Company Overview

GCL-poly is an upstream solar manufacturer. It's the largest polysilicon producer of China and the world's largest solar ingot and wafer manufacturer. Its business covers many branches of clean energy.

Summary

-This is our initial report on GCL-poly. Although as the leading company of Chinese PV industry, its result showed significant growth in 2011, we still hold prudent viewpoint to its operation in 2012 since the external and internal factors are unoptimistic.

-GCL-poly's capacity grew too fast in report period, when there are a wide range of discontinued production in PV industry caused by overcapacity, such activity seemed too radical. Additionally, product specifications of GCL-poly are relatively simple, so we considered that the inventory of ·GCL-poly may shows sharp increase.

-The price of product is at the trough in recent years, as the whole PV industry has sunk into recession in recent years, market demand is also weaker than before. So we considered that price is difficult to rebound in short term.

-The debt ration of GCL-poly increased fast, although management indicated that it would focus on reducing the leverage on its balance sheet, high leverage ratio will put negative effect on operation elasticity as well as the capability to resist macro-economy risk.

-GCL-poly's BVPS is HKD 1.43 and P/B ratio is 1.57x in 2011. Since our viewpoint on its future growth rate is relative prudent, and its financial stability will affected by high debt ratio in 2012, so we estimate that the BVPS is HKD 1.27 and the target price is HKD 2.37 under 1.8x P/B we estimate, the rating is Neutral.

1.Overcapacity and price decline

The business of GCL-poly covers many branches of clean energy, and production of polysilicon and wafer is its major business. With multiple projects put into operation in report period, the capacity of GCL-ploy increased sharply. Its polysilicon capacity already reached 65 thousand tons per year and wafer capacity is 8 GW per year; continue to retaining its industry-leading position. But under present situation, we don`t consider that such huge capacity expansion couldn`t transfer to matching results growth for GCL-poly. In recent 3 years, the capacity of polysilicon in whole Chinese market is extreme surplus as the result of blind expansion, the direct result of new projects is product price decline and more fierce market completion.

From whole situation of PV upstream companies, over half of them have operation problems, which mean the overcapacity has great negative effect on whole PV industry. So it's not a good choice to improve capacity at present.

Another negative factor is cost increase and product price decline. On one hand, comparing with the high-speed development period of PV industry, the price of polysilicon and wafer has been decreasing sharply as well as other products like cells and modules. According to latest data, their price decreased nearly 50% comparing with the data in Jan.2010; especially cell's price, declined almost 60%. We consider that the decline of price will be continuing in 2012. Besides, the key customers of GCL-poly like Suntech also facing operation dilemma, the weak demand made the trend of price declining hard to change in short term; On the other hand, raw material price decline is relative limited, even increase probably in the future. So we estimate that GCL-poly's revenue has great downside risk in the future.

From the two factors above, we consider that the market fundamentals are unfavorable to GCL-poly's operation in 2012, in addition to the inappropriate capacity expansion activity, therefore, it's hard to be optimistic to the operation of GCL-poly in 2012.

2. Operation indicators decline

First of all, the profit margin. Although GCL-poly revenue in 2011 increased greatly, approximately 38.1%, but the gross profit margin and net profit margin fell instead of raised, especially the net profit margin, 5% lower than the level of 2010. Part reason of negative increase in net profit margin is the increase of cost, but the main reason is sharp increase in operation expense, according to annual report of 2011, GCL-poly had much debt to maintain its daily operation and to build its new projects, excessive interest payments seriously affected the profit margins of the GCL-poly. And according to the latest data, the repayment of interest and principals will be maintained in a relative high level, which means the decline in 2011 is just a beginning.

Another problem of GCL-poly is that the inventory level increased too much, the absolute level increased about 125% comparing with 2010. High inventory growth rate means that there may some problems in the sale end of GCL-poly. As mentioned above, the purchase of downstream companies have high flexibility in price and suppliers because overcapacity of upstream companies. Although as the leading-company of PV industry, GCL-poly has the scale economy in production, the product differentiation of GCL-poly has no obvious advantage, which means it hard to lock customers only depend on its scale. With some customers sunk into operation difficulty, the rapid increase of inventory is inevitable. We estimate that since the main reason for overstock is hard to change in short term, the situation may deteriorate in the future.

3. Financial Analysis

The debt level of GCL-poly increased too fast in report period, which means the company raised debt ratio to maintain normal operation and capacity expansion. According to the annual report of 2011, the net debt to equity ratio is almost 100%，this is a dangerous signal definitely to the normal operation.

The high debt ratio has effect on two aspects. On one hand, high debt ratio result into repayment pressure in 2012, which could make tight liquidity and low profit margin; on the other hand, too much debt would limit the financing channels of GCL-poly, therefore, its capability to resist macro-economy risks and sudden issues will be weak relatively.

The high debt ratio of GCL-poly reflected on interest coverage ratio. Although GCL-poly's revenue experienced great increase in report period, but on the contrast, the interest coverage ratio showed significant decrease, which means GCL-poly's operation relied on debt too much, especially the capacity expansion raised the company's medium-and long-term debt in a large extent. This point made the base of rapid growth of GCL-ploy relative fragile, besides, high debt ratio would affect financing flexibility. Although management indicated to reduce the debt ratio, it's not easy in the situation of industry recession and will affect normal operation definitely.

In summary, we hold prudent viewpoint to results of GCL-poly in next 2 years. The company's revenue growth is weak, and cost increase as well as high debt ratio would result into the lack of flexibility in operation, besides, it also put limit on GCL-poly's financing methods. Even the government may provide support policy to PV industry, but we consider that such problems couldn`t be solved in short term.

According to the analysis above, we estimate that the results of GCL-poly will experience another decline in 2012, the situation will restore in 2013, but it's difficult for GCL-poly to reappear the previous glory within short time.

4. Valuation

Since we estimate that the company will suffer loss in 2012, so its EPS will be negative. But according to the historical data, GCL-poly's BVPS has been maintaining in a stable level, so it's reasonable to use BVPS to value its stock price. According to our estimation and change trend of BVPS, we estimate that GCL-poly's BVPS will be HKD 1.27; the target price is HKD 2.37 under 1.8x of P/B we estimate. The rating is Neutral.

5. Risk

Financing environment becomes worse.

Product price decline as well as market demand.

Foreign government's anti-dumping and countervailing on Chinese PV products may upgrade.

Financial Data

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