Emeren Group Ltd (SOL) Q2 2023 Earnings Call Transcript

Emeren Group Ltd (NYSE:SOL) Q2 2023 Earnings Conference Call August 31, 2023 5:00 PM ET

Company Participants

Yujia Zhai – Managing Director, The Blueshirt Group

Himanshu Shah – Chairman of the Board

Yumin Liu – Chief Executive Officer

Ke Chen – Chief Financial Officer

Conference Call Participants

Donovan Schafer – Northland Capital Markets

Matthew Koranda – ROTH MKM

Amit Dayal – H.C. Wainwright

Pavel Molchanov – Raymond James

Operator

Hello, ladies and gentlemen. Thank you for standing by for Emeren Group Limited Second Quarter 2023 Earnings Conference Call. Please note that we are recording today’s conference call.

I will now turn over the call to Mr. Yujia Zhai, Managing Director of The Blueshirt Group. Please go ahead, Mr. Zhai.

Yujia Zhai

Thank you, operator, and hello, everyone. Thank you for joining us today to discuss our second quarter 2023 results. We released our shareholder letter after the market close today and is available on our website at ir.emeren.com. We also provided a supplemental presentation that’s posted on our IR website that we will reference during our prepared remarks.

On the call with me today are Mr. Himanshu Shah, Chairman of the Board; Mr. Yumin Liu, Chief Executive Officer; and Mr. Ke Chen, Chief Financial Officer.

Before we continue, please turn to slide two. Let me remind you that remarks made during this call may include predictions, estimates and other information that might be considered forward-looking. These forward-looking statements represent Emeren Group’s current judgment for the future.

However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere and Emeren Group’s filings with the SEC. Please do not place undue reliance on these forward-looking statements, which reflect Emeren Group’s opinions only as of the date of this call. Emeren Group is not obligated to update you on any revisions to these forward-looking statements.

Also, please note that unless otherwise stated, all figures mentioned during the conference call are in US dollars.

With that let me now turn the call over to Mr. Himanshu Shah. Himanshu?

Himanshu Shah

Thank you. Great to be here and good day to everyone. Strategically, Emeren is positioned well, and we do have a strong balance sheet. The two strategic acquisitions that we made 10 months ago in UK and Italy have been operationally accretive to our results. It says a lot about our disciplined acquisition methodology. Our equity buyback also has been accretive to our shareholder value. Out of our almost 5 gigawatt hour of storage pipeline and keen focus going forward, which is a step in the right direction. Our team is also executing well, as can be seen from our second quarter results.

Now I would like to turn the call over to Yumin and Ke to talk about our operating results.

Yumin Liu

Thank you, Himanshu, and thank you, everyone, for joining our call today. I will begin by presenting a high-level overview of our second quarter 2023 results followed by an in-depth discussion on our guidance. After that, Ke will provide a comprehensive review of our financial results for Q2.

We delivered a strong quarter and made good progress on our key strategic initiatives. Q2 revenue grew 312% year-over-year to $33.8 million, driven by strong contribution across all of our business lines. Gross margin was 37.4%, driven by improving mix of higher-margin projects, particularly in Europe, where we are benefiting from a tailwind of high energy prices. These results show a net income of $8.3 million, which was a record high for us in the last five years.

In our project development business, building on our successful track record in Europe, we sold two major projects in Poland and Hungary for a total of 62 megawatts. Following quarter end in July, we successfully closed the sale of an 11.5 megawatts solar project to the Swiss-based energy company, MET Group. This marked our first major product sale in Germany and it represents a significant milestone for our company, and Germany stands as one of the four most renewable energy markets in the world.

In addition, during the quarter, we saw strong revenue and margin contribution from our recently acquired solar farm in Branston, UK due to the favorable energy prices. These results giving us confidence in our IPP strategy in Europe.

Further, in Q2, we executed on our storage pipeline strategy and began the monetization process of our storage pipeline with an inaugural 260 megawatts of battery energy storage system projects in Italy.

This effort was part of our recently announced strategic partnership with Matrix, divided up to 1.5 gigawatts of portfolio of battery energy storage system in Italy. These solar storage system projects add a new revenue stream with attractive margins to our business and we look forward to sharing further progress in our upcoming quarters.

Over the past two years, the European market has been our top strategic priority and we are very pleased with the progress we have made thus far. We have a very strong pipeline here and it continues to represent Emeren’s largest market opportunity going forward.

In China, we continue to make progress in our realignment strategy to the rest of the world as develop, build, own or sell compared to the original strategy as develop, build, own as IPP. Last quarter, we announced that we are refocusing our efforts to five coastal provinces that have the most favorable power prices supported by a strong economy and regulatory environment. We anticipate setting all of our solar assets outside of these five provinces and some in these five focus markets, which will help strengthen our balance sheet.

In Q2, we successfully closed the sale of a portfolio of a rooftop distributed generation projects located in Henan Province, totaling 29 megawatts to CNNP Rich Energy, a prominent leader in the China’s renewable energy sector. We anticipate on closing the sale of additional projects in the upcoming quarters in Henan and Hebei provinces.

Looking to the remainder of the year, we expect strong performance driven by project sales and contribution from our recent acquisitions. Our full year guidance for net income continues to be between $22 million to $26 million, with gross margin anticipated to exceed 30%.

For revenue, we now anticipate results to be near the lower end of the previously stated range of $154 million to $174 million due to the project timing. Our net income guidance reflects impressive annual growth of approximately 300%, a milestone we are extremely proud of as our focus remains on profitability given the volatile nature of our top line due to the project timing. We expect our Q3 revenue to be between $27 million to $30 million and gross margin to be in the range of 35% to 38%.

Regarding our solar development and storage pipeline, over the course of quarter, we conducted a comprehensive review of our global project pipeline and implemented a standardized tier system that spans across both development and storage pipelines. This refinement has led to the establishment of a more rigorous requirement for projects that are reported in our pipeline.

As a result, we will now track a report an advanced-stage and an early-stage pipeline metric. The advance-stage pipeline represents projects with a significantly high likelihood of successful completion, thus serving as a reliable predictor of our future revenue.

Meanwhile, the early-stage pipeline metric encompasses projects for which we have determined a reasonable probability of success. At end of 2023, we anticipate an advanced-stage solar project pipeline of at least 3 gigawatts, of which we now anticipate monetizing approximately 400 megawatts of projects in 2023. Beyond 2023, we are targeting to monetize 500 megawatts to 600 megawatts a year. In addition, we expect an advanced-stage storage pipeline of 6 gigawatt hours by the end of 2023.

In conclusion, we are optimistic about our revenue growth this year and beyond, driven by a robust project pipeline. Our strong position in rapidly growing solar markets fueled by rising clean energy demand, increased PPA price and supportive government policies further boosts our prospects. With expertise in solar project development an extensive industry network, and solid balance sheet, we are making significant progress towards becoming a leading global solar company. We are committed to delivering the value for our shareholders.

Now let me turn the call over to our CFO, Ke Chen, to discuss our financial performance. Ke?

Ke Chen

Thank you, Yumin, and thanks everyone again for joining us on the call today. I will now go over our financial results for the second quarter. Our revenue of $33.8 million increased 312% year-over-year and 163% quarter-by-quarter. The growth in revenue was mainly driven by strong project sales in Europe and our IPP assets. Gross profit was $12.7 million and gross margin was 37.4%, up from $1.6 million and 12.4% in Q1 2023 and up from $3.7 million and 45% in Q2 2022. .

Gross margin was at the high end of our guidance range primarily driven by improved mix of higher margin projects, particularly in Europe. Operating expense were $7.6 million, up from $4.6 million in Q1 2023 and up from $3.9 million in Q2 2022. The increase in operating expenses primarily resulted from the recognition of $2.1 million onetime loss from the divestiture of our China rooftop products in Henan Province.

Net income attributed to Emeren Group Ltd common shareholder was $8.3 million compared to net loss of $0.2 million in Q1 2023 and a net loss of $0.2 million in Q2 2022. Diluted net income attributable to Emeren Group Ltd common shareholder per ADS was $0.14 compared to zero in Q1 2013 and zero in Q2 2022.

Cash used in operating activity was $2.4 million, which was mainly for the continuous development of Poland and Hungary COD projects. Cash provided by investing activity was $0.1 million. Cash provided by financing activity was $1.2 million.

In terms of our financial position, cash and cash equivalents at the end of Q2 were $60.5 million compared to $66.7 million in Q1 2023. Our net asset value or NAV is approximately $5.98 per ADS. Our debt-to-asset ratio at end of Q2 2023 was 10.1% compared to 11.3% at the end of Q1 2023.

Lastly, regarding our stock buyback program, we purchased approximately $1.4 million of our common shares during the quarter and plan to continue to execute on the program over the coming quarters, which has about $15 million remaining in authorization.

Now we would like to open up the call for any questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] One moment for questions. Our first question comes from Donovan Schafer with Northland Capital Markets.

Donovan Schafer

Hey, guys. Thanks for taking the question. I want to first start off with the storage pipeline because that really stood out for me with the target of hitting 6 gigawatt hours. At this point, that almost makes it seem in some ways even bigger than the solar pipeline, kind of depending on how you measure it. I mean I know that can only back up 6 gigawatts for one hour. So not really an apples-to-apples comparison. But so my first question is just the size of it. Does this reflect any kind of shift in strategy in terms of are you guys — are you trying to — are you moving towards being more of a storage developer than a solar developer or is a lot of this maybe combined? And my second question, following up on that is just a lot of this is around the storage market in Poland, it looks like. You have the three gigawatts in your advanced-stage pipeline. So just is there something special about the market in Poland that makes it a good storage market? Do they have special incentives? Is it a high-demand market to get around grid congestion or securities concerns or what’s making Poland such a big part of that?

Yumin Liu

Okay. Very interesting questions. Number one, I will say that the storage, we initiated the storage development, storage project development back to about 18 to 24 months ago. And in the US, at the start, as literally speaking, US market is a pioneer of the storage development, starting like 2015, ’16. And Europe, we started also around 12 to 18 months ago on storage development. And we do see storage sector becomes a very strategic and important play for our whole company. I will not redefine the company as a storage company only, but it is a very important sector in our company. The second point is the major – two major markets we are developing storage in Europe are Poland and Italy. Even you did not ask, but Italy, just very recently, the government announced the full support to storage market, including upcoming clear policies how developers can develop and benefit from the support of the policies. Poland has been a very strategic market, an important market for the company, too. One of the reason is Poland is moving from a centric of coal-fired production to a renewable energy country with the 80% plus percent of the coal-fired power production go into remote solar, wind and all other renewable energy. At the same time, they are in big demand of energy storage projects. That is why we committed to develop a base solar storage solar pipeline together with the storage pipeline. And we are confident that the country not only is in big demand but also, we see a big benefit developing those projects and provide good contributions to the company from those advanced-stage and early-stage storage pipelines.

Donovan Schafer

Okay. Thanks. That’s helpful. And then I want to talk about the 29 megawatts of rooftop projects that were sold in China. And I guess linking that to, there is a $2 million loss on disposable of PP&E in the EBITDA reconciliation. So just was that — was the loss — that $2 million loss attached to that sale of projects in China? And if so, just if you can talk at all about what kind of drove the loss on that? Was it — were these older projects from years past and solar panels may be more expensive? Were there some other factors? Just kind of — and maybe if that is likely to happen with other assets in China? Just trying to kind of connect the dots there and understand it a bit better, that would be great.

Ke Chen

Yes, Donovan. First of all, we actually — this deal are very good in terms of cash flow for us, and we sell at a very good price. But compared to when this was built more than three years ago, again, the cost at that time is much higher than the cost base. So that’s because, again, accounting treatment. So that’s a loss based on accounting treatment. But from a tax flow point of view, this is a very good deal for us, and we expect very good cash inflow for this project sales. And yes, we are expecting to continue to sell some of this legacy project to, again, attract some cash. But from an accounting point of view, we do expect some of these accounting losses.

Donovan Schafer

Okay. Thank you. That’s helpful. And if I could just squeeze one more in on gross margins. Gross margins look really great for the quarter, and that was nice to see. And I imagine IPP revenue was about 30% of revenue for the quarter. I’m imagining this is sort of saying, okay, you’ve been building more of this IPP portfolio, you’ve got Branston, which has become a big part of it and then didn’t have a strong contribution in Q1 because that’s not a sunny time of the year. But now Q2 boom, here we see it. So I’m just curious if you can help us kind of separate out gross margins. What were — do you have the information? Could you share what the gross margins were for the IPP business? Because I know those tend to be very high. And then if you strip that out, what would the gross margins be for the rest of the business, just excluding the IPP business?

Ke Chen

Yes. In Q2, you actually mentioned that Q2 is a good season for the silver generation. So again, IPP margin is very high, around about 70% gross margin. Our project development is over 30%. And also, again, we did mention these different servers gross margin, not also pretty high, above 50%. That’s related to our Italy business.

Donovan Schafer

Well, the blended gross margin was —

Ke Chen

37%.

Donovan Schafer

37, so what kind of — is it just that a lot of it was the 30% for projects? Because the numbers you gave, if you kind of combine all that, you think you’d even get into like the 40%. So is there — is it the EPC services? Is that part of what kind of drags it down spend.

Ke Chen

Yes, the EPC revenue is over $8 million, but the EPC margin is very low.

Donovan Schafer

Yes. Is it sort of between 0% and 10%, but still positive. I mean was it positive for the quarter?

Ke Chen

It’s 1%, almost breakeven.

Donovan Schafer

Okay. Got it. I know how that ties into all your models. So I totally understand that. All right. Thanks, guys. I’ll get back in the queue.

Ke Chen

Thank you, Donovan.

Operator

Thank you. One moment for questions. Our next question comes from Phil Shen with ROTH MKM. You may proceed.

Matthew Koranda

Hey, guys. This is Matt on for Phil. Thanks for taking the questions. First, I just wanted to get your outlook for energy pricing in the back half of the year and where you think that could go in 2024. And if you continue to expect to benefit from higher energy pricing?

Yumin Liu

Let me answer your question in two ways. One is the, for example, we do have our major contributor, 50 megawatts Branston project. We do have four-year PPAs starting from April 1st this year, going there all the way four years locked PPA with very favorable PPA price. All other talking about the merchant price in the European market, we see the current price is absolutely a lot lower than 12 months ago or even than like eight, nine months ago. Okay. Going to in the average country by country, about $70 to $90 per megawatt hour. But going into 2024, we do see the uptrend of the price going from the current number to as high as 25% to 40% higher compared to today, okay? That literally led us to believe our IPP strategy in Europe is absolutely sustainable, and we are applying our IPP strategy continuously in Europe.

Matthew Koranda

Okay. Great.

Yumin Liu

And then another point on this one is the demand for renewable energy, solar specifically, is so big in the Europe, and we have been seeing all those strong support from all the governments in Europe that will help on the demand side while when the demand is high, the price remains to be very, very good throughout the 2024 based on the forecast.

Ke Chen

Our Branston project, we signed full year PPA with a much, much higher price than current merchant price, so we’ll benefit from that.

Matthew Koranda

Okay. Great. Thank you. I appreciate the color there. And then moving to the US utility-scale market just as a whole, we’ve been doing some work recently that there could be some slowing because some developers might be having difficulty accessing liquidity for project financing and working capital, resulting in some project delays. Are you seeing this at all? And if so, how big of an issue do you think this could be for the industry looking ahead?

Yumin Liu

Very good question. You are absolutely the expert on this one. We do see from Novator West Coast or East Coast, PJM, PG&E, all those utilities, they put on hold of their approval process for the interconnection queue, okay? That is also one reason that we mentioned that we have a lot tighter control on our pure system, qualifying our projects into the advanced tier or the one stage, okay? We absolutely consider that as part of our quality or of our customer base, okay? I do see that the speed of the development may get picked up sooner than later within the next six to 12 months in the US. We feel proud about one big thing we present today, which is a very profitable quarter because of our contribution from the European business. Our US is low as we see same as many other companies who reported in the last three, four weeks. But we reported today a very strong quarter, thanks to our balance, our strategic business operations in Europe.

Ke Chen

Again, I would like to add, again, we talked about this. We have a strong balance sheet. That’s part of our competitive advantage. I believe we talked about this in the last quarter, we have deposits put refund deposits with this US utility projects. So again, we overdraw balance sheet, we can’t compete to others. We can carry this out, and you will see the results our US results in the second half and next year.

Matthew Koranda

Okay, great. I appreciate the color

Ke Chen

Thank you, Matt.

Operator

Thank you. One moment for questions. Our next question comes from Amit Dayal with H.C. Wainwright. You may proceed.

Amit Dayal

Thank you. Good afternoon , everyone. With respect to the storage pipeline, can you clarify if the solar pipeline and the storage pipeline are tied in some fashion? Just trying to see if — when you are successful in converting your solar projects, does that also imply that you will convert the storage projects as well or are they really independent?

Yumin Liu

Very interesting question. We have two different portfolios when we talk about megawatt hours on the storage. One is the solar attached to solar called Solar Plus. But here, when me say that advanced-stage of the storage pipeline, the majority or almost all of them are independent storage projects. And those are not solar attached. And also, that is also a trend we are developing and in different countries, we have different strategy developing different sizes. And even in the different states in the US. We have different approach on the signs of the storage facilities. So but most of them are independent solar independent storage projects.

Amit Dayal

And you didn’t see anything from storage in 2Q, right?

Ke Chen

No. Amit, actually, we talked about this last year, we started our storage initiative actually, in Q2, we already recognized revenue and profit. We talk about the Italy projects, as we continue to see this monetization in Q3 and Q4. Overall, this year, we expect between 8% to 10% of that profit will come in from the storage business. So we are very positive about our storage development here, and you will see more in the coming years.

Amit Dayal

Understood. Thank you for that. My other question was around the margin outlook. Some of them you’ve already addressed. But the 35%, 37% type margin levels, can this be sustained in 2024 also? Or can you help us maybe get some clarity on what are the drivers behind margins? Is it depending on whether IPP or project sales come through in different percentages for the quarter? Like just trying to see — I know there is — it’s a fluid situation for you guys. But is 35% to 37% a little bit higher than normal? Or is that potentially going to be a normal level for you into 2024?

Ke Chen

Yes, that’s a lower margin we are target. And again, obviously, it’s between 27% and 30%. And again, because our — later our project development, we focus on RTP NTPC and IPP model. So that — we believe that will be our margin target going forward.

Amit Dayal

Thank you. That’s all as for now, guys. I’ll take my other questions offline. Thank you.

Ke Chen

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Pavel Molchanov with Raymond James. You may proceed.

Pavel Molchanov

Thanks for taking the questions. I remember, you have talked over the past year about looking at some new European countries to enter. I think maybe Czech Republic, Greece, Turkey, but it seems like you’ve remained focused on your existing geographic footprint. Can you talk about that?

Yumin Liu

Interesting question. We are continuously looking at new markets to expand our business in Europe. We are looking at the several country stuff, but it’s a little bit too early to talk about it before we ink the deal in the European countries. But literally speaking, we are looking about three to four countries in Europe. As also, as I mentioned, we are also looking to expand our business into Australia, the Asia Pacific area. That’s the plan. And also the plan is for both solar and storage as a combined strategic play for the company inside out.

Ke Chen

Pavel, I just would like to talk about storage because you probably know US storage markets relative to in advance compared to Europe. Europe, a little bit behind. And in Europe, UK is maybe number one right now, but the coming market is Italy and Poland, which we have leading positions. So that’s why we focus on those two markets and to monetize or get the leadership in those two markets. That’s why you see our storage pipeline increase quite a lot in those two countries.

Pavel Molchanov

Speaking of storage, we’re watching battery costs coming down quite substantially. I would love to get your thoughts on the battery market and also if you’re observing module prices down 30% according to some estimates in the last 100 days. Is that consistent with your analysis?

Ke Chen

Absolutely. We do see the CapEx from the two things you mentioned, that for example, today’s price is over $300 and we do see that this price should be going down in the next 12, 18 months or even sooner to like at least 25%, 30% lower. And that is the first part of the story. And CapEx on the solar side led by module price decline, we do have since the — you’re right, about over 30% decline. But in the last three months, I will say, about 20%, 25% in general. It did not really happen too much in the US yet. But in Europe, actually, it happens even goes below the price we can purchase back to before COVID.

Pavel Molchanov

Why are European prices — so there are no tariffs. But of course, that’s always been true. Why do you think European module prices are so cheap right now?

Yumin Liu

I think oversupply has been built up the whole — throughout the whole industry. No matter, it’s modules are battery storage. And the oversupply will continue to be the case in the next, I will say, longer term, not only talking about 12, 18 months, will be longer. That drives the price either at a stabilized low or even go lower. But we feel very comfortable at this time as it is competitively pretty low as we feel comfortable about it.

Pavel Molchanov

Okay. Last question, your IPP revenue of $10 million in the quarter, but you sold some IPP assets. So will that number come down from current levels?

Yumin Liu

Yes and no. The one is that we talk about IPP portfolios. We have US, Europe and China. We sold the China one, okay? The US and literally mostly Europe will continue to be very strong. But China, we sold or will continue selling some Henan and Hebei provinces, the solar farms, the legacy ones is Henan and Hebei province, okay? I believe we talked about the government subsidies in those legacy solar farms. And that is one of the reasons we are considering are we implemented the sales strategy. But at the same time, we are also building new solar projects in China in the focus market, okay? We do see some, I would say, revenue coming down as we sold some in Q2, but the impact to the whole scheme is minimum.

Ke Chen

Yes. Pavel, whole year, the IPP revenue is still about maybe 20% of our total revenue.

Pavel Molchanov

Got it. All right. Thank you very much.

Ke Chen

Thank you, Pavel.

Pavel Molchanov

Thank you

Operator

Thank you. [Operator Instructions] One moment for questions. Our next question comes from Donovan Schafer with Northland Capital Markets. You may proceed.

Donovan Schafer

Hey, guys. Thanks for allowing time for some follow-up questions. I wanted to just a little bit more into the Polish storage market, again, just because I know it seems like it looks like it’s a very big opportunity for you guys. I know you have a legacy kind of relationships and you guys have been in the Polish market for a long time. But I’m curious if you can elaborate on like so to take a counter example. I know Spain, for instance, Spain is kind of notoriously a terrible market for storage because it doesn’t have capacity markets. It doesn’t have markets for things like voltage regulation or other ancillary services. So there’s almost no financial incentive to do storage projects in Spain. So is Poland — in the Polish market, do they have — is it a capacity market? Do they have these storage projects, someone an asset owner operating a storage project, can they get compensated for all these ancillary services? Or is it — are there more just sort of like direct subsidies or something? Like what’s the economic case for batteries and how that’s structured in the market in Poland?

Yumin Liu

I think the Poland market, we know the demand is there. The utilities with the high demand of the renewable energy and transferring the 80% plus of the coal production to the more renewable energy, they absolutely in big demand of the storage. So that is the given. The second is we do know people are active purchasing or giving pretty good values of the storage projects, including we are even in the process of setting our first storage deal in Poland, okay? Going into the details of the what you just discussed, the revenue streams, I think the utilities and the government, they are developing the scheme as of now. And I think we expect that will be coming. Just simple as I mentioned, Italy, UK as a friend, but Italy will start immediately starting as early as next quarter. And Spain, you are right. But that is why if you see our depth of the pipeline, we are very cautiously developing Spain storage market. But we are very committed. We are very confident that the Italy and Poland will become our two major storage market at least in the near term for the next six months or so in Europe.

Donovan Schafer

Okay. And then I also just wanted to ask because when you made the Branston acquisition, you also highlighted and talked about some of the additional assets you would hang on to as IPP assets in Europe. And so you’ve got 60 megawatts in Europe, I think 50 megawatts of that is Branston. So I know it’s a small piece of things, like the remaining 10 megawatts. But if I recall correctly, I think, those were in Hungary. It might have been Poland, but you were going to — and I don’t think that PPAs, you were going to sell at the merchant price. So I know this could jump around a bit. But I’m just curious, can you share with us what kind of gross margins you’re getting from the other outside of Branston from the other IPP assets? And if you’re still planning on accumulating some of the ones in Hungary or Poland or other countries in the pipeline right now?

Yumin Liu

I think we explained before that we made a little bit revision of our strategy on IPP in Hungary as of the economic situation of the country. Although the country still maintained a BBB- credit rating, but — we are — and also we are active developing projects in the country, but we decided not to keep a big IPP portfolio in the country. So that is one part of the story. Another one is in Poland, we are — we already started the construction of our IPP portfolio. The first under construction is a little bit less than 20 megawatts, including several projects as we are planning to build up and get them online in the Q1 next year, okay? So that is part of the portfolio, and this is less than we predicted. But there are many different considerations while we slow down a little bit of the IPP construction, including, as I mentioned, Hungary, the big change on the Hungary strategy, but also on the — considering all the lower CapEx and also the target portfolio in Poland, we do face a little challenge of the interconnection. So when we get interconnection approvals of our planned IPP assets, we will construct them. So our IPP strategy in Europe continues. As also as I mentioned, you talked about the price of other than Branston, Branston has a four-year PPA that will add another 3.5 years. But in other countries, for example, in Hungary, that is one of the countries where you see 2024 price will be around 30% or 35%, 40% higher as forecasted than the price today, okay? Similar to several other countries, we see about a minimum 20%, 25% tariff increase in the countries, in general, on a merchant basis.

Donovan Schafer

And does that get you to that like 70% kind of gross margin for assets like that? Or is it kind of we have to think about that differently?

Yumin Liu

I would think the merchant base, the Branston with a high PPA price for the four years, it definitely give us a good margin. And the — in general, on a merchant basis, I think the average margin should be around 50%.

Donovan Schafer

And that’s 50, 5-0 or 1-5?

Yumin Liu

5-0.

Donovan Schafer

Okay. Fantastic. Okay. Thank you guys. Appreciate it. And I’ll take the rest of my questions offline.

Yumin Liu

Thank you, Donovan.

Donovan Schafer

Thank you.

Operator

Thank you. Seeing no more questions in the queue. That concludes our call for today. Thank you, everyone.

Yumin Liu

Thank you all.