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Hanwha SolarOne Challenges European Dilemma

Jul 08, 2013 Hit: 14 Written by 
Hanwha SolarOne Challenges European Dilemma

In light of the provisional tariffs implemented into a law on June 6th, the company’s statement of only 10% shipments to EU in the second half of the year makes Hanwha SolarOne well prepared to evade impact from potentially higher tariffs in August


During Q1, Hanwha SolarOne Co Ltd (NASDAQ:HSOL) delivered significant improvements in comparison to Q4 2012, providing positive gross margins and one of the highest ASPs out of the peer group. As per Solarzoom Export Data, the company was the second-largest Chinese company in amount of deliveries to Japan and to South Africa, the two largest markets for the company during that quarter.  Based on export data from April, deliveries have a corresponding geographic distribution.

In the recent article written for PV-Magazine, we had an opportunity to describe three companies which have engaged in the strategy to limit or eliminate exposure to the EU tariffs. Hanwha SolarOne Co Ltd (NASDAQ:HSOL) is one of those mentioned.

In light of the provisional tariffs implemented into a law on June 6th, the company’s statement of only 10% shipments to EU in the second half of the year makes Hanwha SolarOne well prepared to evade impact from potentially higher tariffs in August.

Describing strategy, technology and opportunities for Hanwha SolarOne, including situation beyond December 2013 in case of permanent tariffs, are Mr. Paul Combs, Vice President of Investor Relations Hanwha SolarOne, and Mr. Jonghyun Shin, General Manager at Hanwha Group.

SPVI: SolarOne is a member of the Hanwha Group, a South Korean conglomerate which also includes Hanwha Solar and Hanwha Q CELLS. Can you please explain Hanwha Group’s strategy to expand market penetration for each of those entities? What is the relationship between those companies and how the described “synergy” materializes in general terms and specifically in the European scenario if tariffs are increased in August, or worse, permanently set in December?

Hanwha:  Hanwha SolarOne and Hanwha Q CELLS combine to form the flagship mid-stream players in Hanwha’s overall vertically integrated solar strategy. Both also are exploiting opportunities downstream, with SolarOne focusing this effort primarily in China, and Q CELLS more globally including Europe, Japan and the US.  The two entities are legally and financially separate with a common owner – Hanwha Chemical. The combined scale of 2.3 GW makes Hanwha’s footprint in the solar industry quite significant. Although the two companies are technically separate, there is potential for close synergies in certain areas including technology exchange, supply chain leverage, branding and quality. Q CELLS also is becoming an important customer for SolarOne, as SolarOne will toll over 400 MW of modules for Q CELLS in 2013.

The strategy for countering potential tariffs in Europe varies with the amount ultimately levied. At the preliminary rate of less than 12%, HSOL can continue to compete in European markets and likely offset the impact of the duty with higher pricing. If the original proposed average of just over 47% was implemented and included modules, then the market would become more challenging for Chinese-based production. If modules were excluded in the final determination, then using a cell supplied by Q CELLS would be a viable alternative. It is important to note that although large European markets like Germany, Italy and Spain were historically progressive in supporting solar, the total importance of European demand relative to overall global demand is declining as new, large markets like China, Japan and the US grow.

SPVI: Sometime in August 2012 Hanwha SolarOne launched Hanwha SolarEnergy America, but in the news release, Hanwha Solar was also named. Which company owns this initiative? A Q4 supplemental presentation showed 400MW of EPC projects and 25% penetration. This note is no longer in Q1 supplement; does this mean SolarOne is just a supplier and will not go into the EPC space in the future?

Hanwha: Hanwha Solar Energy America was owned not by Hanwha SolarOne, but by Hanwha Solar Energy, which is focusing on downstream (EPC & Development) business (located in Seoul) in Hanwha’s overall strategy. In April 2013, the two companies were renamed Hanwha Q CELLS USA and Hanwha Q CELLS Korea, respectively. Both Hanwha SolarOne and Hanwha Q CELLS will supply modules to Hanwha Q CELLS USA. However, SolarOne does EPC business in China and Q CELLS does EPC business in Europe, since EPC is a locally oriented business.

SPVI: In Q1, the company achieved 2.5% in GM; what steps is Hanwha taking in order to reduce its processing costs and improve this metric? What is best technological breakthrough to achieve higher efficiency and receive added value in the market?

Hanwha: Gross margin improvement was the result of several factors, including higher revenues and shipments as well as improved pricing, and when combined with lower costs generated a return to gross profitability. The company has made considerable progress in reducing its cost structure over the recent past and is currently quite competitive with other Tier 1 manufacturers in China.  Some factors include higher cell efficiencies, increased manufacturing automation, improved supply chain management, certain operational and engineering efficiencies at the plant level, and reduction and/or substitution of materials. Our next-generation HSL module series will lower costs as well as being lighter, smaller and more efficient, reducing material consumption and handling expense. Our cell conversion efficiencies continue to improve with our multi cells now achieving over 17%, and we have been able to offset loss of cell efficiencies in harsh operating environments known as PID. Our next-generation cell will include the physical alteration of cell design on both the front and back side, and interesting new high-efficiency technologies like n-type mono are familiar to us.

SPVI: A large portion of the company’s business is tolling. Why this particular strategy? Is the presence in Japan based on part of brand or only OEM arrangements?

Hanwha: Tolling is an interesting and important component of our business model, but we are firm believers in developing a strong and recognizable global brand. In fact, tolling has become a much smaller percentage of our business from a few years ago and our branded product sales have grown. Our business in Japan is a good example, as it represents both tolling and branded sales. We are on record for annual 2013 shipments of a minimum of 1.3 GW; at these levels, tolling may represent around 30% of our volume, so you can see that branded products still compose the majority. Tolling is a good business for us; it helps utilize our manufacturing capacity, adds to profitability, and supports Q CELLS activities with a quality product.

SPVI: Could you describe the most promising markets to watch during 2013 and their potential share of shipments? What is the timeline to return to profitability, and what steps are required to achieve this goal?

Hanwha: There is no question that the two biggest growth markets for the solar industry in 2013 are China and Japan. We are well positioned in Japan, with that country currently accounting for about one-third of our shipment volume. China is a smaller percentage of our business now, but no less important in the future. China is a much lower-priced market, local competition is intense, and credit terms and risk are generally higher. We have recently reorganized our China efforts and will be aggressively pursuing both EPC and module sales opportunities.  We also have a meaningful presence in South Africa, as we signed the largest contract in the company’s history there and volumes should exceed 150 MW for the full year. There are a number of other emerging markets like Southeast Asia, the Middle East and South/Latin America that don’t have the immediate volumes of say China or Japan, but collectively have significant potential. Of course, the US remains an important, large growth market and we are active there.

We have not made any formal forecast as to timing of profitability, but as you can see from first-quarter results we have begun to move down the path toward a return to profitability. The key factors for us are to hit our shipment volume targets, penetrate new growth markets with higher pricing (like Japan and South Africa), maintain operating expense discipline, continue to drive down our cost structure, fully utilize our manufacturing capacity, and enjoy some stability in pricing.

SPVI: Ever since the majority ownership was taken by the Hanwha Group, SolarOne’s shareholder value seems to have remained landlocked. Many investors see SolarOne as a subsidiary of a big company, which is governed by the needs of the group, and those are often to the benefit of the parent. Can you please comment on those views?

Hanwha: You raise an important question and yes, our shareholder value has declined since the acquisition. Truthfully, you need to put this in the perspective of the entire solar industry and the significant downturn in operating performance and shareholder values for all players over the past 12-18 months. We are not unique in this regard. The industry is undergoing consolidation; we believe we are not only a survivor, but will emerge as a leading global player going forward. Hanwha made its investment with a long-term business plan in mind, have remained committed and disciplined in executing that plan, and the synergies of the entire solar portfolio and backing of Hanwha Group far outweigh any perceived negatives. Our recent stock performance is one of the best in the group, up over 70% year-to-date, which seems to show that if the company performs investors will value the stock accordingly.

SPVI:  In 2012 Hanwha Group predicted their domination of the solar market in 2020 with $6B of investments and around 4GW of capacity. Is this idea still in place, including the 10,000MT polysilicon facility? What role will SolarOne play in this plan?

Hanwha: Hanwha SolarOne was Hanwha Group’s first large investment in the solar industry. It got the ball rolling and gave them a meaningful presence from day one, was and is their flagship mid-stream asset, and provided a good foundation on which to build. We look forward to further progress, the continued support of the Hanwha Group, and to a better operating environment and future ahead.

SPVI: Thank you for your time Mr. Combs and Mr. Shin.

This interview was conducted by Robert Dydo, and edited by Senior Editor of SolarPVInvestor, Stephanie Pierce.

Last modified on Tuesday, 08 October 2013 04:34
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Robert Dydo

CEO-Editor SolarPVInvestor, SPVI Reserach

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