The sluggish photovoltaic (PV) industry has finally seen a landmark large-scale merger and acquisition (M&A) deal.

On the evening of August 13, the leading PV company, Tongwei Co., Ltd. (600438.SH), announced that it intends to sign a "Capital Increase Intention Agreement" with Jiangsu Runyang New Energy Technology Co., Ltd. (hereinafter referred to as "Runyang Shares") and its related parties. The company plans to acquire at least 51% of Runyang Shares for a total amount not exceeding 5 billion yuan (approximately 750 million USD). Upon completion of the transaction, Runyang Shares will become a subsidiary controlled by Tongwei.

This acquisition is between two leading PV cell manufacturers. Before focusing on the module segment, Tongwei had been the global leader in cell shipment for several consecutive years, while Runyang was ranked in the top three from 2020 to 2022 and became the fifth-largest cell shipper globally in 2023.

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In the past six months, affected by industry cycles and its own capacity layout, Runyang has fallen into operational difficulties and has not been able to go public successfully. Many industry insiders have expressed their concerns about Runyang to "Caijing" magazine, believing that it would be hard for the company to survive this cycle. There has been much attention on how Runyang would overcome its challenges, but Tongwei's move came as a surprise. Some Runyang employees and industry peers told "Caijing" that there had been some news related to acquisitions, but they did not expect it to be Tongwei.

Tao Longzhong, the chairman of Runyang Shares, stated to "Caijing" that the negotiation process for this acquisition was relatively smooth and beneficial for both parties, and he would continue to participate in the management of Runyang. He mentioned that after acquiring Runyang, Tongwei could quickly make up for its shortcomings in overseas capacity.

At present, due to the impact of oversupply, the PV industry is facing losses across the entire industry chain. At the end of May, the PV Industry Association held a symposium on high-quality development of the industry and mentioned the need to encourage industry mergers and acquisitions and to facilitate market exit mechanisms. At the semi-annual summary meeting held in late July, the association reiterated that the current competition inside and outside the industry is fierce, and the industry needs to "lighten its load," with adjustments being more significant and swift, and the integration period should not be too long.

According to the announcement, the transaction will be initiated by Jiangsu Yueda Group Co., Ltd., which will first inject 1 billion yuan (approximately 150 million USD) in cash into Runyang Shares. After completing due diligence, auditing, and evaluation, and reaching a formal plan, Tongwei will then inject capital into Runyang, and at the same time, Tongwei will purchase the equity obtained by Yueda's capital increase of 1 billion yuan in cash.The acquisition deal is still pending and, if successfully completed, may provide a good example for mergers and reorganizations in the photovoltaic industry.

As a leading company in photovoltaic (PV) cell production, Runyang missed a once-in-a-lifetime opportunity to go public. The company first applied for an IPO on the Growth Enterprise Market (GEM) in March 2022 and received approval from the China Securities Regulatory Commission (CSRC) on June 29, 2023. However, within the one-year validity period, Runyang failed to complete the issuance, and the approval eventually expired at the end of June this year.

According to the information in Runyang's previous prospectus, its valuation was approximately 40 billion yuan. In contrast, based on the current price of "not more than 5 billion yuan to acquire not less than 51% of the shares," its valuation is estimated to be around 10 billion yuan.

Runyang's vertical integration is quite deep, with a presence from upstream industrial silicon to downstream PV power stations. The announcement shows that Runyang currently has an industrial silicon production capacity of 55,000 tons, polycrystalline silicon capacity of 130,000 tons, crystal pulling capacity of 7GW, slicing capacity of 10GW, cell production capacity of 57GW, and module capacity of 13GW, with some PV power station business laid out.

A management member of a PV company told Caijing that Runyang itself has a high debt-to-asset ratio. During the industry's downturn, the capital-intensive silicon material segment and some overseas capacities have brought significant pressure. Additionally, in this round of technological transformation, Runyang has a considerable burden of capacity on the old technology route. Under the influence of multiple factors, Runyang has entered a relatively difficult situation. According to Runyang's previous prospectus, its debt-to-asset ratio at the end of 2022 was approximately 79.17%.

Since the second half of 2023, the technological transformation of PV cells has been rapid, with TOPCon gradually becoming mainstream. Third-party data shows that Runyang's PERC cell capacity is about 23GW, accounting for about 40%, and its TOPCon cell capacity is about 34GW.

Tongwei stated in the announcement that the transaction will help to fully leverage the industrial chain synergies between the company and Runyang, further consolidate its market share in core segments such as high-purity crystalline silicon, high-efficiency solar cells, and modules, and effectively supplement its overseas production capacity layout, helping the company to expand sales channels in overseas high-margin markets.

However, Runyang's contribution to market share outside of cell production is relatively limited. According to the 2023 annual report, Tongwei has a high-purity crystalline silicon capacity of 450,000 tons, cell production capacity of 95GW, and an annual module production capacity of 75GW. This year, Tongwei is expected to have a production of 400,000 tons in the silicon material segment, and the technological transformation of the PERC cell capacity is also underway. It is estimated that by the end of 2024, Tongwei will have at least 850,000 tons of crystalline silicon capacity and about 100GW of TNC cell production capacity. Overall, apart from the 34GW of Topcon cell capacity, the production scale of Runyang's other segments is not enough to significantly increase Tongwei's market share.

Therefore, many industry insiders believe that the focus of Tongwei's acquisition of Runyang lies in its overseas production capacity. Tao Longzhong also told Caijing that after acquiring Runyang, Tongwei can quickly make up for the shortcomings in overseas production capacity.On the one hand, currently leading photovoltaic companies such as Longi, Jinko, Jin Ao, and Trina have production capacity deployments in Southeast Asia and the United States, while Tongwei's production capacity is mainly concentrated domestically. On the other hand, Tongwei has been focusing on the module end in the past two years and needs to develop high-profit overseas markets.

Runyao Shares' President Tang Jun recently revealed in a media interview that the company has already gained a certain level of fame overseas, with the European Union, the United States, and South America being Runyao's advantageous regions, accounting for more than 80% of Runyao's shipment volume. Tang Jun stated that "RUNERGY" has become a brand that has successfully entered the top five of American photovoltaic modules. The company's 2024 annual overseas module shipment target is expected to be around 6.5GW.

Runyao has production capacity deployments in Thailand, Vietnam, and the United States. According to Tianfeng Securities, Runyao has about 15GW of cell and a small amount of module production capacity in Thailand, some wafer production capacity in Vietnam, and 1.5GW of module production capacity and some under-construction capacity in the United States.

Runyao has planned a 2GW module production capacity in the United States. "This 2GW module production capacity is very precious; it is now relatively difficult to invest in new production capacity in the United States," commented an industry insider.

The aforementioned person believes that controlling a leading company with a price of 5 billion is a relatively cost-effective deal. For Tongwei, this acquisition does not seem to be strenuous. According to the announcement, this capital increase and acquisition do not constitute a significant asset restructuring for Tongwei. As of the end of March 2024, Tongwei Shares had about 28.287 billion yuan in monetary funds and 6.489 billion yuan in trading financial assets on its books, indicating a relatively ample fund reserve.

According to the announcement, this transaction is still subject to due diligence, auditing, evaluation, and other matters, which need to be further negotiated and promoted by all parties, and it is expected not to have a significant impact on Tongwei's 2024 business operations. From this perspective, this transaction still needs to be advanced.

If this merger and acquisition can be successfully completed, it may provide a good example for industry consolidation in the photovoltaic sector.

The aforementioned industry insider stated that leading manufacturers are often deeply tied to local governments and find it difficult to apply for bankruptcy. The case of Tongwei's acquisition of Runyao may set a precedent, that is, by the absorption and merger of giants, to help troubled companies alleviate debt issues and get back on track.

"This is a way to achieve a soft landing," he mentioned. Local governments have provided a lot of financial support in this round of industry expansion. Local governments can accept not making a profit, but it is difficult for them to bear losses, or even the outcome of corporate bankruptcy liquidation, which also makes the current industry clearance more difficult.Yancheng State-owned Assets has provided certain support to Runyang, and if the acquisition is successfully implemented, it may be possible to recover part of the investment. The announcement shows that the top three shareholders of Runyang Shares are Tao Longzhong, holding 40.28%; Shanghai Yueda New Industrial Group New Energy Co., Ltd. (hereinafter referred to as "Shanghai Yueda New Energy"), holding 19.38%; and Yancheng Yuanrun New Energy Industry Investment Fund (Limited Partnership) (hereinafter referred to as "Yancheng Yuanrun"), holding 11.13%.

Tianyancha's equity penetration information shows that Shanghai Yueda New Energy is 100% owned by Shanghai Yueda New Industry, and Jiangsu Yueda Group holds 31.117% of the latter's shares. The People's Government of Yancheng City is the actual controller of Jiangsu Yueda Group Co., Ltd., holding about 91.76% of the shares, and in addition, the Jiangsu Provincial Department of Finance holds about 8.24%. Behind the major shareholders of Yancheng Yuanrun, there are also the figures of the People's Government of Yancheng City and the Jiangsu Provincial Department of Finance.

The aforementioned person believes that if there is a leading company with relatively abundant cash flow, it can improve the industry pattern through mergers and acquisitions, and even form a few oligarchs and raise prices, allowing the industry chain to make profits, the industry inflection point may be advanced to the end of this year, the beginning of next year, and the industry can also develop more healthily.