Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. I am Han Sang-Heum, Executive in charge of IR at Hanwha Solutions. I would like to thank you for your participation in today's IR event. Today, we would like to brief you on our company's investment plans in the solar energy business in the U.S. and also our overall strategy for the renewable energy business. Today, we are joined by Executive, Lee Junu in charge of Renewable Energy at the Strategy Division of Hanwha Solutions and Executive in charge of Finance, [indiscernible], for the Q&A.

Good afternoon. I am Lee Junu, Head of Energy Strategy at the Strategy Division of Hanwha Solutions. Let me brief you on Hanwha Solutions renewable energy business strategy and vision as well as our U.S. value chain expansion plan. So let's go on to Page 3. As you well know, Hanwha Solutions has entered into the renewable energy business through its participation in Q CELL solar PV manufacturing business. As of 2023, the strategic direction of Hanwha Solutions renewable energy business is to transform into an energy business company and operator based on differentiated system competitiveness. As you can see in the concentric circles on the left, we are expanding and strengthening our existing manufacturing capabilities to overarching system capabilities that include both hardware and software. And based on this, we are evolving into an energy business that encompasses development installation, asset acquisition and operation capabilities. Our strategic direction is to build a more sustainable and profitable business structure based on this foundation. Let me now explain the 2 core pillars of our strategic direction in detail. So let's go on to Page 4. First, let me explain what we perceive as a differentiated system. From the viewpoint of manufacturing competitiveness, we intend to utilize the U.S. supply chain expansion, which I explain today, to explain a supply chain that is differentiated from that of our competitors. Through this, we would like to change the way we compete in the solar energy manufacturing field. In addition, efforts are being made to strengthen technological leadership through continuous R&D. Starting this year, we plan to start mass production and sales of TOPCon in full fledge, and we are also accelerating the development of perovskite tandem, the leading next-generation product. Our company has continued to strengthen our capacity, not only in terms of modules, but also for the hardware and software constituting our energy system. For example, in the residential market, along with modules, we have been building up MLP inverter, residential ESS and other hardware capabilities, in addition to strengthening our hardware capability for the operation of such hardware, in particular, over the past 3 years, we have been acquiring [indiscernible] Lynqtech and the establishment of a system division within Q CELLS has been taking place as part of our efforts on securing software competencies and strengthening integration. In terms of the overall system, the required capabilities have been diversifying and in line with such a diversified requirements, we have strengthened our own internal capabilities, while at the same time utilizing external partnerships for external expansion, thereby accelerating the buildup of the differentiation overarching system capacity. Let us go on to Page 5. Based on the system competitiveness, Hanwha Solutions have been carrying out various types of energy business. In Europe, we have secured a utility project pipeline exceeding the capacity of 10 gigawatts. And as reported in the media recently in the U.S., we have successfully developed and sold our projects. In other words, we are near completion of establishing a platform for developing and starting construction of gigawatt scale projects every year in both the U.S. and Europe. Based on this achievement, we expect that this year will be a year for establishing a full virtuous cycle, which includes project development and sales, EPC execution, including module supply and at times depending on the situation and execution of IPP operations. In the market where Hanwha Solutions Q CELLS has traditionally been strong, the residential rooftop market, we have been pursuing the transformation so that additional revenue can be generated by making full use of the differentiated existing capabilities, further evolving our business model from one focused on sales activities to one that utilizes installation sales as sources of distributed power generation. In the C&I commercial segment, we are seeking an evolution to become an energy service supplier that is an ESCO operator. Through the strategic direction, in other words, by transforming and to an overarching energy business company and operator based on our differentiated system competitiveness, Hanwha Solutions renewable energy business is continuously improving its business structure. Our renewable energy business will see a shift in our business structure from one that has been hardened by changes in raw and subsidiary material prices to one that is anti-fragile and capable profit generation under any circumstances, and this is the core of the strategy that we are implementing. From Page 6, I would like to explain our plans for our value chain expansion in the U.S. as one of the key factors in implementing the strategic direction I just mentioned above, we intend to expand our domestic production capacity within the U.S., which is our main market through about [$320 million] of investment in new facilities, the module production capacity in the U.S. will increase from the current 1.7 gigawatts to 8.4 gigawatts. The 1.7 gigawatt module plant in Georgia currently in operation will be further expanded by an additional 2.0 gigawatts in addition to the previously announced 1.4 gigawatt expansion. In particular, the new 3.3 gigawatt capacity expansion disclosed today aims to lead the establishment of supply chain differentiated from that of our competitors by establishing a vertically integrated production system from ingots to modules. As it is well known, it is very important to secure supply capacity in key markets, considering the recent international situation and energy crisis. As mentioned before, the expansion of production capacity in the U.S. will become one of the most important enablers in securing differentiated system competitiveness and transforming into an overarching energy business company. Let's go on to Page 7. Let me explain more in detail about the background and expected effects of the investments. The U.S. market is the largest and the fastest-growing renewable energy market among developed markets. The U.S. energy situation and policy environment are expected to drive continuous market growth. And although there are differences depending on the research institute, providing the outlook, the U.S. market size is projected to grow by 30 to 40 gigawatts or more annually. In such a market, Hanwha Solutions has maintained the #1 position in terms of market share and the rooftop market in the U.S. for 5 consecutive years. And as mentioned before, our performance as the Energy business continues to improve, both quantitatively and qualitatively. Through the planned investment announced today, Hanwha Solutions sales to the U.S. are expected to rise to 70% of our total sales and is expected to become a key competitive factor, and evolving the virtuous cycle of our entire business, taking us to the next level. Let's go on to Page 8. Policy support based on U.S. legislation is expected to further improve the profitability and stability of our investment. Announced in August of 2022, the IRA, the Inflation Reduction Act in the United States, includes 2 major policies that have a direct and positive impact on the renewable energy sector. First of all, the ITC policy to drive overall demand, the investment tax credit policy has been extended until 2032, and the domestic content rule has also been included raising the possibility of increasing the value of products produced in the United States. In addition, the advanced manufacturing production credit, the AMPC, policy has been introduced to increase domestic production in the U.S. This policy provides tax credits according to the quantity produced and sold at each stage of solar module manufacturing. In particular, the first 5 years from the time of [ application ] during the total policy period of 10 years include direct pay that is a scheme in which the U.S. government converts the granted tax credit into cash. The total amount of tax credit we will receive as a result of our investment this time around during the policy period is expected to be about [ KRW 8 trillion, ] of which about [ KRW 5 trillion ] is expected to be received through a direct pay. So let's go on to the last page, Page 9. Through this investment, the company is expected to secure supply capacity of 19 gigawatts for modules by the end of 2024, when production facility expansion is completed. Among the 19 gigawatts, 8.4 gigawatts will be produced locally in the U.S. and including the cells and modules from existing plants in Korea and Malaysia, we will be supplying more than 10 gigawatts to the U.S. market annually. I can tell you that the supply chain, we plan to build, will provide us with a differentiated competitive capability for supplying our products to the U.S. market without being affected by any trade barriers or tariffs announced so far. In terms of our module capacity driven by the gap between the module supply and cell production capacity, the company will continuously observe market and competitor trends to ensure that strategic optimal operation continues. This is all I have prepared for today, and I would like to thank you once again for your interest in our company's renewable energy business. Thank you very much.

[Foreign Language] [ Interpreted ] [Operator Instructions]

[Foreign Language] [ Interpreted ] The presentation material for today's IR event will be uploaded on our website, investment material section. So please refer to that. And today's Q&A session, we'll be focusing on the U.S. Solar Energy Investment Plan and Renewable Strategy. So please ask questions referring to those topics. In terms of questions related to the market situation or performance of the company. Please contact our IR team after today's event is over. Thank you.

[Foreign Language] [ Interpreted ] The first question will be provided by Jae Sung Yoon from Hana Securities.

[Foreign Language] [ Interpreted ] I have 2 questions. First of all, now in terms of the module capacity expansion in the United States, I would like to ask you, and what will be the market share within the U.S. as of the end of 2024. And also following the investment for a module capacity expansion in the United States, and what -- how will the capacity for modules change in 2024 compared to before the investment takes place. The second question is that in terms of the expansion for the 3.3 gigawatts, I can see that this will lead to a vertical integration. Before the other expansions, I do not seem to see the vertical integration will take place. So in that sense, how will you be able to secure the raw materials for production.

[Foreign Language] [ Interpreted ] Let me answer your question. So as it was explained before, as of the end of 2024, we will have a module capacity within the United States of around 8.4 gigawatts. And so including that coming from Korea and Malaysia, we will be able to sell around 10 gigawatts within the United States market. So in terms of the market share, well, there is considerable volatility in the mid- to long-term when we're trying to project the market situation. But if you look by segment roughly, and the residential rooftop segment, we have about 30% market share, and we do believe that there will be some increase from that current market share. In C&I, we do believe that from the 10 mid- to latter 10% range, there will be an increase as well. In utility as well, compared to the current market share situation, we do believe that there will be a considerable increase. And also most of the increase will be utilized for our own development projects and EPC. So we will be providing about 10 gigawatts, and we're expecting about 1/3. But considering that there is rapid market growth, it is difficult to provide you with an accurate assessment at this moment. And for the 8.4 gigawatts, well, among which we talked about the 3.3 gigawatt expansion, and that will lead to a vertical integration from production from ingot to modules. For the Georgia plant, their modules will lead to about 5.1 gigawatts. And for the modules, we will be providing the cells coming from Korea and Malaysia.

[Foreign Language] [ Interpreted ] The following question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Foreign Language] [ Interpreted ] Yes. Thank you for your detailed explanation. I have a question related to the IRA benefits and effects. You talked about the AMPC, the Advanced Manufacturing Production Credit. And I understand that there is an annual set budget, this budget is to be shared not only by the solar energy companies that will be receiving the credit benefits, but also the wind energy and the battery sector as well. So if you do the calculation and you do the math, it seems that combining the batteries and the solar energy and et cetera, the amount required would exceed the budget. So if the required amount for the credits provided or the benefits provided exceeds the budget, then how would the tax benefit monetization into cash take place? So how would the scheme be carried out?