Abalance : Research Coverage Report by Shared Research Inc.

Research Coverage Report by Shared Research Inc.	Coverage initiated on: 2023-05-18
Last update: 2023-07-06

3856

ABALANCE CORP

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an "owner's manual" to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [e-mail].

INDEX

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.

Trends and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7. Quarterly trends and results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7. Full-yearcompany forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11. Medium-termmanagement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11. .

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14. . Business overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14. . Business overview by reportable segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15. . Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26. . Sales channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26. . .

Earnings structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26. .

Market and value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33. . Solar power generation market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33. . Global electricity demand and supply; output capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34. . Government policy trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37. . Costs of power generation facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39. . Solar panel supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40. . Solar power generation market in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41. . .

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41. . Solar panel manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41. . .

Solar power producers in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45. . .

Strengths and weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46. . Strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46. . Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47. . .

Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49. . Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49. . Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50. . Cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51. . Historical earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53. .

Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57. .

Company profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61. .

ABALANCE CORP 3856

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ExecutiveAbalance Corporation (TSE Standard:summary3856) primarily manufactures and sells solar panels; the planning, development, sale, operation, and maintenance of solar power systems; and the sale of electricity generated by proprietary solar power plants. It takes on a holding company structure, with the parent holding company Abalance overseeing the group companies that handle the actual business operations. In FY06/22, consolidated revenue was JPY92.4bn and operating profit was JPY1.7bn. Businesses are managed under four reportable segments and Other businesses; the mainstay segments are the Solar Panel Manufacturing business (88.2% of FY06/22 consolidated revenue and 50.9% of operating profit before adjustments) and the Green Energy business (11.1% and 49.5%).

The company was established in April 2000 as a developer and administrator of Internet services. In November 2011, it converted WWB Corporation (unlisted; planned, sold, and installed solar power systems) into a wholly owned subsidiary through an exchange of shares, and the representative director and president of WWB at the time-Mr. Junsei Ryu-became

the representative director of Abalance. Thereafter, Mr. Ryu expanded the company's solar power generation business,

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believing that solving energy-related issues was crucial for global environmental protection and the reduction of CO emissions. In December 2020, Abalance acquired 84.85% of the voting rights in Vietnam Sunergy Joint Stock Company (VSUN; unlisted), a Vietnamese solar panel manufacturer that was generating revenue over three times that of Abalance at the time (FY06/21). With the addition of VSUN to the group, the company established an end-to-end business structure covering solar panel production to solar power plant-related solutions from planning to operation, maintenance, recycling, and trading of entire facilities.

Solar Panel Manufacturing business: VSUN, which operates this business, was established in June 2015. Headquartered in the Bac Giang Province of Northeast Vietnam, VSUN has four solar panel plants in Vietnam with an annual production capacity totaling 5GW. It sources raw materials from China and Southeast Asia, manufactures solar panels at its plants in Vietnam, and sells products chiefly to overseas customers directly or through its sales companies. About 60% of its revenue comes from the US, about 30% from Europe, and the remaining 10% from other regions. Industrial-use products account for roughly 80% of revenue; the rest is generated through home-use products.

Abalance says that amid prolonged US-China trade frictions, it made a foray into Vietnam to capture demand for solar panels that were free from US import restrictions and tariffs on China-made products. At the time of the acquisition, VSUN ranked second in production capacity within Vietnam, but since then, it worked to expand scale by making full use of its network to secure engineers from Chinese peer companies and elsewhere. At present, it tops the Vietnamese market in production capacity. With the acquisition of VSUN, Abalance's consolidated revenue climbed 13.8× from FY06/20 (pre- acquisition) to FY06/22, and operating profit was up 369.3% over the same period. Meanwhile, consolidated OPM fell from 5.4% to 1.8%, mainly due to an increase in raw material costs.

According to the company, VSUN has gained the recognition of third-party organizations for the reliable quality and performance of its products, as well as its procurement practices. The manufacturer has also cleared the strict quality standards of major purchasers. Abalance maintains that VSUN's manufacturing outside of China and its status as a Japanese- owned company generate a certain sense of quality assurance, which makes it easier for US companies and other customers to purchase its products even amid the US-China trade friction. In the current medium-term management plan ending in FY06/24, Abalance targets the achievement of 8GW in annual solar panel production capacity. The plan also includes a 6GW solar cell plant project. As the first phase of the project, a 3GW cell plant is currently under construction and slated for completion in October 2023. If demand continues to expand, the added panel production capacity can lead to revenue growth and margin improvements owing to economies of scale. Further, Shared Research understands that bringing the manufacture of solar cells in-house with the launch of the 3GW phase 1 plant will also contribute to revenue growth and better profit margins.

Green Energy business: Mainly operated by subsidiaries WWB and Valors Corporation, the Green Energy segment comprises a recurring revenue business (accounting for 25.9% of segment revenue in FY06/22) and a one-time revenue business (74.1%). The recurring revenue business is based on a model through which the company continues to own the solar power plants it either develops or acquires, earning income from selling the generated electricity to power utilities. In the one-time revenue business, the company engages in solar power plant trades with investors, sells products associated with power generation facilities, and uses agents to provide end-to-end services for solar projects (such as planning, engineering, development/construction, operation and maintenance, and recycling) to companies and consumers. Abalance plans to expand the portfolio of solar power plants under its ownership and further raise the revenue mix of its recurring revenue business to secure stable earnings.

ABALANCE CORP 3856

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The company's current portfolio includes over 50 solar power plants located in Japan and overseas, and the total output capacity of these facilities is 140MW. The Abalance group seeks to achieve 1GW in total output capacity by 2030. In the onetime revenue business, WWB has a track record of over 2,000 solar power plant trades, including the purchase and sale of pre-used facilities.

In the Solar Panel Manufacturing business, revenue is a function of the unit price of solar panels and sales volume. To calculate the unit price, we simply divided the FY06/22 revenue in this segment by 2.6GW, which was VSUN's production capacity during the same period, and arrived at approximately JPY31,000 per kW (Shared Research estimate). In the Green Energy segment, revenue from the operation of solar power plants (recurring revenue business) is a function of power generation income per kWh and the volume of electricity sold. A simple division of FY06/22 revenue in the recurring revenue business by 140MW (total output capacity of the company's facilities) yielded roughly JPY19,000 per kW (Shared Research estimate). In the one-time revenue business, sales equate to total sales of power plants and goods.

The cost of revenue ratio, which was 73.6% in FY06/20, increased following the acquisition of VSUN, reaching 89.5% in FY06/22. According to the company, the costs of solar cells and other raw materials account for a large portion of its cost of revenue. In contrast, the SG&A ratio, which was 21.0% in FY06/20, declined to 8.7% in FY06/22, chiefly due to a decrease in salaries, allowances, and bonuses, as well as lower container freight rates and other commission expenses. VSUN's solar panels are manufactured on a build-to-order basis, and advances are received at the time of order. The accounts receivable turnover period is about three months. Since transactions are mainly conducted in US dollars, foreign exchange impacts on purchases and sales offset each other. However, the company is subject to foreign exchange impact when it converts US dollar-based profits to Japanese yen.

Capital expenditures are affected by acquisitions of solar power plants and investments associated with solar panel manufacturing. Interest-bearing debt increased in tandem with bank borrowings obtained to finance investments, and at end- FY06/22, the debt-to-equity ratio rose to 6.6× while the equity ratio fell to 7.0%. VSUN independently obtains loans from multiple major financial institutions in Vietnam to fund its capital expenditures (the Abalance group does not offer debt guarantees). It plans to build solar cell plants with a total annual production capacity of 6GW by investing roughly USD300mn, which is about five times the amount it invested to build the existing four solar panel plants. As the first phase of the project, construction of a 3GW cell plant (investment of about USD180mn) is under way, funded by loans and cash on hand. To cover the cost of the second phase of this project and to secure funding for future business growth, the company plans to obtain new loans and also conduct VSUN's IPO via stock exchanges in Vietnam and elsewhere.

Shared Research understands that the solar panel industry is a highly competitive industry characterized by oversupply. It is also easily affected by changes in the government policies of China and other countries. VSUN's competitors are mostly major solar panel manufacturers in China. LONGi Green Energy Technology Co., Ltd. (SSE: 601012) tops the market with an annual production capacity of 60GW, followed by Trina Solar Co., Ltd. (SSE: 688599) at 50GW, and JinkoSolar Holding Co., Ltd. (NYSE: JKS) at 45GW. These companies also manufacture wafers and solar cells. In contrast, annual production capacity of VSUN's solar panel plants totals around 5GW, about 10% of the major companies' or even lower. Only a handful of manufacturers like VSUN make solar panels outside China, one being First Solar Inc. based in the US (NASDAQ: FSLR) with an annual production capacity of 9.8GW.

The International Energy Agency (IEA) predicts that global electricity demand will expand, with renewables such as solar and wind power becoming mainstream sources. IEA presents an outlook on installed capacity for each energy source based on three scenarios. In the most conservative scenario, it expects installed electricity capacity of solar power to grow from 892GW in 2021 to 3,020GW in 2030 and to 7,464GW in 2050. The less conservative scenarios project even greater capacity increases. Demand for solar panels will expand in tandem, and amid a push toward the reevaluation of supply chains due to US-China trade frictions and other factors, Shared Research understands that demand will be particularly strong for solar panels made outside China, such as those of VSUN.

Earnings trends

In FY06/22, consolidated revenue was JPY92.4bn (+243.6% YoY), operating profit was JPY1.7bn (+24.7% YoY), recurring profit was JPY1.5bn (+19.0% YoY), and net income attributable to owners of the parent was JPY867mn (+61.5% YoY). On the revenue front, orders for VSUN's solar panels in the US and European markets increased beyond initial expectations amid rising global demand for renewable energy. Operating profit also grew YoY despite sharp rises in raw material prices and container freight rates, as the company worked to negotiate purchase prices, improve production efficiency, and pass on part of the costs to customers. That said, operating profit growth fell short of the revenue growth mainly owing to hikes in raw material prices; OPM finished at 1.8% as a result, down from 5.1% in FY06/21.

ABALANCE CORP 3856

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In May 2023, Abalance announced an upward revision to its full-year FY06/23 earnings forecast for the third time. The revised forecast calls for consolidated revenue of JPY215.0bn (+132.6% YoY), operating profit of JPY14.0bn (+725.0% YoY), recurring profit of JPY13.5bn (+794.0% YoY), and net income attributable to owners of the parent of JPY5.7bn (+557.4% YoY). Compared to the previous forecast, these figures represent an upward revision of JPY40.0bn in consolidated revenue, JPY7.0bn in operating profit, JPY6.2bn in recurring profit, and JPY2.3bn in net income attributable to owners of the parent. According to the company, the majority of earnings contribution from VSUN's fourth solar panel plant, launched full-scale in January 2023 to address the larger-than-expected increase in US and European orders and sales of its solar panels, will be seen in Q4 or later. The profit projections also reflect improvements owing to successful pass-through of higher raw material costs and the decline in container freight rates.

The Abalance group has established a goal of becoming a core global company in the field of renewable energy by 2030. Central to its growth strategy is the achievement of 1GW in the output capacity of its own facilities in Japan and overseas, and 8GW in its annual production capacity of solar panels. To this end, it positions the Solar Panel Manufacturing business and the Green Energy business as growth drivers. The company considers the current medium-term management plan to be a preparation period for the accomplishment of these goals, and an important three years to pursue both sustainable growth and social value, and to maximize the group's corporate value.

Strengths and weaknesses

Abalance's strengths, according to Shared Research (See the "Strengths and weaknesses" section for details)

Achieves differentiation by expanding solar panel production capacity in Vietnam, rather than in China where geopolitical risks are heightening

Can provide end-to-end services in Japan that no other peers can match, thanks to the addition of VSUN's solar panel manufacturing capabilities

VSUN is well recognized by third-party organizations and major purchasers for both its sustainable procurement practices and its solar panel quality, which bears comparison with major manufacturers

Weaknesses

VSUN, which manufactures solar panels outside of China, carries a higher risk sourcing materials from China than Chinese companies manufacturing their panels domestically

VSUN's manufacturing costs are higher than those of its main competitors because, being a latecomer in the solar panel industry, its production scale is relatively small, and the company does not manufacture upstream products Must maintain financial soundness to continue making large investments using bank loans; issues associated with financing could potentially limit investment

ABALANCE CORP 3856

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