Summary
Hanwha Q CELLS has become a top global player, having successfully integrated the operations of failed German solar cell company Q CELLS.
Annual shipments forecasted to be more than 3GW, which is almost double from 2015 levels.
Internal processing costs competitive with the best global solar panel producers.
Gross margin has become one of the best in the industry due to sharp cut in costs.
Hanwha Q CELLS Co. Ltd (NASDAQ:HQCL) is one of the largest solar cell suppliers globally. The acquisition of Q CELLS in February this year helped HQCL gain, not only in terms of scale and low-cost production capacity, but also gave it a reputable brand name. Today, the company is amongst the top 3 global photovoltaic manufacturers of high-quality and high-efficiency solar modules. During its most recent quarter, the company turned profitable with more than $50 million in net income. Hanwha Q CELLS will benefit from a solid international footprint as a result of its duty free production locations, a growing downstream business and "Engineered in Germany" technology. The stock performance has also been quite good, with HQCL returning more than 150% in the last one year. I would thus recommend adding the stock on dips.
Why HQCL deserves a look
2) Capacity Expansion - Hanwha Q CELLS has plans to achieve a manufacturing capacity of 4.3 GW each for cells and modules. The company is expanding in Malaysia and Korea and has plans to expand capacity through 2015 and 2016. The Malaysian facility will cater to high efficiency product technology while Korea will enable duty free shipments to USA. Given its diverse international footprint, the company is in a unique position to flexibly address the global markets.
HQCL Production Capacity (in GW)
30th Sept. 2015
|
End of 2015
|
Mid 2016
| |
Ingot
|
1.35
|
1.35
|
1.35
|
Wafer
|
0.9
|
0.9
|
0.9
|
Cells
|
3.55
|
4.3
|
5.2
|
Modules
|
3.35
|
4.3
|
5.2
|
Data from HQCL PR
Hanwha Q CELLS has a higher cell production capacity when compared to Trina Solar (NYSE:TSL), which will have an estimated capacity of 3.5 GW and 4.8 GW, respectively, by 2015 and 2016 end. The company also has plans to build a new production facility in Thailand.
3) New Deals - The company signed a module supply agreement over 1.5 GW with NextEra (NYSE:NEE), the industry's largest ever, according to Bloomberg. Hanwha Q CELLS also signed a supply deal with USA's top residential installer Sunrun (NASDAQ:RUN) becoming one of its main suppliers in the next year, providing up to 135 MW of modules. In addition to the above, Hanwha Q CELLS was also chosen by SunEnergy1 as the sole module supplier for its project portfolio in North Carolina.
4) Increasing downstream business - Majority of mainstream Chinese manufacturing companies have diversified into the more profitable solar development segment. Hanwha Q CELLS has also been successful in achieving a decent geographical diversification across its downstream project business. The downstream project pipeline exceeds 1.2 GW this year.
Downstream Pipeline
|
%
|
Latin America
|
50
|
EMEA
|
40
|
China
|
10
|
The downstream project pipeline looks good, with 40% projects in late stage development expected to commence construction within 6 to 12 months.
(in %)
Early Stage
|
46
|
Mid Stage
|
14
|
Late Stage
|
40
|
Although the company has been pursuing its downstream business, it did not lose focus of its core businesses.
We made careful and conscious strategic decision to first focus on our execution of merger and capacity expansion and the strengthening our module and cells to transform new Hanwha Q CELLS to truly one of the most significant module manufacturers in the world first. However, we have continued to strengthen our downstream development platform without putting too much on our balance sheet - Andy Park VP, HQCL.
5) Robust Outlook - Hanwha Q CELLS gave a good outlook, with gross margins expected at more than 20% for Q4 '15. The company expects to incur $280 million as capital expenses for cell and module capacity expansion and technological upgrades. The USA will be the biggest market in 2016 followed by Japan with a growing presence in India and Turkey.
Future Guidance
|
Q4 '15
|
FY 15
|
Shipments (in GW)
|
1.2 - 1.4
|
3.2 - 3.4
|
Gross Margin (%)
|
> 20
|
19
|
Risks for HQCL
a) Falling ASP - The average selling price of external shipments declined by $0.02 to reach 57 cents per watt during the third quarter. Although the company has a decent presence in the US markets, its overall ASP is affected due to shipments to low ASP regions like China and India. Revenues from China increased to 12% in Q3 '15 from 8% in the previous quarter.
Major regions as a % of total revenues in Q3 '15
%
| |
North America
|
31
|
Japan
|
20
|
China
|
12
|
EMEA
|
25
|
b) Increasing debt - Total term borrowings increased by ~$60 million to $517 million. Although HQCL does not face any funding pressures due to its strong parentage (part of the Hanwha conglomerate), it needs to watch debt closely as it has been the cause of downfall for major solar companies.
Valuation low, despite stock outperformance
In my view, a company with such potential deserves better valuation and I think prices will go up, given the expected earnings growth. The stock is currently trading at ~$28 level, almost equal to its 52-week high price. The market capitalization value stands at $2.23 billion and the stock looks very cheap with a forward P/E of just ~3x.
(click to enlarge)
Source: Google Finance
Conclusion
Although the company received a boost in net income because of a reversal of arbitration accruals related to the acquisition of Q CELLS, the results were also driven by a favorable mix achieved due to improvement in operations and reduction in in-house costs. Hanwha Q CELLS has benefited from the Q CELLS acquisition, leading to rapid capacity expansion and strengthening module sales backlog. Its downstream business is also growing, with the company having grid-connected over 50 MW of projects till date. The company is witnessing some upward earnings estimate revision by analysts. HQCL is a hidden gem of the solar industry. However, the solar sector is incredibly volatile and only for investors with a high risk tolerance. The stock valuation looks cheap and I would recommend buying on dips.
By Sneha Shah
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