Hanwha Solutions Gains 'Wings' from US Inflation Reduction Act [Corporate Insight]

With the implementation of the U.S. Inflation Reduction Act (IRA), which includes an investment of $369 billion (approximately 484 trillion KRW) to reduce greenhouse gas emissions, expectations for growth in the renewable energy industry such as decarbonization, wind power, solar power, batteries, and green hydrogen are rising. By providing tax credits and subsidies for eco-friendly energy like solar, wind, and hydrogen, as well as the electric vehicle and battery industries, the 'green industry' market is expected to grow rapidly. Interest in eco-friendly industries that can replace natural gas has increased due to the aftermath of the Russia-Ukraine war, and with the U.S. government's active promotion measures, growth opportunities have also emerged for domestic eco-friendly companies. Asia Economy reviewed the management status and growth potential of Hanwha Solutions and CS Wind, which are considered related companies.

[Asia Economy Reporter Jang Hyowon] Hanwha Solutions is expected to become the biggest beneficiary among domestic companies from the implementation of the U.S. Inflation Reduction Act (IRA). The company is expanding its local renewable energy business, including plans to restart its polysilicon plant in the U.S., and is expected to receive large-scale tax benefits.

Solar Power Turns Profitable After 7 Quarters

Hanwha Solutions' business is divided into basic materials producing polyethylene (PE), polyvinyl chloride (PVC), etc.; renewable energy responsible for solar products such as cells and modules; processed materials handling automotive parts, industrial and solar materials; retail handling sales of clothing, accessories, and cosmetics; and other sectors managing real estate.

As of the end of the first half of this year, the sales proportion by business segment was 37.13% for basic materials, 6.9% for processed materials, 50.27% for renewable energy, 3.04% for retail, and 2.66% for others. At the end of 2018, petrochemical sales accounted for 44.5% and solar power 27.9%, but now renewable energy holds the largest share.

Hanwha Solutions posted sales of 3.3891 trillion KRW and operating profit of 277.8 billion KRW in Q2 this year, up 22% and 26% respectively from the same period last year. Operating profit significantly exceeded the consensus of 161.2 billion KRW. Net profit for the same period increased by 10% to 244.5 billion KRW.

In particular, the renewable energy segment achieved an operating profit of 35.2 billion KRW, turning profitable after 7 quarters. Increased module sales volume and price hikes led to improved profitability. U.S. electricity prices rose about 11% from January to July this year, enhancing Hanwha Solutions' pricing power. Conversely, the chemical segment's profit margin declined due to reduced profitability of low-density polyethylene (LDPE) and PVC, with chemical profit margin falling 2.4% compared to the previous quarter.

The market expects Hanwha Solutions to record another surprise performance in Q3 driven by growth in the renewable energy segment. According to IBK Investment & Securities analysis, Hanwha Solutions' Q3 operating profit in renewable energy is estimated at 100.4 billion KRW, a 185% increase from the previous quarter, significantly exceeding the market consensus of 57 billion KRW.

Lee Dongwook, a researcher at IBK Investment & Securities, said, "Despite continuous capacity expansions by Chinese solar module companies, Hanwha Solutions' main markets in Europe and the U.S. have maintained high product prices due to rising electricity prices and supply shortages," adding, "Additionally, recent declines in transportation costs have further reduced logistics expenses, improving performance." Furthermore, the peak season effect is expected in Q4, making Hanwha Solutions' performance outlook optimistic through next year.

2.6 Trillion KRW Tax Benefits in 2024

The implementation of the Inflation Reduction Act is also expected to positively impact Hanwha Solutions' performance. The IRA mainly provides benefits to clean energy and healthcare sectors through measures such as the introduction of a minimum corporate tax. For solar power, the tax credit period has been extended by 10 years until 2032, and 30% of local investment costs can be refunded.

Currently, Hanwha Solutions operates a 1.7 GW module factory in Georgia, U.S., and plans to add 1.4 GW next year. Hana Securities analyzed that considering a production tax credit (AMPC) of 7 cents per watt for modules, a tax benefit of 260 billion KRW is expected based on 3.1 GW in 2024.

Additionally, Hanwha Solutions is pushing to restart the REC Silicon polysilicon plant in the U.S., acquired last March, which is expected to bring benefits. REC Silicon has a production capacity of about 20,000 tons of polysilicon but had suspended operations due to retaliatory tariffs imposed by China.

Jeon Yujin, a researcher at Hi Investment & Securities, said, "REC Silicon is considering new investments in ingots and wafers following the resumption of polysilicon production," adding, "Once these investments are completed, Hanwha Solutions can secure the entire solar value chain in the U.S. and expand credit benefits."

Supported by these tax benefits, Hanwha Solutions is reportedly considering establishing a solar cell and module factory in the U.S. with a scale of up to $1.8 billion (approximately 2.4 trillion KRW). This would result in an annual production capacity of 9 GW, more than five times the current capacity.

However, some concerns have been raised about financial structure risks due to large-scale investments. Regarding this, researcher Lee Dongwook said, "Risks related to funding are not significant due to the sale of shares in the Chinese PVC subsidiary, completion of a proactive capital increase, and plans to sell shares in the advanced materials division."