Summary

After transforming to polysilicon manufacturing successfully in 2009, GCL-POLY Energy Holdings Limited (GCL-POLY or the Company) achieved a high growth of its performance in 1H10. Benefiting from the abruptly advanced demand, the demand for polysilicon and wafer will still be booming in 2H10, and the prices will keep high. Plus with the low cost advantage, we expect the Company will achieve net profit of RMB 2.6 billion and RMB 2.9 billion in 2010 and 2011 respectively, converting into the EPS at RMB 0.17 and 0.19. We conservatively give its old electric and new energy businesses 12X and 15X 2011 EPS, and the 12-month TP will be HK$2.74. We reiterate it buy rating.

High growth for the strategic transformation

GCL-POLY has successfully become an international enterprise with core businesses of green power, photovoltaic electricity & silicon materials industry chain and new energy equipment manufacturing since 2009, when it was only dependent on electricity and steam businesses. The transformation brought the Company with a high-speed growing performance in 1H10. Its revenue amounted to HK$5.794 billion and the EBITDA reached HK$1.876 billion, increasing 357.6% and 248.3% respectively. Net profit increased by 96.9% YoY to HK$788 million. The Company also expects its wafer business will not only become the largest manufacturer in the world, but also the quality and cost will lead its worldwide peers.

The highly growing performance is attributable to the following:

Firstly, the polysilicon business realized high growth. In 1H10, its polysilicon and wafer businesses developed fast, and achieved the revenue of HK$3.648 billion, with the growth of 188.2%, accounting 63% for the total revenue.

Secondly, the wafer business has expanded quickly, including the acquisition of an aggregate 70.19% of the equity interest in Konca Solar in March 2010.

Thirdly, the acquisition on Jiangsu Zhongneng Polysilicon Technology Development Co., Ltd. was accounted for as a “reverse acquisition”, and the Company is considered as the acquiree for accounting purposes.

What`s more, its average sales prices for polysilicon and wafer had declined 24% and 3.6% YoY to US$50/kg and US$0.8/W, but the profitability of the PV business kept stable, and the gross margin just decreased to 34.6% from 36.4%. That mainly benefited from self-supplied trichlorosilane (TCS), with the degree of self-sufficiency increasing from 57.4% to 70.3%. Therefore, the polysilicon cost had decreased 23.5% from US$43.4/kg to US$33.1/kg YoY, and the wafer cost was only US$0.57/W.

Abruptly advanced demand will keep on by the end of 2010

The polysilicon price has begun climbing up since the end of July, and then become higher each week. Nowadays it is nearly to US$100/kg from US$50/kg in the first half year. Because many European countries like German, Italy, France and Czech Republic have planned to cut down or even cancel the Feed In Tariffs (FIT), and the financing environment has been improved, most manufacturers snap up solar module to control their manufacturing cost.

Therefore, global demand for solar module was as high as 3.82GW, increasing 54% YoY largely, among which German contributed 60% to 2.3GW. What`s more, Italy realized the 127% QoQ growth, ranking second. Considering the abruptly advanced demand will continue before 2011, we expect global newly installed PV capacity will be 16GW in 2010, with the growth above 100%, which will underpin the high polysilicon and wafer prices.

In 2011, the demand will be limited because of decreased FIT. However, the higher polysilicon price will propel relative manufacturers to achieve the technology improvement regarding the wafer thickness, and then the cost will be cut down, making the demand boom again. Furthermore, as the tool to realize the recovered economy, new energy including the PV may win more stimulating policies from other governments like the US, China, and the UK. Therefore, the demand for PV products in 2011 shouldn`t be too pessimistic.

High growth is expectable

As the leading manufacturer in the PV industry, GCL-POLY can win more assured high growth in fact. GCL-POLY has made long-term contracts with its solar cells and modules customers, under which the Company is required to supply a total of 15.4GW of wafers and 33,000 tons of polysilicon between the period from 2008 to 2015. Because the wafers are less manufactured in the past two years, the supply pressure will be concentrated on the later six years, with annual 2,500MW wafers. Recently, the Company has entered the second long-term wafer supply contract to provide a total of 664MW of wafers to DelSolar Co., Ltd. , a leading solar cell and module provider in Taiwan from October 2010 to December 2015. Before long it built up the long-term strategic cooperation with Hareon Solar Technology Co., Ltd., a large-sized photovoltaic products supplier in China, and will supply high quality wafers totaling RMB20.8 billion from 2011 to 2013. Overall speaking, the Company hasn`t the need to worry about its demand.

Meanwhile, the Company is expanding its capacity to meet with the demand. Besides the plan to increase the polysilicon capacity to 21,000 tons, it will also add its wafer capacity through acquisition and new construction, and is expected to realize 2GW wafers capacity by October 2010, then maybe become the largest wafer manufacturer globally. Furthermore, the Company has decided to invest more to add 1GW wafer capacity since July. The capacity expansion will strengthen its scale effect and competitiveness in our view and assure its high growth in medium to long term.

The cost advantage will keep on

Compared to domestic peers, GCL-POLY has maintained its advantage on low cost. Its unit polysilicon production cost is now below US$28 per kg, ahead of the original schedule set for the end of 2010. It is worth noting that its 200,000 MT of hydrochlorination technical improvement program has been put into operation since July 2010, which may cut the polysilicon cost down to US$25/kg, equal to the level of worldwide manufacturer. With regards to wafer business, the Company is to realize the scale of operation, and some equipments are planed to be substituted by domestically manufactured equipment. It is also planning to build up an associate with steel wire supplier. All those may be beneficial to the cost control. All in all, based on the advantage on low cost and high products prices, we believe its PV business will enjoy high gross margin above 30%.

Risks

The demand becomes weak, and the polysilicon and wafer prices perform worse than expected;Its capacity expansion is worse than expected.

To continue buying for reasonable valuation

Generally speaking, the high growth of PV industry is expectable, and the demand situation is sound presently. GCL-POLY takes a leading position, and its low cost advantage can bring about high earning capability. We expect its revenue will be HK$14.7 and 17.6 billion in 2010 and 2011 respectively. Net profit will be HK$2.6 and 2.9 billion, converting into the EPS at RMB 0.17 and 0.19.

Regarding valuation, the Company`s new energy business will grow significantly. Referring to its international peers, the average P/E for electric enterprises listed in HK is 14X, and that for international polysilicon and wafer manufacturer is above 20X. By the sub-segment valuation, we conservatively give its old electric and new energy businesses 12X and 15X 2011 EPS, and the 12-month TP will be HK$2.74. We reiterate it buy rating.

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