Several PV film enterprises reported negative gross profit margins last year. Industry insiders said that after capacity contraction, "transactions will only be made when necessary."

As a core material for module encapsulation, PV film typically accounts for 5%-8% of the total cost of a PV module, yet its performance and stability directly impact the module's power generation efficiency and lifespan. During the PV industry's downturn cycle, the profitability challenges faced by PV film producers have also garnered significant attention.

Taking leading enterprise First (603806.SH) as an example, the company achieved PV film sales of approximately 2.811 billion m² last year, up 24.98% YoY. However, its operating revenue from this business segment declined instead of increasing, reaching 17.504 billion yuan, down 14.54% YoY. Meanwhile, second- and third-tier PV film producers faced even greater survival pressures, with companies such as HiUV New Materials (688680.SH) and Tanyang New Materials (603330.SH) generally reporting negative gross profit margins for their film businesses.

A representative from a film enterprise mentioned in an exchange with a Cailian Press reporter that the company began reducing its film production capacity last year. In Q1 this year, its sales contracted by 40% YoY, and its operational focus shifted to cash flow management, adopting a "no unnecessary transactions" principle and selectively conducting business while ensuring capital security.

Industry analysts believe that second- and third-tier film enterprises are under significant cash flow pressure from operating activities, with some companies having sustained losses for over a year. Currently, most companies lack both the capacity and motivation to expand production, and it is expected that the competitive landscape in the film segment will remain stable.

Further Differentiation in Profitability

First is a global leader in the PV film sector, maintaining a global market share of around 50% for its films. Last year, First's PV film sales reached 2.81 billion m², up 24.98% YoY. Despite a 14.54% YoY decline in revenue, its gross profit margin remained at 14.72%, underscoring its position as a core product and profit driver for the company.

In contrast, second- and third-tier film enterprises generally have lower, or even negative, gross profit margins: Tanyang New Materials' gross profit margin for its PV encapsulation film products was -3.19% last year; HiUV New Materials reported a gross profit margin of 0.54% for this business; and Cybrid Technologies' gross profit margin for its encapsulation film business was -2.80%, down 9.24 percentage points YoY. The company attributed the decline in gross profit margin to homogeneous competition in the industry, leading to losses starting from Q3 last year.

PV film serves as the encapsulation and protective material for the front and back sides of crystalline silicon cell modules, and is broadly categorized into EVA film, POE film, EPE film, and other types based on raw materials and processes. After 2020, amid growing demand for PV production capacity, the film industry faced severe capacity shortages, prompting a new round of capacity expansions. According to industry insiders, as a midstream auxiliary material, the expansion cycle for film production generally spans around nine months.

A representative from a film enterprise noted that, compared to upstream segments like polysilicon and wafers, the film expansion cycle is shorter, with capacity being supplied first, making it an auxiliary material segment that initiated price wars earlier.

"During those years, PV was the most certain segment for development, attracting significant capital inflows. Demand was extremely high, driving up product and raw material prices," the aforementioned film enterprise representative said. According to the representative, the film industry resembles a toll processing sector, with upstream bulk resins including EVA and POE accounting for over 70% of costs. This implies that fluctuations in raw material prices cannot be fully offset by cost control measures on the production side.

Therefore, changes in upstream raw material prices have a direct impact on the profits of film enterprises.

Analysts suggest that PV film market prices are expected to maintain a fluctuating trend at lows, with its pricing system primarily based on the transmission mechanism of fluctuations in upstream resin prices. When rapid increases in PV module production schedules drive a surge in demand, this may trigger temporary price hikes for resin and film products.

Capacity Enters Contraction Phase

PV film production capacity has undergone significant expansion. Taking HiUV New Materials as an example, its film capacity was only 170 million m² at the time of its IPO in 2021. By 2024, its film capacity had reached 800 million m², a fivefold increase.

Tanyang New Materials raised nearly 1 billion yuan through a private placement in 2022, planning to expand PV film production capacity in Rudong, Kunshan, and Hai'an, with the goal of increasing annual capacity from 160 million m² to 540 million m² by the end of 2024.

In 2023, competition intensified in the film segment, leading to price reductions and declining gross profit margins for film products. Under operating pressures, some loss-making enterprises initiated capacity contractions. In November last year, Flariant (605566.SH) announced plans to suspend operations at its controlled grandchild company, Hangzhou Flariant New Energy Co., Ltd.

Facing rapid market changes, Tanyang New Materials began gradually slowing the commissioning of new production capacity last year and, based on considerations of cost improvement and profit enhancement, suspended production on some inefficient production lines. Last year, the company reduced production and halted operations on production lines for the Kunshan Tanyang solar cell encapsulation film project and the Kunshan Tanyang PV Materials Co., Ltd.'s new project to produce 150 million m² of PV film annually. It concentrated on commencing operations at the Nantong Tanyang PV production line to enhance the production efficiency of PV encapsulation film and improve product quality stability.

Regarding downstream demand, a representative from a film enterprise told a Cailian Press reporter that there are risks of price transmission in the module segment, coupled with the accelerated marketization of global energy prices. Considering factors such as policy guidance in February this year and the historical impact of the 531 policy, industry competition has shifted to the dimension of cost control. Notably, the installation rush in March this year prematurely depleted market demand, leading to an accelerated decline in module prices after mid-April and weakening end-use demand.

Industry analysts believe that, in terms of changes in the supply-demand structure, on the one hand, there are expectations of a sustained decline in demand (with installation growth rates potentially remaining negative or flat), while on the other hand, the supply side is undergoing a capacity exit process, with small and medium-sized module producers already experiencing operational difficulties. Currently, the industry is attempting to stabilize the market through self-regulatory agreements and quota systems, but the effectiveness of current market adjustment mechanisms remains uncertain.

According to representatives from film enterprises, based on predictions of industry uncertainties, particularly lower demand visibility in H2, film producers are implementing prudent sales strategies, strictly controlling accounts receivable risks, and proactively reducing business scale. Additionally, the capital market's lukewarm response to short-term installation rushes indirectly reflects cautious market expectations for the industry's medium- and long-term development.