Domestic demand is bottoming out and moving upwards, targeting high premium markets in the Middle East for overseas expansion

The current situation of the photovoltaic industry: the cycle+growth logic has not changed.
1. Currently, the market is concerned that the proactive destocking time is too long, and the photovoltaic industry has become a pure cycle industry. The demand for installed capacity in 2024 may enter a stage of 'slow growth'. The extreme capacity expansion during the proactive replenishment cycle has led to a rapid decline in the prices of the industrial chain.
2. We believe that growth remains an important bottom line factor in this round of photovoltaic downturn cycle. The many problems currently encountered on the demand side are the bottlenecks and pains that photovoltaic power generation will inevitably encounter when growing into a major energy source. The pain this time is intense enough to trigger a large-scale clearance, but it is also an excellent opportunity for the photovoltaic industry to promote disruptive innovation, improve the industry landscape, and build technological barriers.
Therefore, photovoltaic research needs to shift from tracking high-frequency data from the supply side to tracking demand data and deriving the subsequent trend of demand prosperity. We believe that the growth potential of the demand side remains an important characteristic affecting the industry and an important bottom line factor in the industry's downturn.
Outlook for International Market Photovoltaic Demand: Targeting High Premium Markets, Expanding Photovoltaic Capacity to the Middle East. The starting volume of the Central European market does not increase profits, and the high premium market is still a breakthrough point for profits. In the second half of 2023, the main photovoltaic industry chain enterprises will enter a loss making range due to the impact of price decline. The high premium market can still ensure that integrated component factories and industrial chains can achieve strong profitability by expanding their overseas production capacity. In addition, the Southeast Asian bypass export to the United States has brought excess profits, but the green channel is about to end, so the export of production capacity to the Middle East has become a new channel for exporting to the United States.
Source: Guosheng Securities, compiled by Dexun Securities Research Center.
Risk Warning: The risk of domestic photovoltaic installation demand falling short of expectations and the risk of deteriorating competitive landscape.

1. The cycle+growth logic has not changed
1.1. The growth and cyclical logic of the photovoltaic industry
Significant growth after parity grid connection: By reviewing the history of global photovoltaic development, we can summarize the global photovoltaic development process into three stages: the "policy subsidy period" from 2007 to 2012, the "gradual growth period" from 2013 to 2018, and the "demand explosion period" after parity grid connection has been achieved since 2019. Since the implementation of parity grid connection in 2019-2020, the photovoltaic industry has made economic breakthroughs and become an important component of the new energy generation system to achieve energy independence. Although industry demand is still affected by subsidy policies, interest rate cycles, power distribution, and other factors, the overall upward trend is evident, and the sustained growth in new installed capacity over the past decade has verified the industry's growth potential.

Global trend of new installed photovoltaic capacity from 2007 to 2023 (unit: GW)

Cyclicality is the main characteristic that affects the prosperity of the industry: although the demand side continues to grow, the technological barriers in the photovoltaic industry mainly rely on "know-how obtained in production" and "economies of scale combined with latecomer advantages", which leads to breakthroughs in new technologies and makes it easy for enterprises to generate large-scale technology diffusion after gaining profits, accompanied by a large-scale expansion wave. After the expansion, there will be an overcapacity price war and the iteration of old technologies with new technologies, thus entering the next cycle. Therefore, macroscopically, the photovoltaic industry exhibits obvious cyclicality, with interest rate cycles and fossil energy revolution cycles resonating in the era of parity.

Traditional industrial inventory cycle, demand and inventory mismatch resonance

1.2. The market is concerned that the proactive destocking time is too long, and the photovoltaic industry has become a pure cycle industry
For a long time, the general market view has been that the photovoltaic cycle and growth jointly affect the development of the industry. However, in the current cycle, due to the fact that the industry still achieved a large scale of demand growth base in 2023, the market generally believes that the installation demand may enter a "slow growth" stage starting from 2024. However, the extreme capacity expansion that occurred during the active replenishment cycle has led to a rapid downward trend in industry prices in the supply chain.

Average price of polycrystalline silicon dense material from 2023 to 2024.07 (yuan/kg)

The sustained growth in demand has not affected the overall downturn in the photovoltaic industry during the cyclical downturn. Therefore, the market is currently concerned that the photovoltaic industry's "growth" influence will further shrink due to the increasing demand base, and the "cyclical" influence under the supply-demand contradiction will further increase, leading to the industry becoming a purely cyclical industry.
2. Targeting high premium markets and expanding photovoltaic production capacity to the Middle East
2.1 Southeast Asian bypass exports to the United States bring excess profits, but the green channel has ended
Starting from March 2022, the United States will conduct anti circumvention investigations on photovoltaic cells and modules imported from Cambodia, Malaysia, Thailand, and Vietnam. After more than a year of investigation, the final verdict will be announced in August 2023, maintaining the nationwide ruling. Manufacturers exporting batteries and components to the aforementioned countries will face a maximum anti-dumping tax of 254.19%. However, due to the two-year exemption period provided by the US government (June 2022 to June 2024), manufacturers can avoid being subject to anti-dumping taxes by importing or adjusting supply chain capacity during the exemption period.

Timeline of US Photovoltaic Trade Barriers

Therefore, based on the import statistics of the four Southeast Asian countries by the United States, the import amounts of Cambodia, Malaysia, Thailand, and Vietnam in 2023 were 2.31 billion US dollars, 1.87 billion US dollars, 3.73 billion US dollars, and 3.99 billion US dollars, respectively, an increase of 204%, 107%, 151%, and 57% year-on-year. The export value of components from the four countries to the United States has experienced a significant increase in 2023.

Southeast Asian four countries export components to the United States from 2021 to 2023 (in US dollars)

After the tariff exemption ends on June 6, 2024, Southeast Asia will no longer be a green channel for Chinese photovoltaic companies to enter the US market, and the market is therefore concerned that the photovoltaic industry may lose the highest premium market. However, the production capacity layout that bypasses the Middle East can still avoid double reverse investigations and help photovoltaic companies seize high premium market share.
2.2. Layout in the Middle East to open up channels and maintain a high premium market share
According to Wood Mackenzie data, there is currently a planned 20GW solar cell capacity in the United States, but there is still a gap of 40GW compared to the demand of 60GW. And these production capacities will take at least two to three years to build and ramp up, so it is unlikely to have output in the short term, and the long-term capacity gap in the US solar market is still large.

2022-2026E Estimated domestic battery module production capacity in the United States (unit: GW, left image shows battery production capacity, right image shows module production capacity)

On July 16, 2024, Sunac announced the signing of a contract with Saudi Arabia's ALGIHAZ to jointly build the world's largest energy storage project. On the same day, JinkoSolar and TCL Zhonghuan also announced heavyweight investment plans, both located in Saudi Arabia. Photovoltaic companies are intensively announcing their production capacity to go global to the Middle East. In addition to the support for photovoltaic power generation in the Middle East's own 2030 vision and the inherent advantages of Middle Eastern lighting conditions for the development of the photovoltaic industry, the more important thing is to use the Middle East as a substitute for Southeast Asia and export to the high premium market in the United States to obtain excess profits. Sort out the Middle East production capacity layout of Chinese photovoltaic enterprises since 2023, covering silicon materials/wafers/cells/modules as well as brackets/energy storage, etc.

Chinese listed companies plan to expand their photovoltaic production capacity in the Middle East, covering the entire photovoltaic industry chain

In addition, the US market generally believes that there are policy risks after the election, and there may be a downward risk in the expected demand for new photovoltaic installations in the year. We believe that there is a high possibility of suppressed demand in the US market, but there is a possibility of 'price to quantity'. According to the calculations of the US Renewable Energy Commission, potential new anti-dumping/countervailing tariffs may increase the price of US made solar modules by $0.10 per watt (currently $0.3 per watt) and the price of imported modules by $0.15 per watt. After entering the second half of 2024, the expectation of interest rate cuts will strengthen, and energy prices, photovoltaic system prices, electricity prices, and interest rates will become the four key factors that resonate and affect the demand for photovoltaic power generation in the United States. Maintain a cautious but not overly pessimistic assessment of the overall market volume and price.
2.3. Middle Eastern countries undergo energy transformation and vigorously develop the photovoltaic industry
The solar energy resources in the Middle East are as advantageous as oil. For example, Saudi Arabia has an average annual light intensity of 2200-2400 kWh/㎡, while most parts of China only have 1400-1600 kWh/㎡. The capital Riyadh has an average of 3225 hours of sunshine per year, ranking seventh among major cities worldwide.
The climate in the Middle East is dominated by tropical deserts, and almost all regions have very high solar radiation energy. This level of solar energy only exists in certain regions of the Sahara Desert, northern Chile, and Australia worldwide. It can be said that the Arab world is a natural fertile ground for developing solar energy.
In the past two years, Chinese photovoltaic products have accelerated their entry into the Middle East. From 2022 to 2023, China's exports of photovoltaic modules to the Middle East and North Africa will continuously exceed 10 GW, with particularly rapid growth in Saudi Arabia and the United Arab Emirates. Taking Saudi Arabia as an example, China's export of photovoltaic modules to the country in 2022 was 310 million US dollars, and the following year it reached 1.34 billion US dollars, making Saudi Arabia the sixth largest exporter of Chinese modules.

Cumulative installed capacity of wind and solar power in the Middle East from 2013 to 2022

According to the official website of the Saudi Arabian government, Saudi Arabia aims to integrate 2800GW of renewable energy into the national grid by 2030, providing electricity to 520000 households. In addition, 93 companies were established in the portfolio of the Saudi Public Investment Fund (PIF) in 2023, an increase from 71 companies in 2022. The investment in PIF and the establishment of a new energy generation system are important strategic goals in Saudi Arabia's 2030 vision. In addition, besides Saudi Arabia's vision for photovoltaic power generation demand in 2030, other Middle Eastern countries have also launched photovoltaic projects with the goal of energy transformation. Representative examples include:
Iran installed 8.29MW of rooftop photovoltaic systems in 2022, with a cumulative installed capacity of 519MW. Due to the Iranian government revoking its power purchase agreement with private developers, future large-scale photovoltaic projects will only be installed through government bidding.
The cumulative installed capacity of photovoltaic systems in Morocco reached 830MW in 2022, and a long-awaited law allowing companies to connect renewable energy generation facilities to medium voltage grids has been passed. It is expected that the commercial and industrial (C&I) photovoltaic market in Morocco will develop rapidly in the coming years.
Oman will put into use its largest photovoltaic park, the Ibri photovoltaic power station with an installed capacity of 500MW, in 2022. The other two photovoltaic power stations with a cumulative installed capacity of 500MW are planned to be put into use by the end of 2023 and early 2024.
The United Arab Emirates introduced a regulation in 2022 to increase the share of renewable energy generation in the country's electricity structure to 60% by 2035.
2.4. The spring breeze of China's photovoltaic policy has arrived, aiming to solve the problem of consumption
In order to enhance the power system's ability to consume new energy, ensure the large-scale development of new energy while maintaining a reasonable level of utilization, and promote the high-quality development of new energy, the National Energy Administration has issued a notice on ensuring the high-quality development of new energy by doing a good job in the consumption of new energy. This notice further provides policy support for accelerating the construction and grid connection of new energy supporting power grid projects. Including this notice, more than ten government documents have been issued since 2023 to ensure the normal power generation, grid connection, and consumption of new energy installations.

Review of Policy Guarantees Provided by China for New Energy Power Generation from 2023 to Present

Nuclear power design is more important, and only with independent and controllable capabilities can we fully promote it. At present, only China National Nuclear Corporation has China Nuclear Power Design and Research Institute and China Nuclear Power Engineering Co., Ltd., China General Nuclear Corporation has China General Nuclear Engineering Co., Ltd., and State Power Investment Corporation has Shanghai Nuclear Engineering Design Institute with many years of design and construction experience, making it difficult for new entrants.
2.5. Large scale base projects are in full swing, and centralized procurement bidding remains hot
On May 29, 2024, the State Council issued the "Action Plan for Energy Conservation and Carbon Reduction from 2024 to 2025", which proposed to accelerate the construction of large-scale wind and photovoltaic bases with a focus on deserts, Gobi, and other areas.
Under the promotion of green development policies, the publicly designated scale of photovoltaic modules in the first half of 2024 exceeded 172GW, an increase of 40% compared to the same period last year. Firstly, from the perspective of the bidding parties, there are 16 bidding parties exceeding 1GW, and the bidding scale has increased compared to last year. New enterprises such as Green Development Investment Group, Beijing Jingneng Group, China Railway Group, Xi'an Huanghe Photovoltaic, and Jinkai New Energy have also emerged.

Details of the bidding party for photovoltaic modules in the first half of 2024, unit: GW

Looking ahead to the future, the construction of the Fengguang Base remains an important new energy development strategy in China, and we expect the bidding situation to reach a new high in the second half of the year. For large-scale bases, consumption has always been one of the important challenges in their construction, requiring a balance between power generation and transmission in various regions, involving the construction of substations and ultra-high voltage transmission channels, and other aspects. Therefore, with the advancement of ultra-high voltage construction, we believe that the consumption of wind and solar power bases is expected to be alleviated. Once the consumption problem is alleviated, the installed capacity potential that the wind and solar power base can increase is expected to start a new round of photovoltaic demand cycle.