In a sector already fraught with challenges, Chinese solar giant Tongwei’s announcement to acquire a controlling stake in Runergy New Energy—another major player in the industry—could signal more than just a merger. If completed, this deal might wellreshape the competitive dynamics across the photovoltaic landscape.
On August 13, Tongwei revealed its intentions by signing a letter of intent to secure no less than 51% of Runergy’s equity, with the deal capped at RMB 5 billion (USD 701.3 million). If the transaction proceeds as planned, Runergy will become a subsidiary of Tongwei.
Industry struggles ignite M&A activity
The photovoltaic sector is currently in a downturn, with numerous companies scaling back operations or exiting the market altogether. Industry bodies have been pushing for more mergers and acquisitions (M&A) to address these difficulties, making such deals increasingly common.
However, a merger of this magnitude, involving two industry heavyweights, is unprecedented. The proposed acquisition has already generated significant interest, with some speculating that it could kick off a wave of consolidation where larger entities swallow their smaller counterparts.
Is Tongwei’s RMB 5 billion bid for Runergy the start of a broader consolidation trend in the solar industry?
Skepticism over Tongwei’s plans
Amid an industry filled with struggling companies seeking acquisitions, doubts remain about whether potential buyers are both willing and financially capable of proceeding.
Interviews conducted by 36Kr with industry insiders and investors revealed skepticism regarding the Tongwei-Runergy deal and the likelihood of similar consolidations happening.
Li Lu, a photovoltaic analyst at a securities firm, noted that while leading solar companies like Tongwei, Longi Green Energy, and Daqo New Energy have substantial cash reserves, they also face significant short-term financial liabilities. This leaves them with limited funds for acquisitions. Even for these companies, the risks associated with such deals are considerable.
“The prerequisite for any acquisition is a gradual recovery in the solar industry cycle. If the current cash burn continues, even the top companies won’t be able to sustain losses for long. Assets bought at the market’s bottom could turn into liabilities, increasing Tongwei’s exposure to risk,” Li said.
Lukewarm market reaction as uncertainty lingers
Tongwei’s approach of acquiring solar assets during downturns and expanding against the trend isn’t new.
Back in 2013, amid China’s solar industry crisis following the European Union’s imposition of anti-dumping and anti-subsidy measures, Tongwei made a bold move by acquiring LDK Solar for RMB 870 million (USD 122 million). This strategic acquisition allowed Tongwei to enter the solar cell market, laying the groundwork for its current global leadership.
Tongwei appears to be employing a similar strategy with the Runergy acquisition.
According to its 2023 annual report, Tongwei currently has a production capacity of 450,000 tons of high-purity polysilicon, 95 gigawatts of solar cells, and 75 GW of modules, making it the world’s largest producer of both polysilicon and solar cells.
Runergy, ranked fifth globally in solar cell shipments in 2023, operates production facilities across the globe, including in the US, Thailand, and Vietnam.
Should the merger succeed, Tongwei’s market share in polysilicon, solar cells, and modules could see a significant boost.
Despite this potential, the market’s reaction to the acquisition has been lukewarm. On August 14, the day after Tongwei announced the acquisition, its stock price rose by just 1.62%. By the end of the week, the total gain was a modest 3.28%.
“Given the stock price reaction, it’s clear that the market does not see much value in the acquisition of Runergy. Whether Tongwei will move forward with the deal remains uncertain,” Li said.
With no clear signs of a cyclical turnaround, holding onto cash may be a safer and more prudent strategy for Tongwei than acquiring more assets.
Is the overseas market an opportunity or risk?
Some industry insiders believe that Tongwei’s primary interest in Runergy lies in its overseas capacity. Data from InfoLink shows that Runergy has significant solar cell production capacity in Thailand and Vietnam.
However, factories established by Chinese solar companies in Southeast Asia face substantial challenges due to recent US trade policies.
A White House document indicates that the tariff exemptions on photovoltaic products from Cambodia, Malaysia, Thailand, and Vietnam, which began in June 2022, expired on June 6 this year. Chinese companies set up factories in these Southeast Asian countries mainly to meet US market demand. But under current conditions, these products can no longer be exported to the US, drastically reducing the profitability of these factories.
Moreover, InfoLink’s data reveals that a significant portion of Runergy’s solar cell capacity is based on passivated emitter and rear contact (PERC) technology, which is now considered outdated and of lower value.
A senior market analyst from a third-party agency noted that Tongwei’s acquisition plan is still in the intent stage and not legally binding. “Runergy’s overseas capacity is indeed appealing, but it also comes with risks. Whether Tongwei can navigate these risks through due diligence remains to be seen,” the analyst said.
Grappling with financial constraints
It’s not just Runergy—other solar companies are currently facing difficulties and seeking acquisitions.
The past year has seen the solar industry grappling with supply-demand mismatches, intensified competition, and falling product prices, causing widespread losses across the supply chain. In such a challenging environment, numerous solar companies have opted to sell off assets or declare bankruptcy.
For instance, in March this year, Haiyuan Composite Technology transferred its subsidiary Saiwei Energy Technology to Aiko Solar, while Akcome Technology’s subsidiary was auctioned for RMB 550 million (USD 77.2 million) in May. Recently, MedicalSystem also announced plans to sell its photovoltaic business subsidiary.
While the industry has no shortage of companies looking to offload assets, the challenge lies in accurately valuing these assets amid an uncertain market. The key question is whether buyers and sellers can agree on a fair transaction valuation.
A vice president at an alternative investment management group mentioned that he had reviewed several solar M&A projects this year, but the offers ranged from 1.5 to 2 times the price-to-book (PB) ratio. “Such high valuations are impossible in the current market environment. An acquisition would only be feasible at a PB ratio of about 0.3 to 0.5.”
In comparison, Tongwei’s valuation for Runergy is notably higher.
An industry insider told 36Kr that, as of March 2023, Runergy’s net assets were valued at RMB 5.64 billion (USD 791.1 million). Tongwei’s offer of up to RMB 5 billion for a 51% stake corresponds to a PB ratio of approximately 0.9. By contrast, Longi currently trades at a PB ratio of 1.54, and JA Solar at 1.01.
Why is Tongwei willing to offer a relatively high valuation? The M&A expert suggests that this reflects the difference between industrial capital and financial capital. Industrial capital tends to consider factors such as industry status and synergy, which might justify a higher valuation.
However, Chinese solar companies, including industry leaders, face ongoing cash flow challenges. In June, JinkoSolar’s vice president, Qian Jing, told the media that few solar companies can continue burning cash for another three quarters. “Maintaining cash flow is crucial for solar companies to survive the cycle,” Qian said.
Li also pointed out that few industry leaders have the resources for acquisitions, and those that do have limited funds. Therefore, if a large wave of M&A does occur in the solar industry, external capital is likely to play a significant role.
The third-party analyst echoed this sentiment, suggesting that, as more solar companies encounter difficulties, valuable assets could be “harvested” by external capital. “As solar companies face ongoing challenges, state-owned or central enterprises might step in next year,” the analyst said.
It’s worth noting that media outlets often view industry mergers and consolidations as positive indicators of a market bottom. However, secondary market investors have been less optimistic. The day after Tongwei’s announcement, the solar ETF showed only a flat performance.
A private equity investor commented that, from an industry perspective, M&As might be less beneficial than allowing companies to go bankrupt, as this would enable the market to clear more effectively. “For the industry, acquisitions are a short-term negative because capacity that would have been phased out or reduced will regain vitality through mergers, leading to an oversupply.”
Ultimately, given the severe supply-demand imbalance in the solar industry, the market, the valuations of acquired assets, and buyers’ prospects, along with the overall solar industry, will only regain momentum when the sector hits a turning point and begins to rebound.
The stark difference between sellers’ asking prices at two times PB and buyers’ offers at 0.3 times PB highlights the significant disagreement on when that turning point might occur.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Wang Fangyu for 36Kr.