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GCL-Poly (3800 HK) Summary

Core Content

GCL-Poly is the world's largest polysilicon and wafer manufacturer, and is positioned to benefit from the recovery of the global solar industry. The report highlights its strong performance in 1Q14, cost reduction strategies, and expansion into downstream solar projects. It also provides a detailed outlook for the solar industry across upstream, midstream, and downstream segments, emphasizing the potential for growth and market consolidation.

Main Points

Upstream Recovery

• Polysilicon and Wafer Growth: GCL-Poly achieved stable growth in its core business with a 5% QoQ and 93% YoY increase in revenue for the polysilicon and wafer business.
• Electricity Sales: Electricity sold grew by 27.16% YoY, driven by solar projects.
• Cost Reduction: GCL-Poly is implementing two key cost-cutting measures:
  • A captive power plant with 350MW capacity, expected to be operational by June or July 2014, reducing polysilicon production cost by US$2-3/kg.
  • FBR technology facility with 12,000MT capacity, expected to be operational by the end of 2014, reducing production cost to US$10/kg, a 39% decrease.
• Market Position: GCL-Poly is a leading player in the polysilicon and wafer market, with a strong position in the recovery phase of the solar industry.
• Industry Outlook: The global polysilicon market is expected to grow by 25% in 2014, with demand rising due to the recovery of the solar industry. Spot prices are expected to remain stable or increase slightly.

Midstream Turnaround

• Module Production Recovery: The global module manufacturing sector showed signs of recovery in 2013, with pricing stabilizing and inventory returning to historical levels.
• Chinese Dominance: China accounts for 64% of the global module market in 2013, driven by supportive policies and a growing end-market.
• Market Consolidation: The midstream sector is expected to see further consolidation, with leading firms gaining more market share and struggling firms exiting.

Downstream Expansion

• Solar Projects Growth: GCL-Poly is expanding its downstream solar projects business, aiming to install 1GW in 2014 and double that in 2015.
• Acquisition of Same Time Holdings: GCL-Poly acquired 360 million shares of Same Time Holdings, giving it a 67.99% stake, which is expected to serve as a new funding channel for solar projects.
• IRR Expectations: The company expects its solar projects to maintain an IRR of 13%-15%, leveraging its experience in power plant operations.

Key Information

Financial Performance (1Q14)

• Revenue: Increased by 41.73% YoY in polysilicon and 103.23% YoY in wafer business.
• Sales Volume: 27.2% YoY growth in electricity sales, mainly due to solar projects.
• Production Costs: Reduced to US$14/kg for polysilicon with the captive power plant and FBR technology.

Investment Summary

Valuation

• Target Price: HK$3.00, which represents a 35.7% upside from the current price of HK$2.21.
• Valuation Multiples:
  • PER: 22.0x (2014E), 13.4x (2015E), 10.0x (2016E)
  • P/B: 2.7x (2014E), 2.3x (2015E), 2.0x (2016E)
• GCL-Poly's Valuation: The company is expected to be valued at a premium compared to its peers, reflecting its market leadership and growth potential.

Investment Recommendation

• Rating: Buy
• Reason: Strong earnings outlook, attractive valuation, and cost reduction initiatives position GCL-Poly well for future growth.
• Upside Potential: 35.7% from current price to target price.

Key Risks

• Price Volatility: Spot prices for polysilicon and wafer may drop, impacting GCL-Poly's revenue.
• Project Delays: Delays in the launch of the captive power plant and FBR production line could affect cost reduction goals.
• Government Support: Withdrawal of government subsidies or FiTs could suppress end-market demand.
• Trade Disputes: Increased trade disputes may create uncertainty in the global solar market.

Company Background

• Market Leadership: GCL-Poly is the leading player in the global polysilicon and wafer market.
• Capacity: Achieved 65,000MT polysilicon production and 12GW wafer production in 1Q14.
• Projects: Operates 321MW of solar projects globally and has 19 cogeneration power plants, 2 incineration plants, and 1 wind power plant in China.

Conclusion

GCL-Poly is well-positioned to benefit from the recovery of the solar industry, supported by its strong growth in 1Q14, cost-cutting initiatives, and expansion into downstream solar projects. The company's market leadership and promising earnings outlook justify the Buy rating with a target price of HK$3.00, offering a 35.7% upside potential. Despite the risks of price volatility and project delays, the company's strategic moves and cost efficiencies are expected to drive long-term growth.