downstream activity expands. Despite weak short-term momentum, Hanwha Solutions shares are considered attractive at current valuations (PER 12 MF of 9x versus the global peer average of 25x) given the strong growth potential in the medium / long term.

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