1H22 results beat our forecast
TBEA announced its 1H22 results: Revenue rose 72.15% YoY to Rmb38.7bn, net profit attributable to shareholders increased 122.29% YoY to Rmb6.9bn, and recurring attributable net profit grew 262.82% YoY to Rmb7.08bn. In 2Q22, revenue rose 65.6% YoY to Rmb21.7bn, and attributable net profit increased 283.3% YoY to Rmb3.78bn. Its 1H22 results beat our expectation as: 1) prices of silicon materials and coal increased more rapidly than expected; and 2) the firm expanded its production capacity.
Trends to watch
Increased polysilicon prices push up earnings in 1H22; additional production capacity to contribute revenue.
Polysilicon business: Production and sales volume of polysilicon at the company reached 46,200t and 47,700t in 1H22, with prices averaging Rmb240,000/t (incl. tax). Production capacity of its Xinjiang production line reached 100,000t/yr after the firm improved technologies of this project; the high-purity polysilicon project in the Inner Mongolia (production capacity: 100,000t/yr) has entered the debugging stage, and will likely operate at design capacity in 4Q22; and the Zhundong Phase I polysilicon project (100,000t/yr) is scheduled to complete construction by mid-2023, according to corporate filings. We think the new projects will boost the firm's earnings growth in 2022.
Engineering and construction contract (ECC) and build-own-operate (BOO) business: The installed capacity of wind and solar power projects constructed by the firm reached around 1GW in 1H22. The company received approval for construction of more than 2GW of projects in 1H22, with installed capacity of new wind and solar power projects reaching 115MW.
Prices and volume of coal increase; earnings of coal business to remain high in 2022. In 1H22, revenue of the coal business jumped 196.09% YoY to Rmb8.13bn, with gross margin (GM) climbing 14.79ppt YoY to 47.87%. Coal prices remained high in 1H22 due to tight international energy supply. We think coal prices will likely stay high in 2022 given extreme weather and strong demand during the heating supply season at end-2022. TBEA received approval for 10mnt/yr of coal projects in 1H22, and it is awaiting approval for an additional 10mnt/yr of coal projects. We are upbeat on full-year earnings of the coal business in 2022 given the firm's efforts to expand production capacity and strong demand for coal.
Power transmission and transformation business grows rapidly; benefiting from increased investment of power grids. In 1H22, revenue of transformers, electrical wires and cables, and the power transmission and transformation engineering business reached Rmb6.2bn (+14.97% YoY), Rmb5.14bn (+52.70% YoY), and Rmb1.47bn (+174.01% YoY). In 1H22, the firm's new power transmission and transformation orders in China rose 18.38% YoY to Rmb16.99bn. Power grid investment increased amid the implementation of stabilization policies and initiatives to develop renewable energy projects. Power grid investment rose 10.3% YoY in 7M22. State Grid Corporation recently said it would increase effective investment and complete nearly Rmb300bn of investment by end-2022. We believe TBEA will benefit from increased power grid investment, as the company is a frontrunner in the power transmission and transformation equipment industry.
Financials and valuation
We raise our net profit forecasts 42.1% to Rmb13.2bn for 2022 and 51.8% to Rmb14.6bn for 2023 as the firm's renewable energy and coal businesses have grown more rapidly than expected. The stock is trading at 7.3x 2022e and 6.6x 2023e P/E. We maintain an OUTPERFORM rating, but lift our target price 14.3% to Rmb32 given a potential cyclical downturn for silicon material prices in 2H22 due to capacity expansion. Our TP implies 9.2x 2022e and 8.3x 2023e P/E, offering 25.7% upside.
Risks
Intensifying competition in the polysilicon industry; sharper-than-expected declines in silicon material and coal prices; disappointing power grid investment.
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