20150311-美银美林-Coverage_resumed_with_a_Buy_Back_on_the_right_path_27页_1mb

GCL-Poly Summary: Buy Rating with HK$2.8 Price Objective

Core Content

GCL-Poly (GCL) is a leading producer of solar grade polysilicon and wafers, with operations in China and overseas. The report reinstates coverage with a Buy rating and a Price Objective (PO) of HK$2.8, based on a 1.8x 2015-16E P/B valuation. The stock had previously been sold down due to oil price weakness and the management's attempt to dispose of its wafer business, but the report believes the fundamentals and valuations are now misaligned, creating an opportunity for re-rating.

Main Points

Company Overview

• GCL-Poly is a major player in the solar materials sector, particularly in polysilicon and wafer production.
• The company operates cogeneration, biomass, incineration, wind, and solar plants.

Investment Thesis

• Strong fundamentals: Solar demand is expected to grow 15% YoY in 2015 globally and 23% in China.
• Home market advantage: China is the largest solar end-market and relies heavily on imported polysilicon, giving GCL a competitive edge.
• Cost leadership: GCL's polysilicon capacity is expected to reach 90,000 tons by end-2015, including 25,000 tons of low-cost FBR capacity, making it a cost leader.
• Valuation discount: The stock currently trades at 1.45x P/B, which is at the historical trough and significantly lower than global peers like Wacker, suggesting potential upside.

Key Financial Highlights (2015E)

• Sales: HK$34,679 million
• Gross Profit: HK$8,407 million
• Operating Income: HK$5,387 million
• Net Income (Adjusted): HK$3,377 million
• EPS: HK$21.72
• ROE: 17.0%
• P/B: 1.7x
• Free Cash Flow Yield: 18.63%

Earnings Expectations

• The report expects GCL to outperform consensus estimates for FY15 and FY16, with EPS growth of 66% in FY15 and 17% / 26% above consensus for FY15 / FY16.
• The company's cost reduction efforts, including FBR and captive power, are expected to improve margins and offset lower pricing pressures.

Stock Price Catalysts

• Oil price stabilization: Expected to reduce negative sentiment and shift focus back to solar fundamentals.
• Strong 2H15 solar installation: China's NEA has set a 15GW target, with 8GW for utility and 7GW for distributed generation, which could result in a 50% YoY increase in PV installations.
• Environmental awareness: The documentary "Under the Dome" has increased public pressure for solar adoption, reinforcing policy support.
• Lower interest rates: The PBoC rate cut improves project financing and reduces interest expenses.

Wafer Business Retention

• The decision to cancel the wafer business disposal is viewed as positive, as it preserves the company's integrated business model and strategic advantages.
• Wafer business, though lower margin, provides stability and is a key differentiator, especially with its significant market share and partnerships with major module producers.

Market Position

• GCL is the largest upstream polysilicon supplier in China, with a strong domestic position.
• China's reliance on imported polysilicon and the import tariffs imposed on foreign suppliers (e.g., US, EU, South Korea) further enhance GCL's cost advantage and market position.

Key Risks

• Changes in solar subsidies: If the Chinese government reduces support for solar, it could impact demand and earnings.
• Execution risks in China: Challenges in project financing, grid congestion, and poor module quality may hinder solar deployment.
• Market sentiment: The recent sell-off may take time to reverse, and the stock may remain discounted until confidence is restored.

Conclusion

The report highlights that GCL-Poly's fundamentals remain strong despite the recent sell-off, driven by improving solar demand, cost leadership, and a solid home market position. The reinstatement of a Buy rating reflects the belief that the current valuation is undervalued and that the company is well-positioned to benefit from the growing solar market in China and globally. The PO of HK$2.8 is based on a mid-cycle P/B valuation of 1.8x and assumes a 17.9% ROE, 2% terminal growth, and a cost of equity of 10.6%. The report expects a re-rating of the stock once market sentiment improves and the positive fundamentals are re-evaluated.