Hanwha Solutions Corp

KRX:009830

Earnings Call Analysis

Hanwha Solutions Q2 2024 Performance and Future Outlook

In Q2 2024, Hanwha Solutions saw a 13% increase in sales to KRW 2.68 trillion, driven by stronger renewable energy module sales. Despite a continuing operating loss of KRW 107.8 billion, improvements in their Renewable Energy segment saw losses narrow to KRW 91.8 billion, with expectations for a further decline in Q3 driven by a 30% increase in module sales. The chemicals division experienced a reduced loss of KRW 17.4 billion, while Advanced Materials faced profit declines. For the third quarter, the company anticipates total sales from power assets and EPC to reach approximately KRW 800 billion.

Resilient Sales Growth Amid Challenges

In the second quarter of 2024, Hanwha Solutions reported significant sales growth, with consolidated sales reaching KRW 2,679.3 billion, a robust 13% increase quarter-on-quarter. This uptick primarily stems from a recovery in renewable energy module sales after the seasonal downturn experienced in the previous quarter. Despite this positive trend, the company faced operational challenges, resulting in an operating loss of KRW 107.8 billion, although this loss decreased from the previous quarter due to improved performance in the Renewable Energy segment.

Financial Position and Debt Management

As of the end of Q2 2024, Hanwha's total assets increased to KRW 26,792.3 billion, yet the company also faced rising liabilities. Total liabilities for nonfinancial operations rose to KRW 17,383.2 billion, pushing the debt figure up by KRW 2,609 billion to KRW 11,958 billion. This led to a rise in the liabilities-to-equity ratio to 185%, reflecting a rise of 26 percentage points, and a net debt-to-equity ratio which also rose by 26 percentage points to 106%. The increasing debt levels warrant close scrutiny from investors, particularly in terms of liquidity and future financing strategies.

Segment Performance and Future Outlook

The Renewable Energy segment showed signs of recovery with module sales volume expected to increase by 30% in Q3, following a 40% improvement in Q2. The segment is projected to generate approximately KRW 800 billion in sales from power generation asset development and engineering, procurement, and construction (EPC) projects in the upcoming quarter. In contrast, the Chemicals business saw an operating loss decrease to KRW 17.4 billion, with expectations of a favorable price recovery in Q3, although maritime freight expenses may pose challenges. The Advanced Materials segment experienced a decline in profits due to rising raw material costs.

Concerns about Financial Structure Addressed

Management addressed market concerns regarding the company's financial health, announcing an upcoming issuance of a hybrid Tier 1 bond worth KRW 800 billion aimed at improving their financial structure and repaying existing borrowings. This strategic move is intended to fortify the company’s balance sheet and enhance capital flexibility. Investors should monitor this development closely as it indicates the management's proactive approach to managing debt levels.

U.S. Market Demand and Strategic Positioning

Amidst discussions of market dynamics, leadership indicated that demand in the U.S. solar market remains robust, particularly influenced by utility demand. The residential market is expected to become a key growth driver, especially with the introduction of financing services aligned with evolving market conditions. Significantly, the company is committed to manufacturing in the U.S., with anticipated operational openings in 2025, amplifying local production capabilities and likely enhancing sales through market responsiveness.

CapEx Plans and Future Growth Drivers

For 2024, Hanwha Solutions has committed KRW 3 trillion in capital expenditures, primarily directed toward expanding manufacturing capabilities in the U.S. This investment signifies confidence in long-term growth prospects and aligns with an overall strategy to increase production efficiency. Management believes this position will facilitate market growth and output stability, particularly as supply pressures are expected to stabilize in the near future.

Market Competitiveness and Price Stability

Management expressed optimism regarding pricing stability, indicating that the rapid decline in average selling prices (ASP) witnessed earlier this year may not continue. They underscored that new tariff implementations on Chinese manufacturers may create an opportunity for recovery in ASPs, suggesting the worst of pricing pressure could be over. This sentiment aligns with the expectation of improved module ASPs in 2025, fostering a conducive environment for revenue generation.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Thank you for joining Hanwha Solutions earnings call. [Operator Instructions] And now we will begin Hanwha Solutions earnings call for Q2 '24.

[An Yoon, executive]

[Interpreted] Good afternoon. I am Yoon, An Sik, CFO of Hanwha Solutions. I would like to thank everyone for joining the call today. I will brief you on the business performance, financials and outlook by segment for Q2 '24. First, the company's performance during the second quarter of '24. Please refer to Page 8 of the presentation. The consolidated sales of Q2 '24 increased by 13% Q-on-Q to KRW 2,679.3 billion. This is mostly from the renewable energy module sales recovery. The consolidated operating profit recorded the negative KRW 107.8 billion, and the size of the operating loss has decreased Q-on-Q due to the improved performance of Renewable Energy division. Pretax profit was negative KRW 311 billion and net income negative KRW 329.8 billion. For detailed performance by segment, please refer to the bottom of Page 8.

Now let's move on to Page 9 for financial performance. As of the end of the second quarter, the total asset for nonfinancial business increased by KRW 3,468.4 billion, from the end of year to KRW 26,792.3 billion. The cash and cash equivalent declined by KRW 97.2 billion from the end of last year to KRW 1,984.8 billion. The liabilities for nonfinancial business increased by KRW 3,045.7 billion to KRW 17,383.2 billion, and the debt increased by KRW 2,609 billion to KRW 11,958 billion, the net debt by KRW 2,762 billion, 9,974.1 billion. As at the end of Q2 '24, the liabilities to equity ratio has increased by 26 percentage points from the end of last year to 185% and the net debt-to-equity ratio by 26 percentage points to 106%.

Next, performance by segment for Q2 '24. First, Renewable Energy. As the impact from the seasonality from the previous quarter has ended for the second quarter, the module sales volume recovered and the partial realization of profit from the power asset generation asset in Europe helped boost the performance and thus, operating loss improved Q-on-Q to negative KRW 91.8 billion. We expect the module sales will continue to grow the size of loss declined in the third quarter, and the sales from the power generation asset development and EPC for Q3 is expected at around KRW 800 billion.

Next, on Chemicals business. The operating loss from the Chemicals for Q2 has improved Q-on-Q to negative KRW 17.4 billion. This is due to the slight increase in prices of some products despite a somewhat delayed recovery of global demand. In Q3, rising maritime freight rates may pose a burden, but the recovery in the prices of key products is expected to reduce the operating loss.

Next, Advanced Materials. Due to the rise in raw material costs and the maritime freight rate, the operating profit for Q2 declined by 15% Q-on-Q to KRW 9 billion. We expect the operating profit to decline for Q3 due to summer vacations of the major customers.

Next, on Equity Method gains. The Equity Method gains for Q2 has improved and recorded reduced deficit due to the increase in the equity method gain from Hanwha impact. As the performance of Equity Method companies is expected to improve during the third quarter, the Equity Method gain for the period is expected to improve.

This concludes the earnings briefing. Thank you.

[Operator]

[Foreign Language] [Operator Instructions] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Dong Jin Kang, analyst]

[Interpreted] So since June and also during the second quarter, the tariffs imposed upon the Chinese companies had pent up. And that has actually had a negative impact on the operating ratio of the solar manufacturer in China. So under that backdrop, I'd like to understand about the inventory status and the competition status in the U.S. market. Any updates will be appreciated. And also, you also mentioned during the briefing that the size of the loss during the third quarter will decline. So can you elaborate also in line with the sales of the power generation assets and also the EPC end module sales? And if there is any change in the volume guidance, then please share the update with us.

[Unknown Executive]

[Interpreted] So first, let me share the sales guidance. So we will maintain with our existing sales guidance for the year '24, which is 9 gigawatt.

In about the third quarter forecast, we expect that during the third quarter, the operating loss, the size of it will decline, and that is partially because of the improving module sales. The module sales for the Q1 was rather poor. But as we have predicted in the second quarter, it went up by 40%, and we expect additional 30% incremental in the module sales volume in the third quarter.

And regarding the power generation asset development and the EPC. So we were in line with the previous guidance of the second quarter. That was KRW 400 billion, and that helped us reducing the size of the loss. And we expect the trend to be maintained in the third quarter and the sales from the power generation asset development and EPC will be around KRW 800 billion, and mostly, it will come from EPC.

And regarding the inventory and the additional tariffs from June, and I also read through the media report that the manufacturer in the Southeast Asia, the operating ratio went down. But because of the heavy inventory buildup previously, so we have not yet witnessed any dramatic change in terms of the amount of inventory.

But when we look into the trend of the price that it is showing some positive trend. So we believe that the period of the fast decline in the ASP is over. So it is almost at a standstill. And this gives us some room for breath in terms of the volumes that we are selling at the better price.

So we believe that the sudden price decline that we have experienced in the first half is not likely to happen or to be maintained in the rest of the year.

[Operator]

[Foreign Language] The following question will be presented by Hye-young Jeon from DAOL Investment Securities.

[Hye-young Jeon, analyst]

[Interpreted] So I have 2 questions for you. The first is, what is your view about the U.S. solar market demand for the second half of this year? And the second question is that there has been some concern about the financial structure of the company from the market, and there are some rumors that there could be some additional funds raised during the second half of this year or towards -- from -- in the future. So any updates on the financial structure? Any plans?

[Unknown Executive]

[Interpreted] Let me first share the second half forecast with you. I do not believe that we have seen any major change in the forecast of the market research agency so far. For our perspective, yes, we did have some inventory buildup in the second -- weather the first half of this year in the United States, but we believe that the demand remains very strong, especially with regard to the utilities that we are seeing some positive signals.

Regarding the residential, we are yet to witness any growth, but we believe that the impact from the NEM 3.0 has been fully absorbed by the market so far. And additional development is the third-party ownership that is that the third party owns the solar systems and the facilities. And on that arena, we believe that there are still strong needs for the products or the solutions and the power utilization. So we believe that for the residential market, this will be the future driver of the demand, and we expect a strong growth in that area and also to be in line with this up and coming trend that we have also introduced the financing services in the U.S. market. So you would not necessarily generate a short-term strong performance. But starting from this year, we expect that this will be one of the driver of future growth.

[Unknown Executive]

[Interpreted] So regarding the concern from the market. So we have disclosed this briefly before the earnings call that we have decided to issue the hybrid Tier 1 bond worth KRW 800 billion, and the purpose of this bond issuance is to improve the financial structure and the repaid borrowings that we've had so far. So with this hybrid Tier 1 bond insurance, and the fund raise that we believe that our financial structure will be further improved.

[Operator]

[Foreign Language] The following question will be presented by Taeyong Kim from Mirae Estate Securities.

[Taeyoung(Eric) Kim, analyst]

[Interpreted] So I'd like to ask you the impact that the company is expecting to the ongoing U.S. presidential election campaign? And will -- has that affected your strategic direction or the business plan? And have you adjusted the IRA forecast for the year and onwards because of the presidential election?

[Unknown Executive]

[Interpreted] So it has been the company's policy to develop the business strategy not to be impacted by any change in the political scene. So because of that reason that we believe that the ongoing U.S. presidential election and the campaign will have a limited impact on our business, and we do not expect our existing strategy to change. So the solar business or the renewable business has gone through the business restructuring that has happened in the past 4, 5 years. And now we have entered into this 5th year of the business restructuring and the strategy will remain valid in the future. And we have already established sizable plant in the U.S. and our operating ratio of those sites has gone up significantly, and we've had this business with the previous administration. And we have maintained the position that U.S. is one of our most important strategic market, and this will remain valid in the future, regardless of the outcome of the presidential election.

Regarding the [ EPC ], we have booked JPY 200 billion for year '23 and for '24 for the first quarter, the amount recorded was JPY 96.6 billion. For the second quarter, it is JPY 146.8 billion. For the third quarter, we expect the amount to be in the same range with the slight potential for growth. And the guidance figure that we have given you for the whole year of '24 million was CNY 500 billion to CNY 600 billion that we expect that figure is something that will be maintained for the year.

[Operator]

[Foreign Language] The following question will be presented by Woo-Je Chun from KB Securities.

[Woo Jae Chun, analyst]

[Interpreted] So I have 2 questions for you. First is that you said earlier that you will maintain the sales guidance for the year. That means that for the second half of this year that you will have to absorb the 6 gigawatt. So can you give us the breakdown between the Utilities and the Residential? And what is the committed volume out of the 6 gigawatts through the contract and so forth? And the second question is that can you give us an update on the CapEx plan for the year '24 and '25? It seems according to your existing plan that CapEx investment will be closed or finalized for the year '24. But as many companies are adjusting their plans for the CapEx. So I was wondering if same will be true for Hanwha solutions? And do you expect there will be additional investment for the EPC or the power generation assets?

[Unknown Executive]

[Interpreted] So if I were to share with you the quarterly, actual and forecast that we have bottomed in the first quarter. And in the second quarter, it improved by 40%, and we expect additional 30% improved Q-on-Q in the third quarter. And traditionally, we have allocated the largest volume in the final quarter, the fourth quarter. So if we were to meet with the volume according to the guidance, then we also expect for the fourth quarter, that will be another round of sizable volume growth. So on -- want to give you the breakdown between the Utilities and the Residential. So it is a matter of allocation by the company. So the quarterly breakdown might not be that relevant. So that is why we have been communicating the annual allocation between the Utilities and the Residential because the ratio holds true on a quarterly basis as well. So just to remind you that the allocation for the Utilities segment is 50% to 60%, and the rest goes to the Commercial and the Residential. And according -- based upon the general allocation trend by the global companies, yes, we do have a higher allocation for the residential and commercial, especially. But when you look into the Commercial segment, that it also includes the small-sized utilities or those small-sized are power generation. So there could be some of the overlap between the Utilities and the Commercial.

And you also asked us about the committed volume for this year and next. And of course, then we look to the time line, first half is ended and second half also the volumes have been committed through the contracts and so forth and starting from the 2025 onwards, then we will fully operate our manufacturing facilities in the U.S. and sales and onwards will be manufactured in the states. And you know that the volumes that to be generated there are fully committed already, and there is a very strong demand for these products generated -- manufactured in the U.S.

With regard to the CapEx, there hasn't been many changes. So we commit to the KRW 3 trillion for the year '24, and the majority goes to the planned expansion in the United states.

So regarding 2025, then the plan is not yet finalized. So it is our practice to finalize the CapEx plan for the following year in the second half of the previous year. So hopefully, in the next earnings call, then we can give you more color as to what's to happen next year. And further towards the possible sales of the power generation asset and the EPC investment -- so we have maintained the sales of the existing investment. So maybe within those cash flows, so that might be some minor adjustment. But in terms of the annual sales figure, we maintained the KRW 2.5 trillion and I believe that in the first 2 quarters of this year, we were able to be good on those guidance, and we were able to continuously generate the profit. In the third quarter, the profit of the revenue will come mostly from the EPC sales. But on the fourth quarter, we expect there will be another round of the power generation asset sales.

[Operator]

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The next question will be provided by Hye-young Jeon from DAOL Investment Securities.

[Hye-young Jeon, analyst]

[Interpreted] So the question is with regard to the ASP for the U.S. market. So you expect the inventory that has been built up during this year will be resolved in the second half of this year. So that means that you expect the module ASP for 2025 will improve while slightly.

So the predicting ASP is always difficult, but we have seen that the price decline that we have witnessed from the end of last year came to some stable change in the second quarter, the beginning of the second quarter. But if we look into the degree of the price decline for that period starting from the end of last year until the early second quarter, it was as high as 40% to 50%. And that is because of the natural influx of the extreme amount of inventory. So if we were to think logically, then once there's a natural cost that has driven the price to go down that rapidly is resolved, then the price has no choice but to revert to its original range. So the current average cost is about $0.20. But we need to understand that this is the average price that means that some cases it was sold at early $0.20 or even at the $0.30. But if all of those factors that has caused some extraordinary happening at the U.S. market is resolved, then it will naturally be revert to the price that we have experienced before this happening, which was late $0.20 or the $0.30 range.

But of course, that we need to factor in other elements or other influences. So some areas of consideration is that what other companies are doing in terms of the policy change, for example, the imposition of the tariffs. And what kind of response they are planning in terms of the volume. And now we have seen the extreme competition in terms of the supply. So even for some companies, for the sales that they are generating, they are actually generating loss. So we need to keep a close eye on other companies' behavior will they maintain such strong supply at an extremely low cost despite the loss generation. And another factor that we need to take into consideration, well, it's not universally applicable to the whole market. But for Hanwha Solutions specifically because we are shifting the place that we are manufacturing our products, and that will have an impact on the ASP because we wanted to provide our customers with the additional merit by utilizing the products made in the U.S.A. and how that will translate into the ASP, that we'll have to wait and see.

[Unknown Executive]

[Interpreted] As there is no further questions, we'd like to end the earnings call for the second quarter of 2024 for Hanwha Solutions. Thank you, everyone, for joining us today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]