The "Mini LONGi" in PV Insists on Integrated Layout: Hongyuan Green Energy Self-Consumes All Its Polysilicon Capacity

"At the time of investment, I thought PV was a tech growth stock, but later realized it was actually a cyclical stock." An investor made this self-deprecating remark while communicating with the company's management at the 2024 annual general meeting of HYGREEN (603185.SH) held yesterday afternoon.

After experiencing a performance boom from 2020 to 2022, HYGREEN incurred a loss of 2.697 billion yuan in 2024 amid changes in the PV market, marking the highest loss since its listing. Correspondingly, the company's market capitalization also plummeted from nearly 100 billion yuan at its peak to around 10 billion yuan now.

Regarding how to cope with the impact of cyclical risks, the company's management stated that it would comply with the self-discipline production cut requirements of the industry association to stabilize market prices. On the other hand, it would continue to maintain the company's core advantage of integration, with all of the company's self-owned polysilicon capacity used internally and no consideration given to external sales.

"The company is confident in recovering ahead of the industry and now only needs to wait for the market to rebound," the management said. As of Q1 2025, HYGREEN's asset-liability ratio stood at 58.15%, which was at a relatively low level among publicly listed firms in the PV industry.

Integration remains an effective risk-mitigation strategy

Starting from the silicon wafer business and gradually extending its industry chain upstream and downstream, HYGREEN's development path shares many similarities with that of PV leader LONGi Green Energy (601012.SH), leading some investors to refer to it as "Little LONGi."

A review of its operating performance in recent years after entering the manufacturing end of the PV industry can more vividly reflect the ups and downs of this cycle: In 2019, the company began to cross over from high-end intelligent equipment manufacturing into the PV monocrystalline silicon sector. Benefiting from a significant increase in terminal installation demand, various links in the crystalline silicon industry chain, especially upstream products, were in undersupply, and product prices remained high. By 2021, the proportion of the company's new energy materials business revenue in its main business revenue had exceeded 98%.

From 2020 to 2022, HYGREEN also experienced a "boom period" in performance, with net profit attributable to shareholders of the parent company increasing by 186.72%, 222.10%, and 77.22% YoY, respectively.

The company's management introduced at the shareholders' meeting that as early as 2021, during the PV industry's rapid growth phase, the company had already detected the potential risk of overcapacity in the silicon wafer segment. While peers were still aggressively expanding their monocrystalline silicon wafer capacities, the company had already begun to establish a vertical integration layout covering "polysilicon-silicon wafer-battery-module."

The management further stated that if it had bet solely on the silicon wafer segment at that time, although it could have achieved high short-term profits, it would have been difficult to withstand long-term cyclical fluctuations. An integrated layout could effectively avoid systemic risks brought about by sharp price drops in a single segment.

However, it is worth noting that this layout model is often accompanied by controversies, especially when the entire industry chain faces challenges of periodic supply-demand imbalance, and integration also encounters the situation of "it is difficult for a large ship to change course." By Q4 2023, as this market trend neared its end, Hongyuan Green Energy's revenue and net profit began to decline, and in 2024, it recorded the largest loss since the company's listing.

During the post-meeting exchange, an investor asked what the company's core "moat" was. The company's management responded that in the segmented equipment manufacturing business, the company maintains a stable leading position; in terms of PV materials, due to product homogeneity, enterprise competitiveness is mainly reflected in cost reduction. From polysilicon production to battery modules, the cost competitiveness in each segment is at the industry-leading level.

Regarding the current operating status of each segment, the management did not provide a clear explanation but stated that the company is one of the few in the industry with layouts and operations in all four main material segments, and its operating rate is higher than the average.

Hongyuan Green Energy has formed a vertically integrated industry chain pattern. In terms of polysilicon, the company currently has an existing self-owned capacity of 60,000 mt in Baotou, which can be increased to 75,000 mt through improved production efficiency.

The company's management stated that Baotou, Inner Mongolia, is currently one of the regions in China with the greatest electricity price advantages, and its cost competitiveness is relatively obvious. This portion of polysilicon capacity is advanced capacity that has been newly commissioned in recent years, with all parameters at a relatively good level, and all output is for self-use, with no plans for sale or participation in mergers and acquisitions.

Voluntary production cuts are conducive to the recovery of industry chain prices.

In 2024, the prices of PV products in various segments continued to remain at low levels, putting pressure on the gross profit margins of the company's various products. Among them, the gross profit margin of silicon wafers was -4.14%, a decrease of 21.99 percentage points YoY, while the gross profit margin of solar modules and batteries was -12.42%, an increase of 1.15 percentage points YoY.

The company's management frankly admitted during the exchange that the gross profit margin of modules is the lowest, but their sales account for a relatively small proportion of the company's overall business. The core reason for the losses is concentrated in silicon wafers. If calculated based on the current market price settlement, the actual gross profit margin of the silicon wafer business is -6.06%, and that of the module business is 3.18%.

Regarding when the gross profit margin of the silicon wafer business can turn positive, the company stated that it depends on market conditions. In Q1 this year, driven by policies, there was an installation rush in distributed PV, leading to a significant price increase in the PV industry chain and driving an improvement in business operations. Financial reports show that Hongyuan Green Energy achieved revenue of 1.657 billion yuan in Q1 this year, a decrease of 24.37% YoY. Although the net profit attributable to the parent company was a loss of 61.88 million yuan, it increased by 56.23% YoY.

The company's management stated that in the first quarter of this year, rising prices in the industry chain drove the company's gross profit margin to turn positive, making it one of the least loss-making enterprises in the PV industry. "As long as the industry shows a slight recovery, the company's operating conditions will improve rapidly. We are currently waiting for the opportunity to explode."

During the exchange, investors repeatedly asked when the PV industry chain would reach an inflection point, but no definitive answer was given. The management admitted that the current situation in the industry cannot be changed by a single enterprise, and the company can only leverage its advantages within the broader environment.

The company's management told a reporter from Cailian Press that the self-regulated production cuts in the PV industry since the beginning of the year have been effective in improving industry chain prices. The company will comply with the requirements proposed by the industry association to bring the industry back to a reasonable level as soon as possible.

Modules are the most downstream segment in the crystalline silicon industry chain and one of the core sales sources for integrated producers. In 2024, Hongyuan Green Energy's module sales exceeded 4 GW. Regarding the module shipment target for this year, the management stated that there is no clear plan, and it will mainly depend on changes in market conditions.

In terms of taking orders, the company adopts a cautious strategy, focusing on customers' payment collection capabilities and will not accept high-risk orders. However, it can accept orders that are at break-even or slightly loss-making, as it needs to maintain production line operations and provide working conditions for employees.