Solar Glut Rains On Xinyi Energy's Profit Parade

Key Takeaways:

• Xinyi Energy said its net profit in the first half of the year fell by 25% to 35%
• The solar farm operator is suffering in a climate of oversupply after a rapid buildup of solar farms in China

By Lee Shih Ta

China has rapidly emerged as a solar star by building new sun-powered farms at a breakneck pace to become one of the world’s top producers of the clean energy source. But that status is also coming with a darker side, as many of the country’s vast field of solar farms are increasingly underutilized due to the rapid buildup. 

One company feeling the pinch of that solar energy glut is Xinyi Energy Holdings Ltd. (3868.HK), a member of the Xinyi family of companies specializing in solar farms, which earlier this month warned its profit fell between 25% and 35% in the first half of 2024 from HK$570 million ($74 million) in the year-ago period.

Like many of its peers, Xinyi Energy’s asset base and revenue streams expanded as more of its new solar farms came online in the first half of this year. But limitations of the nation’s electric grid reduced the profitability from the company’s electricity sales. Higher depreciation expenses after the acquisition of new farms last year and in the first half of this year and the depreciation of the Chinese yuan against the Hong Kong dollar also undermined the company’s profitability, it said. 

Xinyi Energy’s shares fell 4% to HK$0.96 on the first trading day after the profit warning, dipping below the symbolically important HK$1 level for only the second time this year. The shares have continued to fall since then and closed on Monday at HK$0.90.

From Glass Maker To Solar Farm Operator

As a solar farm operator, Xinyi Energy draws most of its revenue from power generation. The company recorded revenue of HK$2.52 billion last year, up 8.7% from 2022. Its profit inched up by 2.2% over that period to HK$990 million. Revenue from electricity sales and subsidies accounted for 99.6% of the company’s total.

Xinyi Energy’s parent is Xinyi Solar XISHY, China’s largest photovoltaic glass maker. Li Xianyi, founder of the Xinyi family of companies, harkens from the same hometown in South China’s Fujian province as Cao Dewang, China’s “King of Glass” whose fortune tied to his Fuyao Group once made him the country’s richest man. Li went to Hong Kong from Fujian when he was young and started his business by trading auto parts, before also going on to specialize in auto glass with the establishment of his own company in Shenzhen.

In 2005, he listed his Xinyi Glass XYIGY in Hong Kong, and eight years later separately listed his group’s Xinyi Solar photovoltaic glass unit there as well. Apart from making glass, Xinyi Solar also started building solar farms, and subsequently spun off that part of its business for a separate listing as Xinyi Energy in 2019.

Xinyi Energy’s business model is quite simple. It buys power plants from Xinyi Solar and then sells the solar power they generate to grid operators. Since China has basically guaranteed that it will buy all the energy produced by such renewable sources, operating solar farms came to be viewed as a no-lose proposition, locally called an “iron rice bowl” business.

But plunging prices for solar modules and energy storage since last year have caused construction of new farms to shoot up, flooding the market with more power than the grid can absorb.

China’s installed solar power capacity jumped a massive 55% year-on-year in 2023 to 610 GW. Put differently, the amount of newly installed capacity last year was almost as much as that for the previous four years combined. The rapid addition of so much new capacity inevitably means that a growing percentage of it can’t be effectively utilized, especially due to elements like uneven supply and supply-demand mismatches. That ultimately leads to “electricity abandonment” when the grid’s ability to absorb and distribute all the energy is insufficient.

Growing Abandonment Rate 

Chinese regulations previously stipulated that the abandonment rate for solar farms should be 5% or less, meaning utilization rates should be 95% or higher. In the first quarter of this year, the average power abandonment rate nationwide was 4%, up two percentage points year-on-year. Fitch pointed out that installed capacity for renewable energy in China has reached record highs, which will continue to push up the abandonment rate.

The failure of new grid infrastructure to keep pace with the addition of so much new supply is only adding to the bottleneck that is seeing the amount of wasted capacity grow. Reflecting that mismatch, the State Council, China’s cabinet, issued a new regulation on May 29 raising the maximum allowable electricity abandonment rate for renewable energy plants to 10% from the previous 5%, meaning the government only guarantees grid operators will buy up to 90% of a plant’s installed capacity.

At the same time, the latest national power industry statistics published by China’s National Energy Administration have stopped including utilization rates for different power generation methods, according to Reuters. It speculated the change implies an oversupply of electricity from solar power generation and a decline in the utilization rate.

Despite the government guarantee of buying power from solar producers, in practice that guarantee often equates to a policy of “guaranteeing price but not quantity” or “guaranteeing quantity but not price,” but not both. Now, the raising of the maximum allowable abandonment rate makes clear the government is stepping back from its promise to purchase all electricity generated by renewable sources.

The National Development and Reform Commission (NDRC), China’s state planner, issued a new regulation in March categorizing renewable energy purchasing into two types: “guaranteed acquisition” and “market-oriented transactions.” The former equates to purchasing at a specific base price, while the latter lets “members of electricity market” determine the price. The regulation specifies that failure to purchase power due to grid security, grid maintenance, or force majeure factors may not be included in the guaranteed price category.

The movement of renewable energy to a more market-oriented pricing and selling system will inevitably erode revenue and profits for power generation companies. But profitability will still be possible as long as the government continues to offer subsidies. Still, the current case of oversupply will make it hard for anyone to show significant growth in the short term.

Xinyi Energy currently trades at a price-to-earnings (P/E) ratio of about 7.3 times, higher than the 6.3 times of China Suntien Green Energy (0956.HK) and the 5.4 times for Concord New Energy (0182.HK). While high dividend payouts previously attracted investors to Xinyi Energy, the payout ratio has been shrinking with the recent profit declines dating back to the middle of lats year, with 2023’s full-year dividend of 0.06 yuan per share down 60.2% year-on-year. That led disappointed investors to start abandoning the stock, and that flight could accelerate if the latest profit decline leads the company’s interim dividend to a new low.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.