As we move into the latter half of 2023, the renewable energy sector is facing notable challenges, particularly in the photovoltaic (PV) industrySince the beginning of the year, the performance has been lackluster, with the photovoltaic index experiencing a decline of approximately 14%. This downturn has positioned the sector as trailing behind major market indices like the Shanghai 50, CSI 300, and the ChiNext IndexSeveral factors contribute to this predicamentOn one hand, there is a significant withdrawal of capital from the sector as speculators engage in trading activitiesOn the other hand, concerns regarding oversupply, aggressive pricing wars, dwindling future demand, and increasing protectionism in international trade are casting a shadow over the industry's prospects.

The situation highlights a transitional phase for the photovoltaic sector, following a period marked by explosive demand, substantial capital influx, and rapid capacity enhancements

The industry is undeniably entering a more cutthroat competition stage, suggesting that we may soon observe a rigorous process of survival of the fittest among enterprisesHowever, it's essential to recognize that the current developmental stage of this industry is fundamentally distinct from traditional sectors at the peak of their cyclical prosperityMajor integrated enterprises in the photovoltaic sphere are likely to demonstrate sustainable profitability, potentially surpassing the market's pessimistic expectationsHere are some insights that support this outlook.

Firstly, the driving forces behind industry growth remain unaltered, and the demand potential is still substantialThe growth in demand for PV installations can be attributed to two main factors: the economic viability and accessibility of solar energy production, and the supportive energy transition policies from various governments

• BYD's 30th Anniversary
• Solar Sector Valuations Hit Historical Lows
• US Economy Poised for 3% Growth? Data Out Tonight
• Nvidia Down 5% After Hours
• Fed Expected to Cut Rates

Prominent economies such as the United States, China, and those in Europe are continuing to demonstrate robust backing for clean energy initiativesAdditionally, public awareness and acceptance of distributed photovoltaic products are steadily increasingEmerging markets in regions like the Middle East and Africa are beginning to cultivate growth as wellWhen we analyze the potential for demand growth, it is noteworthy that in 2022, solar power constituted a mere 6.2% of the total electricity generation worldwide, indicating that the industry's full potential has yet to be realizedGiven that recent declines in the supply chain prices enhance the investment returns for solar power stations, a compound growth rate of around 20% in global PV installations over the next five years appears attainable.

Secondly, the continual evolution of technology within the sector grants leading companies a competitive edge

Unlike many mature and cyclical industries, photovoltaic technology progresses at an accelerated paceFirms that pioneer the commercialization of new technologies can reap substantial profits resulting from reductions in costs, efficiency enhancements, and the necessity-driven scarcity of advanced production capacity, while outdated capacities lagging behind on technical advancements face expeditious obsolescenceHistorical cases of market leadership shifts, such as the transition from multi-crystalline to mono-crystalline technology and the replacement of BSF by PERC, have equipped investors and industry professionals with crucial learningsAware of past mistakes, the leading integrated module manufacturers emphasize maintaining technical superiority and advanced production capacity, continuously investing in various technological paths.

When scrutinizing the current industrialization of next-generation solar cells like TOPCon, XBC, and HJT, it becomes evident that the complexity of manufacturing processes and the proportion of core technologies managed on the production side have notably increased compared to the PERC era

As a result, leading enterprises possess a distinct competitive advantage over second and third-tier companies, particularly concerning capability in mass production and innovation of new productsThis observation indicates that these firms are likely to advance their production at a more accelerated paceLooking toward the medium to long term, the aforementioned technological routes still present considerable opportunities for further cost reductions and efficiency improvements, while the process of commercializing stacked cells is already underwayThus, we believe that leading integrated companies will capitalize on this wave of technological iterations, effectively bolstering their unit profitability.

Apart from their technical expertise, leading module manufacturers possess additional advantages that are difficult to replicate swiftlyIn terms of international operations, markets in the U.S

and Europe have demanding requirements concerning financing, branding, distribution channels, customer support, supply chain management, and complianceConsequently, most of the companies entering overseas markets are seasoned players who have navigated multiple industry cycles, making it significantly challenging for newcomers to penetrate these markets through competitive pricingIn fact, profits derived from overseas businesses can account for over 70% of the total revenue for leading module manufacturers, providing a robust foundational profit marginFurthermore, the advantages they hold in production costs, supply chain oversight, and brand equity result in excess profits that translate into several cents per wattTherefore, we maintain a relatively optimistic stance on integrated companies sustaining good profit levels even as silicon material prices decline.

Finally, when analyzing valuation levels, the current price-to-earnings ratio (PE-TTM) for the photovoltaic sector stands at approximately 16.6x, which places it in the bottom 0.6% of the past five years