20140219-Maybank_KERPL-Brighter_and_clearer__Initiate_BUY_24页_699kb

GCL-Poly Energy (3800 HK) Summary

Core Content

GCL-Poly Energy (3800 HK) is a leading player in the polysilicon and wafer manufacturing industry. The report initiates a BUY recommendation with a target price of HKD3.60, representing a 37% increase from the current share price. The company is expected to benefit from industry consolidation, cost reductions, and the recovery of polysilicon and wafer prices.

Main Points

• Share Price and Valuation:

  • Current share price: HKD2.63
  • Market capitalization: HKD40.7B
  • Target price: HKD3.60 (+37%)
  • Based on a 3x FY15E P/B valuation, which is at the mid-point of the current up-cycle.

• Financial Forecasts (FYE Dec):

  • Revenue: Expected to rise from HKD25,505.6M (FY11A) to HKD29,385.6M (FY15E).
  • Core Net Profit: Projected to increase from HKD4,274.9M (FY11A) to HKD2,985.1M (FY15E).
  • Core EPS: Expected to grow from HKD0.28 (FY11A) to HKD0.19 (FY15E).
  • Core EPS Growth: 101.5% in FY15E.
  • Net DPS: Projected to rise from HKD0.06 (FY11A) to HKD0.04 (FY15E).
  • Core P/E: Expected to decrease from 27.5x (FY14E) to 13.6x (FY15E).
  • P/BV: Expected to decrease from 2.7x (FY12A) to 2.2x (FY15E).
  • Net Dividend Yield: Projected to increase from 2.1% (FY11A) to 1.5% (FY15E).
  • ROAE: Expected to rise from 2.1% (FY13E) to 14.0% (FY15E).
  • ROAA: Expected to rise from 2.1% (FY13E) to 4.0% (FY15E).
  • EV/EBITDA: Projected to decrease from 16.9x (FY13E) to 7.0x (FY15E).
  • Net Debt/Equity: Expected to decrease from 201% (FY12A) to 138.4% (FY15E).

• Polysilicon and Wafer Price Trends:

  • Polysilicon spot price increased from USD15.4/kg (end-2012) to USD21.15/kg (Feb 2014), with a forecast to reach USD22/kg in 2014E and USD23/kg in 2015E.
  • 6-inch poly-wafer price increased from USD0.25/W (end-2012) to USD0.26/W in 2014E, with a forecast of USD0.27/W in 2015E.

• Gross Margin Expansion:

  • Forecasted to expand from 8% (2012) to 21% (2014E) and 27% (2015E), driven by cost reduction and ASP recovery.

• Solar Farm Business:

  • GCL targets 1GW of solar projects to be developed and connected to the grid in 2014.
  • The company has a 1GW overseas project pipeline and has signed cooperation letters with multiple enterprises to secure over 2.5GW of project reserves.
  • The IRR for solar projects is expected to be attractive, potentially exceeding 10%, due to supportive policies, VAT rebates, and low PV panel costs.
  • The solar farm business is considered a growth driver for future earnings.

• Strategic Acquisition:

  • GCL is conditionally acquiring Same Time (451 HK) for HKD1.44B, which will help focus on solar projects and provide additional funding channels.
  • The acquisition is expected to enhance GCL's downstream solar project development and create a dedicated platform for renewable energy.

• Industry Consolidation:

  • The industry has seen significant consolidation since 2012, with top-five players controlling 80% of the market share.
  • Capacity expansion is limited due to weak profitability, leading to an expected increase in utilization rates to 82% in 2015E.

• Cost Advantages:

  • GCL has lower production costs, particularly in polysilicon manufacturing, due to in-house TCS production, modified Siemens process, and FBR technology.
  • The company's cash cost for polysilicon is estimated at USD15/kg, significantly lower than competitors.
  • Further cost reduction is expected through the FBR method, which could reduce energy consumption by more than half.

• Market Outlook:

  • Global solar power demand is expected to increase from 39GW in 2013 to 43GW in 2014 and 46GW in 2015, with China and Japan being the main growth drivers.
  • In 2014, China will contribute 31% of global installations, and Japan will contribute 19%.
  • China's feed-in tariff has been adjusted to a range of CNY0.9/kWh to CNY1/kWh, with a CNY0.42/kWh subsidy for distributed PV.

• Peer Comparison:

  • GCL is expected to trade at a higher P/B than its peers due to higher ROE.
  • The average P/B of its peers is 2.3x in FY14E and 2.1x in FY15E, while GCL's is 2.46x and 2.15x, respectively.
  • The DCF valuation implies a terminal growth rate of 5.4% and a target price of HKD3.60, aligning with the 3x P/B valuation.

Key Information

• Industry Outlook:

  • The solar power industry is in a recovery phase.
  • Demand is shifting from the West to the East, with China being a key driver.

• GCL's Competitive Position:

  • GCL has a cost advantage due to in-house production, modified Siemens process, and FBR technology.
  • The company is expected to increase its market share and profitability through cost reduction and ASP recovery.

• Growth Drivers:

  • Polysilicon and wafer price recovery.
  • Solar farm development, especially in China.
  • Strategic acquisition of Same Time to enhance downstream business.

• Valuation Metrics:

  • Target price: HKD3.60 (3x FY15E P/B).
  • DCF valuation suggests a terminal growth rate of 5.4%.
  • EV/EBITDA is expected to decrease from 16.9x (FY13E) to 7.0x (FY15E).

• Policy Support:

  • VAT rebate of 50% for solar projects from 2013 to 2015.
  • Feed-in tariff adjustments in China support solar development.

• Investor Sentiment:

  • The market consensus is positive with 10 positive recommendations, 6 neutral, and 4 negative.
  • The target price is considered attractive and above the industry average.

Conclusion

GCL-Poly Energy is well-positioned to benefit from the recovery of the solar power industry, cost reduction initiatives, and strategic expansion into solar farm development. The BUY recommendation is based on strong fundamentals, attractive valuation, and positive outlook for both polysilicon and solar projects. The company's lower production costs and government support in China are key factors driving its profitability and growth potential.