TCL Zhonghuan Earnings: Lower Fair Value Estimate by 40% on Prolonged Industry Overcapacity

TCL Zhonghuan's CNY 3.1 billion net loss in the first half is in line with its preliminary guidance. Based on the weak results and our expectation of a prolonged overcapacity in the solar industry, we reduce our shipment, average selling price, and gross margin assumptions for 2024-28. We now forecast a CNY 5.9 billion net loss in 2024, down from our prior CNY 340 million net loss forecast. We project a turnaround in 2026 but reduce our net income estimates by 28%-58% for 2026-28. As a result, we've slashed our fair value estimate by 40% to CNY 10.50, which translates to a 1.1 times 2024 price/book ratio. We still think the shares are attractive, with a 36% upside to our revised valuation. Zhonghuan currently trades at a record low 0.8 times price/book ratio since being listed in 2007. To recap, it was trading at a premium to its book value in 2012 and 2018, when the solar industry was in significant downturn.