Can solar EPCCs dodge VAT bullet?

CHINA’S decision to abolish export value added tax (VAT) rebates for photovoltaic products from April is, at first glance, a direct earnings headwind for Malaysia’s listed solar engineering, procurement, construction and commissioning (EPCC) players.

Removing the 9% rebate will increase module prices, which are a major cost in solar projects.

In a sector where margins can be thin and bidding competitive, a sudden increase in panel costs is the kind of shock that usually finds its way into the profit and loss statement.

But the immediate earnings risk appears far more contained than the market reaction suggests.

Rather than a sector-wide margin cliff, the VAT move is shaping up as a stress test of procurement discipline, contract structure and the ability to pass costs through, with the best-prepared players likely to emerge relatively unscathed.

RHB Research expects panel prices to rise by about 9% once the rebate is removed in April.

That increase matters, but analysts argue the more important earnings question is what happens before April.

RHB Research says the key risk lies not with new projects secured after April – which can be repriced – but with existing projects that were contracted under the assumption of VAT-rebated panel pricing.

In other words, new contracts can be recalibrated. The danger lies in already-won jobs, where contractors could be forced to procure modules at higher prices without being able to revise EPCC pricing, effectively absorbing the cost increase through margins.

Solarvest Holdings Bhd, the country’s largest solar EPCC player, insists it has already neutralised that scenario.

Group chief executive officer Datuk Davis Chong says: “The 2GW blanket order secured at below US$0.10/w in the third quarter of calendar year 2025, covers 100% of our existing order book and forecast upcoming projects.”

The timing and scale of that procurement matters. It suggests Solarvest’s most immediate vulnerability – being forced to buy modules at higher post-April spot prices for jobs already priced – is largely mitigated.

The market’s second fear is supplier default, the risk that suppliers might walk away from fixed-price commitments if spot prices rise.

RHB Research acknowledges suppliers could, in theory, be economically incentivised to default, especially if prices move sharply beyond current levels.

But it argues outright default is unlikely because Solarvest’s suppliers are top-tier, China-listed manufacturers where reputational and legal costs outweigh short-term gains.

Chong reinforces that the company has contractual protections in place. “Our procurement contracts are supported by refundable deposits and corresponding bank guarantees, which provide strong protection against non-performance,” he stresses.

Operational disruption, rather than outright default, appears to be the more realistic risk.

Ditrolic Energy’s China-region general manager Anthony Sun describes how the announcement triggered front-loading and congestion: “We observed a short-term surge in orders as overseas buyers rushed to place last-minute bookings.”

“This has resulted in temporary order congestion ... and we do see a number of manufacturers renegotiating contracts and schedules,” he tells StarBiz 7.

That kind of disruption may affect delivery timelines, but it does not necessarily translate into an earnings hit for players with buffers, locked pricing, or the ability to sequence projects around supply availability.

For other Malaysian listed players, the earnings defence is less about blanket procurement and more about contract structure.

Samaiden Group Bhd group managing director Datuk Chow Pui Hee tells StarBiz 7: “Our existing order book was priced without assuming the 9% VAT rebate, and our contracts have price adjustable clauses linked to such VAT changes.”

If that holds across the bulk of its order book, the VAT removal becomes a pass-through event rather than a margin event – the cost increase is transmitted to the client, instead of being absorbed by the contractor.

Ditrolic’s Sun points to a third layer of protection: early anticipation and budgeting.

“We had anticipated this development as early as mid-2025 and our project budget already included sufficient cost buffers ... as such, we do not expect a material impact on margins for our ongoing projects,” he says.

Still, the policy shift matters because it may reshape bidding behaviour and reset pricing expectations across the sector.

If the VAT removal simply raises costs but the industry continues bidding irrationally, the change could become a margin squeeze.

But if it reduces the temptation for exporters to dump modules abroad at ultra-low prices – a behaviour China itself appears to be trying to curb – the new equilibrium could be healthier for downstream players.

Solarvest explicitly connects the VAT move to Beijing’s “involution” policy, designed to address overcapacity and excessive price competition.

Ditrolic’s Sun similarly argues that the change could encourage more sustainable industry practices, saying it may lead to “better project design, higher execution efficiency, and avoidance of destructive price competition.”

This is where the longer-term earnings story becomes more interesting.

For years, the global solar industry has seen costs fall so dramatically that solar is now one of the cheapest energy sources in the world.

But the relentless deflation has also crushed profitability across the value chain, forcing contractors and manufacturers alike into a race to the bottom.

Sun points to what he considers a healthier price level, saying that based on industry research, module pricing around “0.85 yuan per watt is considered a healthy level for profitability across the value chain.”

If China is now trying to push the market towards that kind of rational pricing, Malaysian contractors could benefit from a more stable procurement environment and less chaotic tendering cycles.

Even so, Malaysia’s solar EPCC players cannot escape one uncomfortable reality: the supply chain remains dominated by China, and there is no easy substitute.

Ditrolic is blunt: “At present, there are no cost-competitive alternatives to China-made panels.”

Solarvest’s Chong agrees, noting China-made panels – with “more than 80% global market share” – remain “the most cost-competitive and scalable option ... even after VAT rebate adjustments,” citing China’s “pricing, scale, supply chain integration, bankability, and delivery certainty.”

He also highlights that alternative regions remain structurally more expensive, citing International Renewable Energy Agency-derived domestic module costs in markets such as Vietnam, India, Australia and Germany.

Currency blunts the shock

Currency strength is another meaningful offset.

RHB Research notes the impact is partially mitigated by the 3.2% appreciation of the ringgit against the yuan as at Feb 3.

Solarvest’s Chong quantifies the relationship in unusually investor-friendly terms: “For every 1% strengthening of the ringgit against the US dollar, our gross profit margin is expected to improve by 0.3%, while every 1% increase in solar panel prices would have a 0.3% impact on our gross profit margin.”

In other words, even if panel prices rise due to the VAT change, currency strength can partially cushion the net margin impact. Where the VAT removal will matter more is in the next bidding cycle.

Post-April, costs will be embedded into tender pricing and higher tariffs.

RHB Research expects solar EPCC players will pass through higher module procurement costs, and Solarvest says revised costs will be incorporated into pricing and passed through to clients.

Samaiden expects more disciplined bidding, which could ultimately support healthier margins.

If the industry resets its tender assumptions and stops treating deflationary module pricing as a permanent feature, the VAT removal could end up improving sector sustainability rather than damaging it.

This is why analysts conclude the market reaction has been excessive. RHB says the sell-off is “overdone” and that the VAT cut has “negligible impact on the earnings.”

Kenanga Research similarly calls the share price decline “harsh,” arguing it assumes pre-procurement arrangements are not honoured, a downside scenario it does not treat as its base case.

The near-term winners will be the companies with locked-in procurement, pass-through clauses and disciplined foreign exchange management.

Over time, the bigger payoff may be structural: more rational pricing, more realistic bidding assumptions, and an industry that finally competes on execution rather than on who can survive the steepest margin squeeze.