China Solar:Cost leadership is key;Buy GCL-Poly

A market for selective players; Buy GCL-Poly.

    Rapid capacity expansion despite stable demand will create price pressuresahead, which is to be expected for a subsidized industry in which pricereduction is the key to long-term success. Low-cost, high-efficiency producersshould consolidate their leadership and GCL-Poly is well placed to achieve this.

    Almost fully converted to diamond wire cutting and with cheaper in-house polysupply, it has a >15% cost advantage over peers, driving a 13% earningsCAGR. Trading on 0.8x PB and a PE of just 7x, the shares are at a substantialdiscount to its closest peer, Longi (4.6x PB and 13x PE). We raise our forecastsby 14-25% and our TP to HK$1.70. Buy.

    Demand: stable and resilient after a strong spike in 2017.

    Global solar installation jumped +36% to 105GW in 2017 and we expect solardemand to stay resilient and grow a mild 2% to 107GW in 2018. We staypositive on China’s solar capacity outlook and expect 50GW installation in2018 (only a mild retreat yoy), supported by rising distributed PV, povertyalleviation projects, and rush installation ahead of a tariff cut in 2019. Throughto 2020, we forecast a global demand CAGR of 9%, driven by growth in Indiaand other emerging markets, as well as a recovery in the US/EU. Demand alsolooks healthy in the longer term after reaching grid parity in more countries.

    Supply: more new capacity addition leads to consolidation opportunities.

    We forecast c.20% wafer oversupply this year due to accelerated capacityexpansion (+15%/27% in 17/18). This will be driven by both Mono-Si players(+>80%) and an additional 20% from Multi-si players converting to diamondwire cutting. Conversely, poly supply should remain tight until 3Q18, given thatnew capacity ramp-ups are mainly scheduled for later in the year. In anoversupplied wafer market, price dynamics will squeeze small-scale playersand those multi-si producers using high-cost slurry wire cutting. We expectwafer prices to continue to drop in 2018/19 (-11% p.a.). This should ultimatelyforce out inefficient producers, with a larger market share taken by the lowproduction-cost leaders.

    GCL-Poly stands out as cost leader; lifting earnings forecasts.

    Multi-Si players, by upgrading to diamond wire cutting, blacksilicon and PERC,have largely caught up with mono-Si competitors in terms of cost reductionand efficiency improvement. After adopting diamond wire conversion andexpanding in-house poly supply, GCL-Poly is further cementing its leadershipas a low-cost multi-Si wafer producer. We expect its total wafer cost to drop11% and market share to rise 3ppt to 24% in 2018. We lift our 2017-19Eearnings forecasts by 14-25% on higher wafer shipment and faster cost cuts.

    An earnings CAGR of 13% in 17-19E is mainly driven by wafer output, whilewe expect blended wafer margin to be stable with cost reductions largelyoffsetting falling ASP. Also, GCL is undergoing a deleveraging process.