Longi has grown from humble beginnings to become the undisputed global leader in the solar industry, and there’s still a long way to go
601012Longi Green Energy Technology
Market Cap: CNY406 billion (US$60 billion)
Note: Longi shares split 1.4:1 today, so information in financial databases may not be accurate.
Longi Green Energy Technology is the world’s largest solar module producer, shipping 50% more GW than its nearest competitors in 2021 to hold approximately 20% market share. This is a fairly recent development, as Longi only first entered the module market in 2014 through the acquisition of a relatively minor player and gradually rose through the ranks to take the top spot in 2020. Over the last five years, the Company has grown revenue and earnings at a 40%+ CAGR, driving 55% annualized returns for shareholders.
In 2021, Longi recorded twice as much revenue as its nearest competitors at significantly higher operating margins (14% vs. 5-8%) and ROIC (20% vs. 5-10%). Longi generated roughly as much operating income in 2021 as the rest of the top ten module manufacturers combined. In a hyper-competitive industry with a history of financial instability, Longi has emerged as the only AAA-rated module supplier according to PV-Tech. Longi achieved this by first dominating the monocrystalline silicon wafer market, where it has captured a 45% share, and then moving downstream into cells (cut wafers) and modules (assembled cells). As a result, Longi’s module competitors are often reliant on Longi for their key inputs, which constrains their growth and margins while Longi is in a better position to scale their downstream operations, especially during periods of turbulence across the supply chain. After increasing module shipments by 55% to 38GW in 2021, the Company has planned for another year of strong growth to deliver up to 60GW of modules in 2022:
The surge in oil, gas, and coal prices is accelerating demand for solar, wind, batteries and electric vehicles as a means to combat inflation, establish energy independence, and reduce environmental impact. The relative weakness in Chinese renewable energy stocks this year presents an attractive entry point for long-term investors.
2022 has been a rough ride for many investors, unless of course you went all-in on oil and gas stocks at the start of the year. Economic activity has sharply rebounded as vaccines facilitate a return to normal, and it turns out that our cars and planes still use the same kind of fuel as before the pandemic. The supply side has struggled to catch up with demand as persistently low oil prices over the past decade caused many oil producers to curtail capital investment as they switched from growth to survival mode, culminating in a record $100 billion worth of North American oil and gas producers entering bankruptcy during the height of the coronavirus pandemic in 2020. To add more fuel to the fire, the Russian invasion of Ukraine and resulting political fallout constrained a significant source of oil and gas supply to Europe during a seasonal peak in heating demand. As oil ran to prices not seen since 2008 and subsequent inflation and rising interest rates weighed heavily on long-duration growth stocks in the technology sector, oil and gas stocks outperformed the broader S&P 500 by 70% through the first five months of the year.
While the market appears to be acting rationally on the surface, it is making one glaring oversight. Renewables have been left out of the rally in the energy sector, as they have been lumped in with other high-growth stocks that have taken a beating due to higher interest rates. This may have made sense in past cycles, as the renewable energy and electric vehicle industries existed on a relatively tiny scale to serve niche markets and were nowhere close to being cost-competitive with fossil fuels for mass consumption. However, this is rapidly changing as renewable technologies follow their learning (cost) curves, meaning they become cheaper to produce at a predictable rate as more units are produced, which drives a virtuous cycle of lower prices, more demand, and more production. Fossil fuels, on the other hand, do not benefit from a learning curve, in part due to the maturity of combustion engine and power plant technologies, as well as a rising cost of extraction over time as the world’s cheapest resources tend to be discovered and depleted first. Even before the recent surge in input prices, this dynamic led solar and wind to leapfrog fossil fuels to become the cheapest source of electricity from new power plants over the past decade:
Price declines for renewables have temporarily gone in reverse as the industry contends with rising prices of most input materials, such as polysilicon used for solar wafer production, the steel used for wind turbines, and various minerals that go into lithium-ion batteries. For solar and wind, prices are back to 2018 levels, while lithium-ion batteries have risen back to 2020 levels. As fossil fuel prices have now risen to 2x-4x 2018 levels, higher prices have not had any chilling effect on demand for renewables and electric vehicles. An updated LCOE (levelized cost of energy) analysis from Lazard in October 2021 concluded that unsubsidized new-build wind and solar projects have already fallen below the cost of operating existing coal plants, and are competitive with existing gas plants. Since then, the price of coal has risen 100% and oil and gas have risen approximately 50%, while the cost of solar modules has been relatively flat. The difference in cost is perhaps most apparent in the Australian power market, where customers of the coal-heavy New South Wales and Queensland grids are contending with larger price increases than in South Australia, where the renewable mix is higher.
I will be launching a newsletter on Substack later today. “The Money Corner” will focus on idea generation in the Asian markets. I’ve got a long list of themes and companies I’d like to discuss; first up is an overview of the broader opportunity in renewable energy and a profile on the world’s leading solar module manufacturer, listed in Mainland China.
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