The Sustainability Of Inverter Volume And Profits In Emerging Markets

Since the beginning of the year, the demand for photovoltaic storage in emerging markets such as Asia, Africa and Latin America has continued to grow rapidly and has exceeded market expectations. From January to May, the export of components to overseas markets other than Europe and the United States was 62.7GW, a year-on-year increase of 56%; from January to May, the export value of inverters also increased sharply, with India increasing by 78% year-on-year, Pakistan by 241%, Saudi Arabia by 677%, and Brazil by 19%. Inverter companies have benefited from the outbreak of emerging markets. Sungrow has signed large energy storage orders in Latin America and Saudi Arabia; Deye and Solis have released performance forecasts, and their second-quarter performance exceeded market expectations. We believe that the main reason for the outbreak of emerging markets is the sharp decline in photovoltaic storage costs and the low penetration rate of photovoltaic storage. In 2022, the proportion of photovoltaic power generation in the emerging markets of the Middle East, Africa, and Latin America will be 1.7%, 2.0%, and 3.9%, respectively, while the traditional markets of China, Europe, and North America will be 4.8%, 6.3%, and 4.2%, respectively. In addition, power shortages, incentive policies, and falling interest rates in some markets are also stimulating factors.

In the short term, the demand in emerging markets in the second half of the year is likely to exceed expectations. Solis's overseas shipments in the third quarter are expected to increase by 30%-50% month-on-month, which is a confirmation. The first reason is that the market is still in the process of outbreak, and the second reason is that the second half of the year is generally a relatively peak season for emerging markets. This pattern can be found by comparing the inverter export data in the first and second half of previous years. In the medium term, stable and excellent project economics and a low base are still the fundamental reasons for the continued high growth of demand. Take Pakistan as an example. Its population is about three times that of Germany (at the end of 2023), but the proportion of photovoltaic power generation (2022) is only 1%, far lower than Germany's 11%. At the same time, its annual per capita power generation (2022) is only 9% of Germany, and its annual per capita GDP (2023) is only 3% of Germany. It has much higher space for photovoltaic storage development than Germany. At the same time, there is a high probability that more countries in emerging markets will show explosive strength in the future. We believe that the demand for photovoltaic storage in emerging markets is expected to maintain a high growth rate in the next 2-3 years, and the compound growth rate of photovoltaic installation scale overseas outside Europe and the United States is expected to reach about 40%.

The manufacturing barrier of inverters is not high. Latecomers can catch up with products through reverse development and talent introduction. Therefore, we have seen that inverter companies, especially small-scale companies, have converged in product series and market layout in recent years. Against this background, in the long run, the same type of products in the same market are destined to decline in profitability as homogeneity increases and market competition intensifies. The above logic has caused the market to have certain concerns about the sustainability of profitability in emerging markets.

Different from the market's view, we believe that for emerging markets in the next 2-3 years, the explosion of demand and diversity will ensure diversified product innovation and continuous iteration, thereby supporting corporate profitability. For example, in Pakistan, there are more lead-acid batteries, and the corresponding inverter selection is significantly different from that in Europe. In order to open up channels in emerging markets, companies first need to launch products that cater to market demand rather than price competition. Because the market is just starting, customers, dealers, and inverter suppliers have not yet formed a full and mature understanding of demand, and it will take several years of scale development to realize demand mining, function development, and product iteration. Therefore, in the next 2-3 years, the products in these markets are expected to continue to be in a market window of rapid iteration, and the new generation of products can naturally have a good premium. Therefore, we expect that in emerging markets, the profitability of inverters will not change significantly in the next 2-3 years. Companies with better product adaptability, better cost control, and stronger scale effects are expected to continue to enjoy a higher net profit margin level in emerging markets.