UBS Equities-APAC Focus China Solar Industry _Beating solar glut - Lesso...-116872355

ab30 July 2025Global ResearchChina Solar IndustryAPAC Focus: Beating solar glut - Lessons from China's 2015-16 supply-side reform With the anti-involution campaign gaining momentum, market has been questioning the effectiveness of solar overcapacity reduction, as it is dominated by non-SOEs with minimal technological differences. However, we think solar should be a bellwether for reform due to its substantial overcapacity, large overseas exports, and significance in the global energy transition. Examining China's previous supply-side reform in 2015-16, we think some of the same market-driven policy instruments could be used to cut solar capacity, despite some differences. We think demand stimulus is also critical for reaching a supply-demand rebalance. Top picks: GCL Tech (initiate at Buy), Tongwei (upgrade from Neutral to Buy with 53% 2027E EPS lift and PT raised to 26.20 from 16.60),and Longi. Upgrade Zhonghuan from Neutral to Buy (19% 2027E EPS lift ).Anti-involution vs. supply-side reform: alike but not identical pathwaysRamp up of the anti-involution campaign is reminiscent of 2015-16 supply-side reform, utilising key policy instruments like: 1) mandatory capacity shutdown, 2)　capacity replacement, 3) M&A, 4) lifting technology and energy intensity standards, 5) fiscal support. However, solar is dominated by non-SOEs, and with over 80% of capacity coming online post-2020, technology divergence is minimal across new production lines. So although we expect solar reform to see similar measures, we also expect differences, with market-driven clearance likely the primary measure this time. We expect sector earnings to bottom out in 2H25 and sector ROE to recover to 12% in 2027E from -10% in 2024. We think supply controls could start with polysilicon, as it is the most consolidated and energy-intensive subsector, followed by downstream sectors. Revitalising demand equally importantReferring to previous reforms, we see lifting demand is equally critical to rebalancing S/D, especially with current solar supply at more than double demand. To revitalise demand, the government is pushing mandatory renewables consumption for energy-intensive industries, along with renewables direct connection. We believe energy storage systems (ESS) could also be a key solution for solar to reduce volatility and lift the demand ceiling. Thus integrating the solar and storage businesses could be an emerging trend, allowing companies to meet user demand and drive long-term differentiation. Figure 1: Valuation of our key coverage in solar main supply chainSource: Company data, UBS-S estimates. Above data is priced at 29 July 2025.This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 29. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may ha