Rising Costs And Supply Chain Risks Will Strain Solar Margins

Key Takeaways

• Margin pressure and profitability risks are mounting due to supply chain challenges, tariff impacts, and inability to pass higher costs to customers.
  
• Execution delays, industry competition, and heavy capital requirements threaten revenue stability, long-term earnings, and the company's competitive position in a rapidly evolving market.
  
• U.S. localization, supply chain diversification, and a strong brand position Hanwha Solutions to benefit from policy tailwinds, margin support, and long-term growth in solar markets.

Catalysts

Operates in the chemicals, energy solutions, and advanced materials business areas in South Korea and internationally.

• Hanwha Solutions faces rising supply chain risk and cost inflation as it restructures away from Chinese suppliers due to global trade tensions and protectionist policies. The company is already experiencing cell quality issues and tariff impacts, with management cautioning that higher production costs may not be fully passed onto customers, likely compressing net margins and pressuring profitability in future quarters.
  
• The delay and uncertainty in U.S. and European plant ramp-ups, combined with operational challenges at major sites, has already led to downward revisions in annual solar module shipment guidance from 9 gigawatts to 7.5 gigawatts and persistent operating losses. This disrupts revenue visibility and signals vulnerability in execution as global demand shifts, undermining growth forecasts and future revenue.
  
• Hanwha Solutions is highly exposed to a capital-intensive model, as evidenced by growing net debt, shrinking cash reserves, and a net debt ratio that climbed to over 105 percent in the latest quarter. If macroeconomic conditions tighten further or solar market growth underdelivers, rising debt service and capex requirements could strain free cash flow and threaten earnings over the long term.
  
• Intensifying global competition, commoditization, and oversupply in solar modules and chemicals have already crimped operating profits; with Hanwha Solutions' chemical division remaining vulnerable to cyclical swings and low margins due to input cost volatility, long-term net margin expansion looks increasingly challenging, especially as the company struggles to carve out durable pricing power.
  
• Accelerating technological disruption in renewable energy, including novel energy storage and generation solutions outside Hanwha's current portfolio, presents a risk that the core solar and chemicals businesses could lose long-term relevance, ultimately leading to potential revenue erosion and diminished market share as clean energy transitions evolve beyond the company's existing capabilities.

Hanwha Solutions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hanwha Solutions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hanwha Solutions's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.7% today to 1.5% in 3 years time.
• The bearish analysts expect earnings to reach ₩214.7 billion (and earnings per share of ₩1259.31) by about September 2028, up from ₩-769.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from -6.5x today. This future PE is greater than the current PE for the KR Chemicals industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 1.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

Hanwha Solutions Future Earnings Per Share Growth

Risks

• The company is well-positioned to benefit from accelerated project initiations due to the looming reduction of tax credits and safe harbor criteria in the U.S. solar market, which could drive higher near-term and medium-term module and EPC sales, improving overall revenue and earnings.
  
• Hanwha Solutions' ongoing investments in localizing its supply chain (with new wafer, cell, and module manufacturing in the U.S.) position it to take share from Chinese competitors as U.S. incentives increasingly favor domestically manufactured products, providing support for margins and top-line growth.
  
• The company's established Qcell brand in the residential solar segment and active pursuit of market share gains through financial partnerships and evolving incentive programs could enable it to capture greater share and potentially improve its long-term profitability.
  
• Strategic moves to diversify supply sources outside of China and vertically integrate production may allow cost increases (from tariffs or alternative sourcing) to be partially or fully passed on to customers in high-demand scenarios, mitigating margin pressures over the long run.
  
• Secular tailwinds from global energy transition policies, electrification trends, and robust ESG regulatory support are likely to sustain strong demand for solar modules and renewable solutions for years to come, helping drive recurring revenue streams and potentially supporting earnings and valuations.

Valuation

• The assumed bearish price target for Hanwha Solutions is ₩19759.28, which represents two standard deviations below the consensus price target of ₩33900.0. This valuation is based on what can be assumed as the expectations of Hanwha Solutions's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩43000.0, and the most bearish reporting a price target of just ₩15000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩14140.9 billion, earnings will come to ₩214.7 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₩29150.0, the bearish analyst price target of ₩19759.28 is 47.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.