Kingsway Research
Kingsway Research Environmental
Oct 30 2009
China
Jim Fong, CFA (852) 2283 7336
[email protected] www.kingswayresearch.com
GCL Poly Energy
BUY
3800.HK / 3800 HK
Initiate coverage
Stands out against headwind Polysilicon price drop decelerating–overcapacity is likely to persist but 1) the spot price has dropped to a supporting level of ~US$60-65/kg, further decline should lead to lower supply, 2) if all the announced new capacities are built on schedule, utilization rates for Chinese players will be too low for survival, 3) Chinese government has announced strict regulations to control the overcapacity problems. Production cost converges to world class levels – GCL’s production cost was US$39/kg in 2Q09 versus US$32-33/kg from overseas rivals. We expect the cost can go down to US$32/kg as 1) GCL can double production volume to capture economies of scale, 2) Increasing in-house production of TCS, 3) Lower electricity cost. Close proximity to customers - enables GCL to have a shorter supply lead time versus overseas competitors. In addition, the recent scrap polysilicon embargo has lengthened the import administration processes and benefits domestic producers. Strong customer base with long-term supply contracts - GCL has a strong customer base and major customers include Suntech, JA Solar and Trina Solar. It has long-term contracts with some of them, safeguarding aggregate sales of about 70% of both wafers and polysilicon capacity. Eyeing on Solar farm operation – With a countrywide Feed-in on grid electricity tariff (FiT) to be announced soon and leveraging on the longstanding experience in environmental-friendly power plants in China, GCL should be one of the most suitable candidates to get utility-scale solar farm projects in China. Multiple competitive advantages and 30% upside, initiate coverage with BUY recommendation - Our DCF-based TP of HK$2.60 implies a FY11 PER of 12.0x, which is about in line with the industry's average. Given its first mover advantages among Chinese polysilicon players, proven cost reduction records, the aforesaid competitive advantages and 30% potential upside, we initiate coverage with a BUY recommendation.
HK$1.99
(Oct 29, 09)
Target price: HK$2.60 HSI: 21,264.99
(+30%) (Oct 29, 09)
Share Data 52week Hi/Lo (HK$) Avg. daily t/o (US$m) Market cap. (US$m) Total issued shares (m) Public float (%) Major shareholders: Asia Pacific Energy OZ Management Credit Suisse Beanspouts
0.375/3.84 14.95 3,174.52 12,363.25 32.53% 40.54% 9.63% 9.53% 7.77%
Company profile GCL Poly Energy manufactures polysilicon and wafers in China. It also operates cogeneration power plants in China
Source: Bloomberg & HKEx
Share Price Chart
Source: Bloomberg Earning Forecasts Year ended 31 Dec Sales (RMB'm) EBITDA (RMB'm) Net profit (RMB'm) EPS - Weighted average (RMB) YoY change (%) Consensus PER (x) EV/EBITDA (x) DPS (RMB) Yield (%) ROE (%) Net debt/equity (%)
2007 1,845 75 (267) (0.274) -278.6
2008 3,693 649 131 0.130 -147.2
(7.3) 58.6 0.000 0.0 (20.6) 107.1
14.6 6.7 0.023 1.2 5.6 105.5
2009F 5,675 1,391 482 0.072 -44.5 0.122 24.5 24.6 0.007 0.4 9.0 132.0
2010F 10,190 3,162 1,501 0.121 +68.3 0.218 14.6 11.3 0.012 0.6 16.7 130.7
2011F 13,436 4,561 2,369 0.191 +57.9 0.283 9.2 8.0 0.019 1.0 21.9 110.9
Source: Company data & Kingsway Research estimates
Kingsway Financial Services Group Limited Please see the important disclaimer and disclosures (if any) at the end of this report
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Polysilicon market outlook Oversupply in polysilicon market
With polysilicon supply represented the main bottleneck in the Photovoltaic (PV) industry during 2005-3Q08, the spot price had soared to the peak of over US$400/kg. However, the PV industry demand was nearly frozen during the economic crisis as solar farm projects were halt on credit crunch. Global credit market has been gradually improved since 1Q09, therefore we go along with European Photovoltaic Industry Association (EPIA) that worldwide solar market can enjoy 32% 5-yr CAGR, but it cannot stop the spot price from reversing the downward trend as production capacity is going to be more than doubled in this year while additional PV demands are not likely to digest the excess supply. Polysilicon market has been plagued by overcapacity as more than 20 Chinese companies have announced plans to invest in polysilicon production before the economic crisis. However, we believe the polysilicon price will drop in a decelerating rate after 71% YTD decline due to the reasons discussed below. Polysilicon spot price trend 500
475 475
450
405
400
415 417 417
393 384 350
US$/kg
350 300 250
219
200
151
150
133 79
100
93
83
72
69 66 63
50 Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Source: Photon International, industry sources & Kingsway Research estimate
Global PV market Market share of annual PV market in 2008
Japan 4% USA 6%
China South Korea 1% 5%
Historical development of the Global annual PV market by region
Rest of the world 3%
Germany 27%
Rest of Europe 4% Italy 5%
Spain 45%
Source: EPIA
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Est. polysilicon demand until 2013F Belgium Czech Republic France Germany Greece Italy Portugal Spain Rest of Europe Japan USA China India South Korea Rest of the world Worldwide PV market (MW) YoY% cSi modules ratio (%) Polysilicon-to-solar cell conversion (t/MW) Polysilicon demand for solar applications (tonne) Polysilicon demand for semiconductor applications (tonne) Total polysilicon demand (tonne) YoY%
08 48 51 46 1,500 11 258 50 2,511 28 230 342 45 40 274 126 5,560 86% 7.8 37,296 25,000 62,296
09E 175 100 300 2,500 52 500 50 375 250 500 1,200 100 100 200 400 6,802 22% 82% 7.7 42,948 26,250 69,198 11%
10E 125 160 500 2,800 200 800 80 500 325 1,000 3,000 150 200 350 600 10,790 59% 78% 7.6 63,963 27,563 91,526 32%
11E 130 200 850 3,200 450 1,100 180 600 400 1,200 3,400 600 250 450 800 13,810 28% 76% 7.5 78,717 28,941 107,658 18%
12E 140 220 1,200 3,600 700 1,400 350 650 525 1,500 3,900 1,200 300 700 1,000 17,385 26% 76% 7.4 97,773 30,388 128,161 19%
13E 160 240 1,400 4,000 900 1,600 500 1,500 625 1,700 4,500 2,000 600 1,000 1,600 22,325 28% 75% 7.3 122,229 31,907 154,136 20%
Source: EPIA (under policy-driven scenario)
Polysilicon in oversupply (assuming all announced new capacities built on schedule)
12,000
3,000 1,500 3,000 3,000 2,500 15,625 60,625
10E 21,000 11,000 10,000 6,000 3,000 3,000 3,000 3,000 3,000 8,500 16,300 87,800
11E 25,200 16,000 10,000 6,000 3,000 3,000 4,500 6,000 3,000 14,000 19,280 109,980
19,000 8,000 9,000 10,000 5,200 3,150 1,300 55,650
19,000 12,000 17,500 15,150 8,200 3,300 1,400 76,550
25,000 15,000 17,500 25,000 8,200 4,300 1,400 96,400
36,000 15,000 17,500 35,500 8,200 4,300 1,400 117,900
5,000
16,500
26,500
26,500
Total planned production capacity (tonne) Average production capacity (tonne)
72,650 63,450
153,675 113,163
210,700 182,188
254,380 232,540
Total polysilicon demand (tonne)
62,296
69,198
91,526
107,658
1,154 98%
43,965 61%
90,662 50%
124,882 46%
GCL LDK Sichuan Yongxiang Asia Silicon Ledian Tianwei Louyang Silicon CSG Holdings Daquan Renesolar Inner Mongolia Polysilicon Corp Others Chinese polysilicon producers (tonne) Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium Current major polysilicon players (tonne) OCI
Excess capacities Utilization rate (%) - with new capacity under planning built on schedule
08 3,000 1,000
2,000 3,000 3,000
09E 18,000 6,000 4,000 4,000
Source: EPIA, PV news, company data & Kingsway Research estimate
Page 3
Kingsway Research
GCL Poly Energy (30 Oct 2009)
We expect polysilicon price to drop in a decelerating rate as … 1. The price has dropped to a supporting level
With reference to some industry sources, the production cost of those enterprises without scaled production or closed-loop production is about US$100/kg. Being suffered from gross losses of ~US$30-35/kg under current polysilicon price of US$60-65/kg, we believe those planned polysilicon production projects from small players will be cancelled. In fact, some of the existing plants have already ceased their productions according to some news reports. For large producers in China (> 3,000t/year), the production cost is about US$40-70/kg, which makes further substantial price drop less likely as further decline should lead to lower supply. Given sizeable investment required for the polysilicon plant (~US$1bn for annual capacity of 10,000t), we believe some of the plans from large players will be postponed or even cancelled due to low risk-adjusted returns. Production cost comparison 120 100
100
100
100
US$/kg
80
77
75
70
55
60
40
32 33
39
50 50 33
35
29
30
26
20
GCL
08 LDK
Sichuan Yongxiang
09E REC
Wacker
10E Small-scaled players
Source: Company data, industry sources & Kingsway Research estimate
2. Planned aggregate production capacity unlikely to realize
Current production capacity for polysilicon in China is 35,000t/yr while another 13,000t/yr is under construction and 45,500t/yr has been planned by large players in the next few years. If all the planned projects are built on schedule, we estimate that the worldwide utilization rate will drop to 50% in 2010E. Since global top polysilicon makers are enjoying lower production costs and producing higher quality polysilicons, the utilization rate for Chinese players will be too low for survival and therefore we believe some of the Chinese followers may not realize their plans.
3. Chinese government also controls the overcapacity problems
The Chinese government has laid out detailed plans to curb overcapacity in polysilicon industry late last month. With the strict entry barriers listed in the table below, as well as low risk-adjusted returns for new comers as mentioned above, we believe the new regulations can significantly discourage new entrants. With the new regulations, new supply will be restricted as local governments will become more cautious on project approvals and the Chinese government can control new production capacity through administrative procedures.
New regulations to curb overcapacity in polysilicon industry in China 1 Strictly control new polysilicon projects in area with high electricity tariff or lack of energy resources 2 Disallow any polysilicon projects incompliance with environmental requirements 3 New polysilicon factories must be able to capture and recycle up to 98.5%, 99% and 99% of silicon tetrachloride, hydrogen chloride and hydrogen respectively 4 New facilities must be larger than 3,000t/yr but less than 6 hectare/1000t while recycling power consumptions have to be less than 60kwh/kg 5 Any factories with power consumption over 200kwh/kg will be required to shut down by 2011 Source: NDRC
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Moreover, overcapacity problem may be further lessened as the new regulations will accelerate industry consolidation with some existing/potential manufacturers failing to meet the environmental, gas recycling or power consumption requirements, which should benefit those leading players with competitive production cost and technical know-how, e.g. GCL (3800 HK) and LDK (LDK US), as we believe they can grasp more market share in the consolidation. With more projects in China are expected to be postponed or cancelled, especially for those small ones, we believe industry utilization will improve and the price drop will decelerate, even though excess capacity will remain at least over the next couple of years.
Industry consolidation likely to benefit market leaders
Our estimation on the overcapacity problem Demand vs production capacity
Utilization rate
300,000
110%
254,380 100%
250,000
225,100
98% 98%
210,700 90%
200,000 177,900 150,000
80%
%
MT
153,675 139,550 107,658
70%
91,526
100,000 62,296
72,650
69,198
65% 58%
60%
53%
61%
50,000 50%
50%
08
09E
10E
11E
46%
40%
Estimated demand
08
09E
10E
11E
Our est. production capacity (MT) Production capacity (MT) if all announced plans built on schedule
Production capacity (MT) if all announced plans built on schedule
Our est. production capacity (MT)
Source: Company data & Kingsway Research Estimates
Our estimated production capacity in coming years
12,000
3,000 1,500 3,000 3,000 1,000 6,000 46,500
10E 21,000 11,000 10,000 2,000 3,000 3,000 3,000 3,000 3,000 2,000 4,000 65,000
11E 25,200 16,000 10,000 3,000 3,000 3,000 4,500 6,000 3,000 5,000 2,000 80,700
19,000 8,000 9,000 10,000 5,200 3,150 1,300 55,650
19,000 12,000 17,500 15,150 8,200 3,300 1,400 76,550
25,000 15,000 17,500 25,000 8,200 4,300 1,400 96,400
36,000 15,000 17,500 35,500 8,200 4,300 1,400 117,900
5,000
16,500
16,500
26,500
Est. production capacity (tonne) - with some projects postponed Average production capacity (tonne)
72,650 63,450
139,550 106,100
177,900 158,725
225,100 201,500
Total polysilicon demand (tonne)
62,296
69,198
91,526
107,658
1,154 98%
36,902 65%
67,199 58%
93,842 53%
GCL LDK Sichuan Yongxiang Asia Silicon Ledian Tianwei Louyang Silicon CSG Holdings Daquan Renesolar Inner Mongolia Polysilicon Corp Others Chinese polysilicon producers Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium Current major polysilicon players OCI
Excess capacities Utilization rate (%) - with some projects postponed
08 3,000 1,000
2,000 3,000 3,000
09E 18,000 6,000 4,000 1,000
Source: EPIA, PV news, company announcements & Kingsway Research estimate
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Est. polysilicon spot price trend 450
393
400
350
350
US$/kg
300
235
250 200 150
109 82
69
100
57
52
50
50 2004 2005 2006
2007
2008 2009E 2010E 2011E 2012E
Source: Photon International, industry sources & Kingsway Research estimate
GCL - Largest upstream player along the PV value chain in China Cost and quality are the keys to success
GCL Poly Energy (GCL) has become the largest polysilicon producer in China after the acquisition of GCL Solar in Jul-09. With production capacity expanding to 18,000MT by this year-end, GCL is likely to remain the industry leader in China. Being an upstream player along the PV value chain, GCL cannot avoid suffering from the declining polysilicon price, therefore cost advantages and high quality are the keys to success under current market consolidation.
GCL - an upstream player along the PV value chain Silicon Ingot Wafer
Cell
Panels
Installation
GCL LDK Sichuan Yongxiang Louyang Silicon Solargiga Comtec Singyes Solar Suntech JA Solar Trina Solar Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium OCI Solarworld Yingli Green Renesolar
Source: Company data and Kingsway Research estimates
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
To be one of the worldwide cost leaders Production cost is converging toward world class levels
With prompt ramp-up of factories and cutting-edge manufacturing processes, the production cost of GCL should be the lowest among domestic manufacturers and is converging toward the worldwide leading players. Polysilicon production cost of GCL was US$39/kg in 2Q09 versus US$32-33/kg from REC and Wacker and US$50-70/kg from large Chinese manufacturers.
Cost Analysis Polysilicon production cost breakdown in 2009F
Power generation cost breakdown in 2009F
Electricity 33%
Coal 47%
Repair and mainenance 2% Depreciation 11%
TCS 22%
Others 1% Labour 4%
Labour 5%
Depreciation 9% Biomass 8%
Others 29%
Gas 29%
Source: Company data & Kingsway Research Estimates
Cost reduction roadmap 1) Doubling production volume for economies of scale. Given proven capability in ramping up Xuzhou Phase I and II, we believe the Xuzhou Phase III can be fully ramped up by Dec-09, expanding its production capacity to 18,000t and enabling GCL to become the third/forth largest producer in the world by 2010 in terms of production capacity. We forecast GCL to produce ~14,000t of polysilicon in 2010 as 70% of which has been locked-in under long-term supply agreements, more than doubled from our forecast of ~6,000t production in FY09. Based on our forecast worldwide demand of 91,500t in 2010, we believe GCL will have ~15% market share, which should be one of the largest polysilicon producers in the world and the largest in China. GCL’s historical production volume 1,400 1,180
1,200
1,094
1,000
Tonne
To be one of the largest polysilicon producers in the world
800 565
600 400 200
302
624
359
154
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
Source: Company data
Page 7
Kingsway Research
GCL Poly Energy (30 Oct 2009)
GCL’s production capacity 25,000 21,000 20,000
18,000
Tonne
15,000
10,000
8,000 5,000
5,000 1,500
1,500
1,500
4Q07
1Q08
2Q08
3,000
3,000
3Q08
4Q08
1Q09
2Q09
4Q09F
4Q10F
Source: Company data and Kingsway Research estimate
Lower production cost due to more in-house production of TCS
2) Increasing in-house production of TCS. Trichlorosilane (TCS) is one of the main and most costly raw materials as GCL uses the hydrochlorination process, one of the leading polysilicon production technologies, to reduce the production cost. The hydrochlorination process recycles silicon tetra chloride (STC), which is a by-product of the polysilicon production process, into TCS. Given not much QoQ increase in production volume and no change in electricity tariff in 2Q09, we believe most of the cost reduction in 2Q09 was attributable to the jump in % of TCS in-house production through the hydrochlorination process. Therefore, we estimate that every % increase in in-house production of TCS approximately reduces production cost by US$0.25/kg. We expect inhouse production of TCS can gradually increase to 98.5% by end-10 after the Xuzhou Phase III is fully ramped up, which will be in compliance with the country’s standard, and therefore reduce the production cost by ~US$4.60/kg. (Assuming each % increase in TCS in-house production to lower production cost by US$0.20/kg) Inverse relationship between TCS in-house production and total cost 50
120.0% 48.5
98.5%
100.0%
48 46
80.0%
(%)
42 40
60.0% 40.0%
37.3%
38
38.7
(US$/kg)
44
76.0%
36 34
20.0%
34.1
32 30
0.0% 1Q09
2Q09
Percentage of TCS produced in-house
2010F Production cost
Source: Company data
Using cheaper and more environmental-friendly technology than the small players
GCL utilized a modified Siemens process to produce polysilicon with both solar (>6N) and electronic (>9N) grades through hydrochlorination process (with TCS). Siemens process, the currently most popular polysilicon production method, can be roughly separated into hydrogenation and hydrochlorination processes. The thermal hydrogenation method had been banned in most of the developed countries due to severe environmental pollution, but most of the small polysilicon producers in China are using hydrogenation method. Since hydrogenation method requires more energy input, the production cost is generally US$10-15/kg more than that of hydroclorination process.
Page 8
Kingsway Research
GCL Poly Energy (30 Oct 2009)
First mover advantage in TCS recycling
Being the first Chinese polysilicon producer using Siemens-hydrochlorination process, GCL has improved the percentage of in-house production of TCS from 37% in 1Q09 to 76% in 2Q09. Both LDK and Sichuan Yongxiang, the second and third largest competitors in China, also utilizes the Siemens-hydrochlorination process, but Sichuan Yongxiang has just started its plants in Jul-09 with a recycling rate of 40% while LDK has just successfully completed the first production run and initiated production ramp-up of its first 5,000t plant in Sep-09. Therefore, GCL’s major competitors may require months or even years to narrow the cost gap.
Further cost cut by direct electricity supply
3) Applying direct electricity supply. The Chinese government recently has kicked off the direct electricity supply program through approving the Fushun aluminum plant to get direct electricity supply from a nearby power plant of Huaneng Power. The Chinese government has been investigating the possibility of direct electricity supply for large electricity consumers for some months so as to lower the reliance on the grids and lower the electricity tariff. GCL has obtained approval from the Jiangsu government to buy electricity directly from power plants but still awaiting the central government's nod. On the back of the central government's intention to promote direct electricity supply, we believe GCL’s application will be approved by FY10. Electricity accounted for 33% of production cost in 2Q09 and we believe electricity tariff will be reduced by 20-30%, therefore the production cost will drop by US$2.4-3.6/kg. Est. polysilicon production cost of GCL 45 40 35
US$/kg
30 25 20 15 10 5 0 2Q09
2009F TCS
Electricity
2010F
2011F
Depreciation
Labour
2012F
2013F
Others
Source: Company data & Kingsway Research estimate
Page 9
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Beware of technology obsolescence risk Newer technologies post risk to the company, but it isn’t unprepared
There are a number of new production methods with lower production cost to replace the Siemens process. One of them is called Fluidized Bed Reactor method, which is under trial production by REC, which claims that FBR can substantially lower the production cost by lowering energy input and continuous production process. However, we believe the commercialization of these technologies may take years and the market will remain dominated by the Siemens process in the near future. GCL has setup a research centre in the US to mitigate the risk so that the company may build FBR plants when the technology becomes more mature.
Siemens process (with hydrochlorination)
Source: Photon International, industry sources & Kingsway Research estimate
Fluidized Bed Reactor vs Siemens process
Source: REC ASA
Page 10
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Geographical advantages to traditional top players Production cost is slightly higher than top players, but making up by shorter delivery lead time and good quality
Current production cost of GCL is still ~20% or ~US$6/kg higher than that of leading polysilicon producers as the latter enjoy >95% TCS recycling percentage and lower depreciation expense as equipment costs are lower. However, all leading players are foreign companies and GCL’s major customers, i.e. Suntech, Trina Solar, Yingli, Solargreen, are located near its production plants in Xuzhou in China, which enables GCL to supply polysilicon with a shorter lead time than its foreign rivals. Most of the midstream players have suffered from substantial inventory impairments during 4Q081H09 as polysilicon price plunged by as much as 85% during the period. Therefore, we believe the midstream player prefer purchasing polysilicon from GCL for more efficient inventory control.
Recent trend favours domestic polysilicon producers Scrap polysilicon embargo favors domestic polysilicon producers
The recent embargo on importation of scrap polysilicon has lowered polysilicon supply manufactured from scraps in China, hence less competition from this source. In addition, Chinese Customs has requested for more documentation works and has lengthened the administration processes for the importation of polysilicon so as to ensure there is no imported scrap polysilicon. Since the lead time for importing polysilicon has been lengthened and has become more uncertain, domestic producers including GCL become more attractive to domestic wafer makers due to more timely deliveries. We believe the production cost advantages of traditional top producers should be temporary as most domestic players are still too small to enjoy economies of scale and their TCS in-house production rates are still low. As the domestic palyers grow larger with better economies of scale, higher TCS in-house production rate and lower electricity costs, domestic players including GCL may even dominate the market in the Yangzhijiang Delta due to the geographical advantage.
Large and cost competitive customer base Compliments from customers reaffirm its advantages
GCL has established good business relationship with a number of famous solar cell and module producers including Suntech, JASolar, Solarfun, CanadianSolar, China Sunergy, Trinasolar and Solargiga. GCL has not only supplied polysilicon to them for more than one year, most of them have long-term contracts with minimum volume commitment with GCL. Although the actual volumes are renegotiable and the preset prices can be adjusted based on the spot prices according to some prescribed conditions, these contracts reflect GCL’s good relationships with its major customers and its cost advantages, satisfactory quality and timely deliveries. According to one of its major customers, GCL is one of the highest quality producers in China, though there is still a gap with those top-tier producers overseas. But, with shorter lead time and lower total purchase cost, this customer sees GCL as one of its major long-term suppliers.
Vertical integration to wafer production 1GW of wafer production capacity by 2010
GCL was approved last month by Xuzhou government to develop a 2GW wafer production plant at Xuzhou city in Jiangsu Province, where its polysilicon production is located, with a planned total investment of US$700m. Phase 1 of the project will have a production capacity of 1GW of wafers for an investment of US$300m. Construction of the project will be commenced in 4Q09 and it is expected to come into full operation by the end of 2010. The scope of production will include pulling of monocrystalline and multicrystalline silicon ingots and slicing and grinding the silicon wafers (156x156 mm). With 1GW production capacity, we believe GCL will have the critical mass to compete with other major wafer makers in China. Given our estimated conversion ratio of 7t/MW, full operation of the 1GW wafer production capacity will consume 7000t of internal-made polysilicon.
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Long-term contracts safeguard aggressive expansion plan Further capacity expansion required to meet committed sales volume
We believe the six-fold increase in production capacity within one year in GCL is demanddriven as GCL has entered into polysilicon and wafer supply agreements with cell and module manufacturers to provide for aggregate sales of ~15.4GW of wafers and ~33,311t of polysilicon by 2015. Given our estimated conversion ratio of 7t/MW, GCL requires 109,200t of polysilicon for its 15.4GW of wafers. Thus, deducting our est. sales of 6,200t of polysilicon and 40MW of wafers in FY09, average yearly production volume for polysilicon and wafers could be 24,000t and 2.56GW respectively. Compared with the expected production capacity of 21,000t of polysilicon and 1GW of wafers by end-10, it implies that further capacity expansion could be required.
Eyes on downstream – PV farm operation Leveraging on experience in power generation business for potential solar farm investments
Leveraging on its long-standing development and operation experiences in power generation business, especially in the areas of cogeneration and Resources Comprehensive Utilization (RCU) plants operation, we believe GCL has a proven track record in running environmental-friendly power plants in China, which can enable GCL to source utility-scale solar farm projects in China. GCL is establishing development team and actively finding partnership opportunities so as to source profitable PV farm projects in the near future.
China’s PV power installed capacity target is likely to be lifted up substantially
China has set out aggressive growing plan on PV market in its “Medium and Long-Term Development Plan for Renewable Energy in China” in Sep-07. China planned to develop a PV market with 300MW by 2010 and 1.8GW by 2020. Compared with the cumulative PV power installed in end-08 of 145MW, this “original” plan implied a 44% annual growth rate until 2010. The current negligible domestic demand for PV panels has made China, the largest solar panel producer in the world, over-reliance on exports for mid-stream products, so we believe the domestic market target will be lifted up substantially. It was hinted by some officials from the National Development and Reform Commission (NDRC) that a new renewable energy stimulation plan is also under preparation for announcement soon. Several news reports have said that the cumulative PV market target will be substantially increased to 10-20GW by 2020 instead of the original 1.8GW. We believe this is a possible scenario as the PV market, in terms of installed capacity, of Germany and Spain in total has already reached ~10GW while their total country area is less than 10% of China. We believe solar farm will be one of the major growth drivers for China’s PV market as solar farm construction can consume large amount of over-supplied mid-stream PV products, as well as polysilicon, in China.
With grid parity still not reached, government policy is the key
Grid parity (the point at which the generation cost of PV electricity equals the retail price of electricity) still has a long way to reach in China. According to various news reports, the average cost of solar farms in China should be between Rmb1.5-2.0/kwh in China, compared with the conventional countrywide coal-fired on-grid electricity tariff of ~Rmb0.3/kwh, PV electricity is still not economical without considering its future potential and environmental positives. Therefore, PV market is highly dependent on government policies, especially the coming feed-in on-grid electricity tariff (FiT).
Jiangsu Province, where GCL is located, has set the official FiT for solar farm development
The NDRC of Jiangsu Province has announced its detail plans to promote PV industry in the province. In particular, the Jiangsu NDRC estimated that the industry average cost of on-grid PV system in the province is ~Rmb2.15/kwh and it targets to lower the cost to Rmb1.00/kwh in the long run, so FiTs in Jiangsu Province for on-the-ground PV farms are set to be Rmb2.15/kwh, Rmb1.70/kwh and Rmb1.40/kwh in 2009-11 respectively. Given GCL’s good relationship with those module suppliers and long-standing experiences in power plants operation, we believe its solar farm cost should be less than the industry average of Rmb2.15/kwh, therefore GCL is likely to make profit through solar farm operation based on a FiT of Rmb2.15/kwh.
Page 12
Kingsway Research We believe a reasonable countrywide FiT will be implemented soon
GCL Poly Energy (30 Oct 2009)
Some Chinese officials previously said the floor for a countrywide standardized FiT is Rmb1.09/kwh, we believe this is an misinterpretation because the physical and economic environments varies across China and different solar energy methods incur different costs, e.g. on-the-ground solar farm should be less costly than Building Integrated Photovoltaic (BIPV) and rooftop solar panel installations. Furthermore, as aforesaid, the average cost of solar farm should be between Rmb1.5-2.0/kwh in China, therefore we believe the FiT should be set at levels higher than this range. With reference to the solar energy development history in Germany and Spain, we believe FiT should be one of the most effective method to stimulate the industry and we believe China will outline the FiTs for different project types and regions in the near future instead of a standardized one applied for the whole country.
Power generation business to grow HoH Specializes in cogeneration power plants for higher profitability
Regarding the power generation division, GCL specializes in cogeneration power plants, which can generate both electricity and steam to achieve higher thermal efficiencies than that of conventional coal-fired plants. Typically, the thermal efficiencies of conventional coal-fired plants and cogeneration plants are 30-40% and 45-90% respectively. Cogeneration power plants are granted by the Chinese government to enjoy higher dispatch priority than that of traditional coal-fired power plants. Some of the cogeneration power plants are also Resources Comprehensive Utilization (RCU) plants or biomass plants, which enjoy even more preferential government supportive policies. We believe this explains why GCL can remain profitable while most of the conventional coalfired power generators were in red during 2008.
The division to grow HoH
On the back of economic recovery in China, nationwide utilization rate of power plants have been gradually improving. With co-generation and RCU power plants have priority access to grids, hence higher utilization than that of traditional coal-fired plants, we believe the utilization rates of the GCL's power plants should maintain satisfactory growth. In addition, coal prices in 3Q09 have been relatively stable, therefore we expect power generation business to grow HoH in 2H09. Although earnings contribution from this division will likely be diminishing due to our expectation of strong growth in the solar division, the power generation business is essential to fund the solar business development.
Macro environment of power generation industry in China Electricity industry in China 53% 52% 51% 50% 49% 48% 47% 46% 45% 44%
Power Coal price at mines (5000-5500 Calorie)
52% 50%
47% -4%
49%
52%
1%
50% 49%
-1%
1%
-2%
-2% -3%
2%
-3%
450
416 418 418 379
400
0% -1% -2%
387
378
390 397 397 395
382 359 361 353
350 329 300
-3% -4%
250
Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 YTD utilization rate
YTD electricity grow th YoY (%)
200 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
Source: Company data & Kingsway Research Estimates
Page 13
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Power generation process of cogeneration plant and conventional coal-fired power plant
Source: Company data
Summary of the power plants under GCL Electricity Sales (MWh)
Plant
Fuel
Kunshan cogeneration plant Haimen cogeneration plant Rudong cogeneration plant Huzhou cogeneration plant Taicang Poly cogeneration plant Jiaxing cogeneration plant Lianyungang Xinneng cogeneration plant Puyuan cogeneration plant Fengxian cogeneration plant Yangzhou cogeneration plant Dongtai cogeneration plant Peixian cogeneration plant Xuzhou cogeneration plant Suzhou cogeneration plant Baoying cogeneration plant Lianyungang Xiexin cogeneration plant Taicang Incineration plant Huitengliang Windpower plant
Coal Coal Coal Coal Coal Coal Coal/Sludge Coal Coal/Sludge/Gangue Coal/Sludge/Gangue Coal/Sludge Coal/Sludge/Gangue Coal/Sludge/Gangue Natural Gas Coal/Biomass Coal/Biomass Municipal Solid Water Wind
Equity interest
Sub-total (Subsidiaries power plants) Funing cogeneration plant Coal/Sludge China Resources Beijing cogeneration Plant Natural Gas
Installed capacity (MW/yr) FY07
FY08
Steam (tonne)
FY09F
1H09
51% 420,480 377,241 362,150 380,092 190,046 51% 262,800 175,450 136,350 148,456 73,060 100% 262,800 161,160 145,780 181,927 89,790 95% 262,800 178,936 174,208 178,722 88,187 100% 394,200 299,506 265,425 227,890 112,187 95% 315,360 179,195 208,640 228,590 112,904 100% 183,960 42,880 72,450 122,404 60,387 100% 315,360 61,482 154,781 223,599 110,396 51% 262,800 185,247 160,891 204,582 101,154 51% 420,480 328,540 277,310 272,201 134,220 100% 262,800 178,910 150,450 175,514 86,570 100% 262,800 192,920 138,623 194,087 95,873 75% 262,800 197,074 155,238 197,106 97,392 51% 3,153,600 1,634,911 1,738,923 2,057,377 1,013,481 100% 262,800 208,101 204,770 211,478 104,560 100% 262,800 193,202 202,327 195,611 96,631 100% 52,560 31,847 42,410 43,728 21,864 100% 433,620 N/A N/A N/A N/A
Steam extraction capacity (tonne/yr) 1,401,600 876,000 876,000 876,000 1,314,000 1,506,720 1,095,000 1,506,720 876,000 1,401,600 876,000 876,000 876,000 1,752,000 876,000 876,000 N/A N/A
FY07 448,092 351,952 422,340 244,474 462,799 627,825 172,221 126,090 292,748 226,874 348,171 177,186 166,838 432,288 144,013 44,101 N/A N/A
FY08
FY09F
483,221 317,597 433,498 348,777 420,365 749,232 194,691 579,192 246,091 167,628 370,072 170,747 176,395 469,363 151,007 85,832 N/A N/A
1H09
435,136 338,201 450,139 332,999 402,999 692,512 149,971 650,060 264,208 209,623 352,989 178,569 213,156 538,094 130,665 115,489 N/A N/A
217,568 165,167 221,276 162,328 196,013 339,528 70,214 317,894 128,367 99,193 172,641 85,780 102,906 261,215 61,966 54,152 N/A N/A
7,621,200 4,626,602 4,590,726 5,243,363 2,588,702 17,861,640 4,688,012 5,363,708 5,454,811 2,656,208 60% 262,800 49% 1,314,000
182,540 N/A
132,890 739,114
192,328 686,238
94,980 336,732
876,000 876,000
154,671 N/A
80,880 289,300
87,807 333,617
40,493 162,482
Sub-total (Associates power plants)
1,576,800
182,540
872,004
878,567
431,712
1,752,000
154,671
370,180
421,425
202,975
Total
9,198,000 4,809,142 5,462,730 6,121,930 3,020,414 19,613,640 4,842,683 5,733,888 5,876,236 2,859,183
YoY%
14
12
18
2
Source: Company data & Kingsway Research Estimates
Page 14
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Earnings forecasts & valuation To relieve part of the margin squeeze pressure through cost reductions
We believe the production cost for polysilicon will fall to US$34/kg in 2010 as TCS inhouse production is expected to reach 98.5% by end-10 from the current 76% and further drop to US$32/kg by 2011 due to the use of direct electricity supply. With est. production volume more than quadrupled in the coming two years, we believe the economies of scale will also contribute to the lower production costs. We assume the cost reduction in the wafer business will be similar to that of polysilicon business. However, we expect gross margin to be squeezed as polysilicon price is still falling faster than the cost reduction. Assuming no solar farm projects, we believe the power generation business will see fairly flat growth of 1-3% p.a. over the next three years, and therefore we expect the solar divisions will become the major revenue and gross profit contributors from next year onward.
Assumptions made in our forecasts Solar sector: Polysilicon (MT) Wafer (MW) Conversion amount (MT/MW) Polysilicon used for wafer production (MT) Total polysilicon production (MT) YoY%
2H09F 3,684 40 7.9 316 4,000 +116.2
2010F 10,517 500 7.2 3,600 14,117 +252.9
2011F 11,945 1,300 7.1 9,230 21,175 +50.0
2012F 9,030 2,340 7.0 16,380 25,410 +20.0
Polysilicon Capacity (MT) Sales (MT) ASP (US$/kg) Cost (US$/kg) Revenue (Rmb'm) Gross profit margin (%) Gross profit (Rmb'm)
18,000 3,684 63 37 1,578 41.3% 651
21,000 10,517 57 33 4,055 41.3% 1,675
21,000 11,945 52 30 4,237 41.6% 1,764
21,000 9,030 50 30 3,043 39.1% 1,190
Wafer Capacity (MT) Sales (MT) ASP (US$/kg) Cost (US$/kg) Revenue (Rmb'm) Gross profit margin (%) Gross profit (Rmb'm)
40 0.70 0.41 191 41.3% 79
1,000 500 0.63 0.38 2,151 39.2% 843
2,000 1,300 0.58 0.34 5,146 41.9% 2,158
2,800 2,340 0.55 0.32 8,800 41.3% 3,633
Source: Kingsway Research estimates
Change in sales mix 2008
2009F
2010F
Polysilicon 28%
Power generation
P ower g e n e ra t i o n & coal 39%
Pol ys i li c on 40%
Wafer 3%
& coal Power generation & coal
69% W afer 21%
100%
Source: Company data & Kingsway Research Estimates
Page 15
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Change in gross profit contributions from each division 2008
2009F
2010F Power generation & coal 18%
Power generation & coal
Polysilicon
43%
Polysilicon
51%
55% Wafer 27% Power generation
Wafer
& coal
6%
100%
Source: Company data & Kingsway Research Estimates
Valuation With 30% upside, we initiate coverage with a BUY recommendation
We use DCF model for valuation, which values the company at HK$2.60 per share. We use a WACC of 12.5% with a terminal growth rate of 2%. In the calculation of WACC, we estimate beta and debt ratio from its peers by weighting 60%, 20% and 20% on polysilicon, wafer and IPP stocks respectively with reference to their earnings contribution from each divisions in FY10F. The company is currently trading at par with the blended average forward FY09 and FY10 PERs of its peers, but trading at a 20% discount to the industry’s average in FY11. Given its first mover advantages among Chinese polysilicon players, proven cost saving records and the aforesaid competitive advantages, the discount looks unjustifiable. Our valuation of HK$2.60 per share implies a 11F PER of 12.0x, which is about in line with the industry’s average. Therefore we set our target price at HK$2.60/share. With upside potential for 30%, we initiate coverage with a BUY recommendation.
DCF Model EBITDA Chg in working cap Adjusted tax Capex Unleveraged FCF YoY%
FY09 1,391 (1,296) (163) (2,930) (2,997) -2359%
DCF 11-17 PV (Terminal value) EV (End-10) (Rmb'm) Yer-end net cash/(debts) F.D. equity value (End-10) (Rmb'm) F.D. no. of shares (m) F.D. equity value/share (Rmb) F.D. equity value/share (HK$)
10,610 30,470 41,080 (12,687) 28,393 12,363 2.30 2.60
Risk-free rate Risk premium Beta Cost of equity Cost of debt Tax rate After-tax cost of debt Debt to total capital WACC Terminal growth
FY10 3,162 (423) (465) (3,731) (1,457) -51%
FY11 4,561 (281) (770) (3,724) (213) -85%
FY12 5,505 (254) (1,020) (3,556) 675 -416%
FY13 6,374 (233) (1,277) (4,589) 275 -59%
FY14 7,611 (285) (1,531) (4,445) 1,351 391%
FY15 8,887 (235) (1,810) (2,106) 4,735 251%
FY16 8,992 4 (1,826) (150) 7,021 48%
FY17 9,094 13 (1,856) (150) 7,101 1%
3.0% 10.0% 1.30 16.0% 5.6% 25.0% 4.2% 30.0% 12.5% 2.0%
Source: Kingsway Research estimates
Page 16
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Peers Comparison
Company name
Ticker
Closing price
Market Cap (USD in Mn)
Revenue (USD in Mn)
Net income (USD in Mn)
Net debt (USD in Mn)
Debttocapital ratio (%)
Net debt ratio (%)
Gross margin (%)
Net margin (%)
ROE (%)
Est. Div yield (%)
Hist PE (X)
1Yr PE (X)
2Yr PE (X)
3Yr PE (X)
Beta
1.2
Polysilicon manufacturers Wacker Chemie
WCH GR
104.95
8119.0
6322.0
646.3
(45.9)
11.6
(1.4)
27.6
10.2
22.4
1.2
57.0
40.7
13.8
10.7
Renewable Energy
REC NO
36.23
4264.5
1470.6
550.1
876.0
28.5
26.4
N/A
37.4
21.7
0.0
N/A
N/A
16.7
9.8
1.2
Tokuyama
4043 JP
575.00
2201.8
3007.5
(55.9)
401.3
33.6
14.0
28.8
(1.9)
(2.9)
1.0
N/A
23.4
18.3
13.2
1.1
12.72
2843.6
2004.5
387.4
(1104.5)
1.5
(51.4)
50.1
19.3
18.8
0.0
43.9
N/A
14.5
9.9
1.3
215500.00
3805.8
1963.7
294.1
103.5
29.7
7.4
33.8
15.0
27.8
0.9
13.8
N/A
N/A
N/A
1.3
21.0
(1.0)
35.1
16.0
17.6
0.6
38.2
32.0
15.8
10.9
1.2
MEMC
WFR US
OCI
010060 KS Average
Wafer manufacturers LDK Solar
LDK US
7.14
808.3
1643.5
70.2
1005.0
61.9
49.4
5.4
4.3
9.6
0.0
N/A
N/A
21.4
9.0
1.8
Solargiga
757 HK
1.84
405.3
214.9
12.0
(4.2)
16.1
(1.9)
15.1
5.6
8.8
0.2
31.7
N/A
22.5
20.4
N/A
Trina Solar
TSL US
33.86
1176.9
831.9
61.4
267.9
48.0
32.2
19.8
7.4
15.3
0.0
18.1
18.5
14.5
11.7
1.8
GT Solar
SOLR US
5.36
768.7
541.0
88.0
(107.1)
0.0
(130.8)
39.1
16.3
101.4
N/A
8.0
10.3
9.2
8.9
N/A
Solarworld
SWV GR
15.25
2527.2
1324.3
218.7
(190.5)
Average
45.4
(8.9)
N/A
16.5
19.4
1.0
15.1
16.4
14.6
11.8
1.5
34.3
(12.0)
19.8
10.0
30.9
0.3
18.2
15.1
16.4
12.4
1.7
IPP in China China Resources Power
836 HK
16.22
9787.2
3438.4
220.6
4215.4
55.8
47.8
N/A
6.4
6.6
1.9
23.4
15.4
12.8
11.0
0.9
Huaneng Power
902 HK
5.10
12212.7
9710.0
(566.8)
15190.4
72.0
68.3
N/A
(5.8)
(9.4)
4.5
N/A
10.7
10.6
10.6
0.9
Datang International Power
991 HK
3.68
12210.6
5302.2
109.6
15683.4
78.5
75.0
N/A
2.1
2.7
2.5
35.5
19.8
14.8
13.0
1.2
Huadian
1071 HK
2.20
3881.7
4317.9
(368.5)
8460.8
78.9
76.4
N/A
(8.5)
(19.9)
3.2
N/A
9.3
7.4
8.0
1.0
China Power International
2380 HK
2.17
1009.5
1386.5
(98.4)
1513.8
GCL Poly Energy At target price
58.9
52.2
N/A
(7.1)
(7.1)
2.6
N/A
12.7
9.9
9.5
0.9
Average
68.8
64.0
N/A
(2.6)
(5.4)
2.9
29.4
13.6
11.1
10.4
1.0
Weighted average
33.2
9.8
31.3
11.1
15.6
1.0
32.5
24.9
15.0
11.6
1.3
54.5
47.9
13.5
3.6
5.6
0.5
14.2
24.5
14.6
9.2
1.3
31.9
19.0
12.0
3800 HK
1.99
3174.5
2.60
4113.4
474.3
16.9
383.5
Source: Bloomberg & Kingsway Research estimates Closing price @ Oct 29, 2009
Key risks 1) With grid party still not reached, government policies in each country are the keys. 2) Polysilicon price is expected to be under pressure due to overcapacity. 3) The amount of new polysilicon production capacity to be built is highly uncertain. 4) Cost saving measures may not achieve on time. 5) Direct electricity supply is subject to central government’s approval. 6) Short-listing history. 7) Expansion to other solar farm operation. 8) Technology obsolescence risk 9) High gearing implies high equity funding risk.
Page 17
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Financial forecast Year ended 31 Dec Income Statement (Rmbm) Polysilicon Wafer Power generation Coal trading Turnover YoY% COGS Gross profit Gross margin Other income Selling & distribution Admin Other opex Total opex Operating profit (EBIT) Operating margin Provisions Finance costs Profit after financing costs Associated companies & JVs Pre-tax profit Tax Minority interests Net profit YoY% Net margin Gross profit by divisions Polysilicon
2007
2008
2009F
2010F
2011F
0 0 1,845 0 1,845 98 (1,482) 362 19.6%
0 0 3,057 637 3,693 100 (3,196) 497 13.5%
1,585 191 3,337 562 5,675 54 (4,385) 1,291 22.7%
4,073 2,151 3,403 562 10,190 80 (7,092) 3,097 30.4%
4,256 5,146 3,471 562 13,436 32 (8,923) 4,513 33.6%
109
168
97
98
100
0 (143) (67) (209)
(7) (213) (24) (245)
(11) (397) (37) (446)
(20) (688) (61) (769)
(26) (873) (67) (966)
262 14.2% (337) (162)
421 11.4% 0 (259)
942 16.6% 0 (299)
2,427 23.8% 0 (509)
3,647 27.1% 0 (579)
(236) 20 (216) 4 (55) (267) (546) -14.5%
162 45 207 (27) (48) 131 (149) 3.6%
642 19 661 (112) (67) 482 267 8.5%
1,918 19 1,937 (368) (68) 1,501 211 14.7%
3,068 20 3,088 (648) (70) 2,369 58 17.6%
0
0
654
1,683
1,771
Wafer Power generation Coal trading
0 362 0
0 459 38
79 524 33
843 538 33
2,158 550 33
EBITDA EBITDA margin
75 4.0%
649 17.6%
1,391 24.5%
3,162 31.0%
4,561 33.9%
EPS (Rmb) YoY% DPS (Rmb)
(0.274) (279) 0.000
0.130 (147) 0.023
0.072 (45) 0.007
0.121 68 0.012
0.191 58 0.019
Year ended 31 Dec Cash Flow (Rmbm) EBITDA Chg in working cap Others Operating cash Tax Net cash from operations
2007E
2008E
2009F
2010F
2011F
408 (191) (1) 216 (3) 213
683 (23) (31) 630 (17) 613
1,391 (1,296) 0 96 (8) 87
3,162 (423) 0 2,739 (157) 2,582
4,561 (281) 0 4,281 (368) 3,913
(264) (115) 53 10 191 (124)
(338) (129) 19 18 (21) (452)
(2,930) 0 0 3 0 (2,926)
(3,731) 0 0 4 0 (3,727)
(3,724) 0 0 7 0 (3,717)
89
161
(2,839)
(1,144)
195
1,048 (329) (162) (47) 179 (150) 539
0 0 (259) (46) (230) (3) (539)
0 0 (299) 22 500 0 223
0 0 (509) (89) 2,000 0 1,402
0 0 (579) (150) 1,500 0 771
628 188 0 (12) 804
(378) 804 0 (13) 414
(2,616) 414 2,419 0 216
258 216 0 0 474
967 474 0 0 1,441
0.053
0.364
(0.017)
0.168
0.270
Capex Investment Dividend received Interests received Others Investing cash FCF Issue of shares Buy back Interests paid Dividend paid Net change in bank loans Others Financing cash Net change in cash Opening cash Cash from acquisition Adjustment Closing cash CFPS (Rmb)
Source: Company data & Kingsway Research estimate
Year ended 31 Dec Ratios Gross margin (%) Operating margin (%) Net margin (%) Selling & dist'n exp/Sales (%) Admin exp/Sales (%) Payout ratio (%) Effective tax (%)
2007
2008
2009F
2010F
2011F
19.6 14.2 (14.5) 0.0 7.7 0.0 1.9
13.5 11.4 3.6 0.2 5.8 17.8 13.1
22.7 16.6 8.5 0.2 7.0 10.0 17.0
30.4 23.8 14.7 0.2 6.8 10.0 19.0
33.6 27.1 17.6 0.2 6.5 10.0 21.0
Total debt/equity (%) Net debt/equity (%) Current ratio (x) Quick ratio (x)
153.1 107.1 0.81 0.75
134.5 105.5 0.55 0.45
141.4 132.0 0.43 0.30
141.4 130.7 0.57 0.38
127.7 110.9 0.74 0.52
Inventory T/O (days) AR T/O (days)
21 49
27 37
70 40
70 40
70 40
AP T/O (days)
24
28
28
28
28
Cash conversion cycle (days)
45
35
81
81
81
Asset turnover (x) Financial leverage (x) EBIT margin (%)
0.27 3.02 14.2%
0.52 2.93 11.4%
0.37 2.90 16.6%
0.39 2.91 23.8%
0.44 2.84 27.1%
Interest burden (x) Tax burden (x) Return on equity (%)
(0.82) 1.24 (11.7)
0.49 0.63 5.4
0.70 0.73 9.0
0.80 0.77 16.7
0.85 0.77 21.9
Year ended 31 Dec Balance Sheet (Rmbm) Fixed assets Goodwill Associated companies & JVs Long-term investments Other non-current assets Non-current assets
2007
2008
2009F
2010F
2011F
4,901 117 73 12 26 5,128
5,185 116 245 65 60 5,671
14,123 6,845 264 65 41 21,338
17,114 6,845 284 65 41 24,348
19,917 6,845 303 65 41 27,171
Inventories AR Prepayments & deposits Other current assets Cash Current assets
126 380 166 262 804 1,739
259 366 102 258 414 1,399
841 620 157 831 216 2,666
1,361 1,114 283 831 474 4,062
1,712 1,468 373 831 1,441 5,825
Total assets
6,867
7,070
24,004
28,410
32,996
AP Tax Accruals & other payables Bank loans Convertible loan notes
159 5 456 1,492 0
246 8 581 1,652 0
219 157 893 2,648 498
224 368 1,604 2,648 498
228 648 2,115 2,648 498
Senior notes Other current liabilities Current liabilities
0 46 2,157
0 54 2,542
1,587 164 6,167
1,587 164 7,093
1,587 164 7,889
Bank loans Senior notes Deferred tax Deferred income Embedded derivatives Advances from customers MI Non-current liabilities
1,988 0 22 62 0 0 364 2,437
1,597 0 32 75 0 0 408 2,112
6,198 793 101 216 10 1,752 475 9,544
8,198 793 101 216 10 1,752 543 11,613
9,698 793 101 216 10 1,752 613 13,183
Total net assets
2,273
2,416
8,293
9,704
11,924
Shareholder's equity Share capital Reserves
2,273 93 2,180
2,416 93 2,323
8,293 973 7,319
9,704 973 8,731
11,924 973 10,951
2.34
2.48
0.67
0.78
0.96
3,480 (2,434)
3,249 (2,548)
11,725 (10,944)
13,725 (12,687)
15,225 (13,220)
Book NAV (Rmb) Total debts Net cash/(debts)
Page 18
Kingsway Research
GCL Poly Energy (30 Oct 2009)
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Page 19
Oct 30 2009
China
Jim Fong, CFA (852) 2283 7336
[email protected] www.kingswayresearch.com
GCL Poly Energy
BUY
3800.HK / 3800 HK
Initiate coverage
Stands out against headwind Polysilicon price drop decelerating–overcapacity is likely to persist but 1) the spot price has dropped to a supporting level of ~US$60-65/kg, further decline should lead to lower supply, 2) if all the announced new capacities are built on schedule, utilization rates for Chinese players will be too low for survival, 3) Chinese government has announced strict regulations to control the overcapacity problems. Production cost converges to world class levels – GCL’s production cost was US$39/kg in 2Q09 versus US$32-33/kg from overseas rivals. We expect the cost can go down to US$32/kg as 1) GCL can double production volume to capture economies of scale, 2) Increasing in-house production of TCS, 3) Lower electricity cost. Close proximity to customers - enables GCL to have a shorter supply lead time versus overseas competitors. In addition, the recent scrap polysilicon embargo has lengthened the import administration processes and benefits domestic producers. Strong customer base with long-term supply contracts - GCL has a strong customer base and major customers include Suntech, JA Solar and Trina Solar. It has long-term contracts with some of them, safeguarding aggregate sales of about 70% of both wafers and polysilicon capacity. Eyeing on Solar farm operation – With a countrywide Feed-in on grid electricity tariff (FiT) to be announced soon and leveraging on the longstanding experience in environmental-friendly power plants in China, GCL should be one of the most suitable candidates to get utility-scale solar farm projects in China. Multiple competitive advantages and 30% upside, initiate coverage with BUY recommendation - Our DCF-based TP of HK$2.60 implies a FY11 PER of 12.0x, which is about in line with the industry's average. Given its first mover advantages among Chinese polysilicon players, proven cost reduction records, the aforesaid competitive advantages and 30% potential upside, we initiate coverage with a BUY recommendation.
HK$1.99
(Oct 29, 09)
Target price: HK$2.60 HSI: 21,264.99
(+30%) (Oct 29, 09)
Share Data 52week Hi/Lo (HK$) Avg. daily t/o (US$m) Market cap. (US$m) Total issued shares (m) Public float (%) Major shareholders: Asia Pacific Energy OZ Management Credit Suisse Beanspouts
0.375/3.84 14.95 3,174.52 12,363.25 32.53% 40.54% 9.63% 9.53% 7.77%
Company profile GCL Poly Energy manufactures polysilicon and wafers in China. It also operates cogeneration power plants in China
Source: Bloomberg & HKEx
Share Price Chart
Source: Bloomberg Earning Forecasts Year ended 31 Dec Sales (RMB'm) EBITDA (RMB'm) Net profit (RMB'm) EPS - Weighted average (RMB) YoY change (%) Consensus PER (x) EV/EBITDA (x) DPS (RMB) Yield (%) ROE (%) Net debt/equity (%)
2007 1,845 75 (267) (0.274) -278.6
2008 3,693 649 131 0.130 -147.2
(7.3) 58.6 0.000 0.0 (20.6) 107.1
14.6 6.7 0.023 1.2 5.6 105.5
2009F 5,675 1,391 482 0.072 -44.5 0.122 24.5 24.6 0.007 0.4 9.0 132.0
2010F 10,190 3,162 1,501 0.121 +68.3 0.218 14.6 11.3 0.012 0.6 16.7 130.7
2011F 13,436 4,561 2,369 0.191 +57.9 0.283 9.2 8.0 0.019 1.0 21.9 110.9
Source: Company data & Kingsway Research estimates
Kingsway Financial Services Group Limited Please see the important disclaimer and disclosures (if any) at the end of this report
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Polysilicon market outlook Oversupply in polysilicon market
With polysilicon supply represented the main bottleneck in the Photovoltaic (PV) industry during 2005-3Q08, the spot price had soared to the peak of over US$400/kg. However, the PV industry demand was nearly frozen during the economic crisis as solar farm projects were halt on credit crunch. Global credit market has been gradually improved since 1Q09, therefore we go along with European Photovoltaic Industry Association (EPIA) that worldwide solar market can enjoy 32% 5-yr CAGR, but it cannot stop the spot price from reversing the downward trend as production capacity is going to be more than doubled in this year while additional PV demands are not likely to digest the excess supply. Polysilicon market has been plagued by overcapacity as more than 20 Chinese companies have announced plans to invest in polysilicon production before the economic crisis. However, we believe the polysilicon price will drop in a decelerating rate after 71% YTD decline due to the reasons discussed below. Polysilicon spot price trend 500
475 475
450
405
400
415 417 417
393 384 350
US$/kg
350 300 250
219
200
151
150
133 79
100
93
83
72
69 66 63
50 Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Source: Photon International, industry sources & Kingsway Research estimate
Global PV market Market share of annual PV market in 2008
Japan 4% USA 6%
China South Korea 1% 5%
Historical development of the Global annual PV market by region
Rest of the world 3%
Germany 27%
Rest of Europe 4% Italy 5%
Spain 45%
Source: EPIA
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Est. polysilicon demand until 2013F Belgium Czech Republic France Germany Greece Italy Portugal Spain Rest of Europe Japan USA China India South Korea Rest of the world Worldwide PV market (MW) YoY% cSi modules ratio (%) Polysilicon-to-solar cell conversion (t/MW) Polysilicon demand for solar applications (tonne) Polysilicon demand for semiconductor applications (tonne) Total polysilicon demand (tonne) YoY%
08 48 51 46 1,500 11 258 50 2,511 28 230 342 45 40 274 126 5,560 86% 7.8 37,296 25,000 62,296
09E 175 100 300 2,500 52 500 50 375 250 500 1,200 100 100 200 400 6,802 22% 82% 7.7 42,948 26,250 69,198 11%
10E 125 160 500 2,800 200 800 80 500 325 1,000 3,000 150 200 350 600 10,790 59% 78% 7.6 63,963 27,563 91,526 32%
11E 130 200 850 3,200 450 1,100 180 600 400 1,200 3,400 600 250 450 800 13,810 28% 76% 7.5 78,717 28,941 107,658 18%
12E 140 220 1,200 3,600 700 1,400 350 650 525 1,500 3,900 1,200 300 700 1,000 17,385 26% 76% 7.4 97,773 30,388 128,161 19%
13E 160 240 1,400 4,000 900 1,600 500 1,500 625 1,700 4,500 2,000 600 1,000 1,600 22,325 28% 75% 7.3 122,229 31,907 154,136 20%
Source: EPIA (under policy-driven scenario)
Polysilicon in oversupply (assuming all announced new capacities built on schedule)
12,000
3,000 1,500 3,000 3,000 2,500 15,625 60,625
10E 21,000 11,000 10,000 6,000 3,000 3,000 3,000 3,000 3,000 8,500 16,300 87,800
11E 25,200 16,000 10,000 6,000 3,000 3,000 4,500 6,000 3,000 14,000 19,280 109,980
19,000 8,000 9,000 10,000 5,200 3,150 1,300 55,650
19,000 12,000 17,500 15,150 8,200 3,300 1,400 76,550
25,000 15,000 17,500 25,000 8,200 4,300 1,400 96,400
36,000 15,000 17,500 35,500 8,200 4,300 1,400 117,900
5,000
16,500
26,500
26,500
Total planned production capacity (tonne) Average production capacity (tonne)
72,650 63,450
153,675 113,163
210,700 182,188
254,380 232,540
Total polysilicon demand (tonne)
62,296
69,198
91,526
107,658
1,154 98%
43,965 61%
90,662 50%
124,882 46%
GCL LDK Sichuan Yongxiang Asia Silicon Ledian Tianwei Louyang Silicon CSG Holdings Daquan Renesolar Inner Mongolia Polysilicon Corp Others Chinese polysilicon producers (tonne) Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium Current major polysilicon players (tonne) OCI
Excess capacities Utilization rate (%) - with new capacity under planning built on schedule
08 3,000 1,000
2,000 3,000 3,000
09E 18,000 6,000 4,000 4,000
Source: EPIA, PV news, company data & Kingsway Research estimate
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
We expect polysilicon price to drop in a decelerating rate as … 1. The price has dropped to a supporting level
With reference to some industry sources, the production cost of those enterprises without scaled production or closed-loop production is about US$100/kg. Being suffered from gross losses of ~US$30-35/kg under current polysilicon price of US$60-65/kg, we believe those planned polysilicon production projects from small players will be cancelled. In fact, some of the existing plants have already ceased their productions according to some news reports. For large producers in China (> 3,000t/year), the production cost is about US$40-70/kg, which makes further substantial price drop less likely as further decline should lead to lower supply. Given sizeable investment required for the polysilicon plant (~US$1bn for annual capacity of 10,000t), we believe some of the plans from large players will be postponed or even cancelled due to low risk-adjusted returns. Production cost comparison 120 100
100
100
100
US$/kg
80
77
75
70
55
60
40
32 33
39
50 50 33
35
29
30
26
20
GCL
08 LDK
Sichuan Yongxiang
09E REC
Wacker
10E Small-scaled players
Source: Company data, industry sources & Kingsway Research estimate
2. Planned aggregate production capacity unlikely to realize
Current production capacity for polysilicon in China is 35,000t/yr while another 13,000t/yr is under construction and 45,500t/yr has been planned by large players in the next few years. If all the planned projects are built on schedule, we estimate that the worldwide utilization rate will drop to 50% in 2010E. Since global top polysilicon makers are enjoying lower production costs and producing higher quality polysilicons, the utilization rate for Chinese players will be too low for survival and therefore we believe some of the Chinese followers may not realize their plans.
3. Chinese government also controls the overcapacity problems
The Chinese government has laid out detailed plans to curb overcapacity in polysilicon industry late last month. With the strict entry barriers listed in the table below, as well as low risk-adjusted returns for new comers as mentioned above, we believe the new regulations can significantly discourage new entrants. With the new regulations, new supply will be restricted as local governments will become more cautious on project approvals and the Chinese government can control new production capacity through administrative procedures.
New regulations to curb overcapacity in polysilicon industry in China 1 Strictly control new polysilicon projects in area with high electricity tariff or lack of energy resources 2 Disallow any polysilicon projects incompliance with environmental requirements 3 New polysilicon factories must be able to capture and recycle up to 98.5%, 99% and 99% of silicon tetrachloride, hydrogen chloride and hydrogen respectively 4 New facilities must be larger than 3,000t/yr but less than 6 hectare/1000t while recycling power consumptions have to be less than 60kwh/kg 5 Any factories with power consumption over 200kwh/kg will be required to shut down by 2011 Source: NDRC
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Moreover, overcapacity problem may be further lessened as the new regulations will accelerate industry consolidation with some existing/potential manufacturers failing to meet the environmental, gas recycling or power consumption requirements, which should benefit those leading players with competitive production cost and technical know-how, e.g. GCL (3800 HK) and LDK (LDK US), as we believe they can grasp more market share in the consolidation. With more projects in China are expected to be postponed or cancelled, especially for those small ones, we believe industry utilization will improve and the price drop will decelerate, even though excess capacity will remain at least over the next couple of years.
Industry consolidation likely to benefit market leaders
Our estimation on the overcapacity problem Demand vs production capacity
Utilization rate
300,000
110%
254,380 100%
250,000
225,100
98% 98%
210,700 90%
200,000 177,900 150,000
80%
%
MT
153,675 139,550 107,658
70%
91,526
100,000 62,296
72,650
69,198
65% 58%
60%
53%
61%
50,000 50%
50%
08
09E
10E
11E
46%
40%
Estimated demand
08
09E
10E
11E
Our est. production capacity (MT) Production capacity (MT) if all announced plans built on schedule
Production capacity (MT) if all announced plans built on schedule
Our est. production capacity (MT)
Source: Company data & Kingsway Research Estimates
Our estimated production capacity in coming years
12,000
3,000 1,500 3,000 3,000 1,000 6,000 46,500
10E 21,000 11,000 10,000 2,000 3,000 3,000 3,000 3,000 3,000 2,000 4,000 65,000
11E 25,200 16,000 10,000 3,000 3,000 3,000 4,500 6,000 3,000 5,000 2,000 80,700
19,000 8,000 9,000 10,000 5,200 3,150 1,300 55,650
19,000 12,000 17,500 15,150 8,200 3,300 1,400 76,550
25,000 15,000 17,500 25,000 8,200 4,300 1,400 96,400
36,000 15,000 17,500 35,500 8,200 4,300 1,400 117,900
5,000
16,500
16,500
26,500
Est. production capacity (tonne) - with some projects postponed Average production capacity (tonne)
72,650 63,450
139,550 106,100
177,900 158,725
225,100 201,500
Total polysilicon demand (tonne)
62,296
69,198
91,526
107,658
1,154 98%
36,902 65%
67,199 58%
93,842 53%
GCL LDK Sichuan Yongxiang Asia Silicon Ledian Tianwei Louyang Silicon CSG Holdings Daquan Renesolar Inner Mongolia Polysilicon Corp Others Chinese polysilicon producers Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium Current major polysilicon players OCI
Excess capacities Utilization rate (%) - with some projects postponed
08 3,000 1,000
2,000 3,000 3,000
09E 18,000 6,000 4,000 1,000
Source: EPIA, PV news, company announcements & Kingsway Research estimate
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Est. polysilicon spot price trend 450
393
400
350
350
US$/kg
300
235
250 200 150
109 82
69
100
57
52
50
50 2004 2005 2006
2007
2008 2009E 2010E 2011E 2012E
Source: Photon International, industry sources & Kingsway Research estimate
GCL - Largest upstream player along the PV value chain in China Cost and quality are the keys to success
GCL Poly Energy (GCL) has become the largest polysilicon producer in China after the acquisition of GCL Solar in Jul-09. With production capacity expanding to 18,000MT by this year-end, GCL is likely to remain the industry leader in China. Being an upstream player along the PV value chain, GCL cannot avoid suffering from the declining polysilicon price, therefore cost advantages and high quality are the keys to success under current market consolidation.
GCL - an upstream player along the PV value chain Silicon Ingot Wafer
Cell
Panels
Installation
GCL LDK Sichuan Yongxiang Louyang Silicon Solargiga Comtec Singyes Solar Suntech JA Solar Trina Solar Hemlock MEMC REC Wacker Tokuyama Mitsubishi Osaka Titanium OCI Solarworld Yingli Green Renesolar
Source: Company data and Kingsway Research estimates
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
To be one of the worldwide cost leaders Production cost is converging toward world class levels
With prompt ramp-up of factories and cutting-edge manufacturing processes, the production cost of GCL should be the lowest among domestic manufacturers and is converging toward the worldwide leading players. Polysilicon production cost of GCL was US$39/kg in 2Q09 versus US$32-33/kg from REC and Wacker and US$50-70/kg from large Chinese manufacturers.
Cost Analysis Polysilicon production cost breakdown in 2009F
Power generation cost breakdown in 2009F
Electricity 33%
Coal 47%
Repair and mainenance 2% Depreciation 11%
TCS 22%
Others 1% Labour 4%
Labour 5%
Depreciation 9% Biomass 8%
Others 29%
Gas 29%
Source: Company data & Kingsway Research Estimates
Cost reduction roadmap 1) Doubling production volume for economies of scale. Given proven capability in ramping up Xuzhou Phase I and II, we believe the Xuzhou Phase III can be fully ramped up by Dec-09, expanding its production capacity to 18,000t and enabling GCL to become the third/forth largest producer in the world by 2010 in terms of production capacity. We forecast GCL to produce ~14,000t of polysilicon in 2010 as 70% of which has been locked-in under long-term supply agreements, more than doubled from our forecast of ~6,000t production in FY09. Based on our forecast worldwide demand of 91,500t in 2010, we believe GCL will have ~15% market share, which should be one of the largest polysilicon producers in the world and the largest in China. GCL’s historical production volume 1,400 1,180
1,200
1,094
1,000
Tonne
To be one of the largest polysilicon producers in the world
800 565
600 400 200
302
624
359
154
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
Source: Company data
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
GCL’s production capacity 25,000 21,000 20,000
18,000
Tonne
15,000
10,000
8,000 5,000
5,000 1,500
1,500
1,500
4Q07
1Q08
2Q08
3,000
3,000
3Q08
4Q08
1Q09
2Q09
4Q09F
4Q10F
Source: Company data and Kingsway Research estimate
Lower production cost due to more in-house production of TCS
2) Increasing in-house production of TCS. Trichlorosilane (TCS) is one of the main and most costly raw materials as GCL uses the hydrochlorination process, one of the leading polysilicon production technologies, to reduce the production cost. The hydrochlorination process recycles silicon tetra chloride (STC), which is a by-product of the polysilicon production process, into TCS. Given not much QoQ increase in production volume and no change in electricity tariff in 2Q09, we believe most of the cost reduction in 2Q09 was attributable to the jump in % of TCS in-house production through the hydrochlorination process. Therefore, we estimate that every % increase in in-house production of TCS approximately reduces production cost by US$0.25/kg. We expect inhouse production of TCS can gradually increase to 98.5% by end-10 after the Xuzhou Phase III is fully ramped up, which will be in compliance with the country’s standard, and therefore reduce the production cost by ~US$4.60/kg. (Assuming each % increase in TCS in-house production to lower production cost by US$0.20/kg) Inverse relationship between TCS in-house production and total cost 50
120.0% 48.5
98.5%
100.0%
48 46
80.0%
(%)
42 40
60.0% 40.0%
37.3%
38
38.7
(US$/kg)
44
76.0%
36 34
20.0%
34.1
32 30
0.0% 1Q09
2Q09
Percentage of TCS produced in-house
2010F Production cost
Source: Company data
Using cheaper and more environmental-friendly technology than the small players
GCL utilized a modified Siemens process to produce polysilicon with both solar (>6N) and electronic (>9N) grades through hydrochlorination process (with TCS). Siemens process, the currently most popular polysilicon production method, can be roughly separated into hydrogenation and hydrochlorination processes. The thermal hydrogenation method had been banned in most of the developed countries due to severe environmental pollution, but most of the small polysilicon producers in China are using hydrogenation method. Since hydrogenation method requires more energy input, the production cost is generally US$10-15/kg more than that of hydroclorination process.
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
First mover advantage in TCS recycling
Being the first Chinese polysilicon producer using Siemens-hydrochlorination process, GCL has improved the percentage of in-house production of TCS from 37% in 1Q09 to 76% in 2Q09. Both LDK and Sichuan Yongxiang, the second and third largest competitors in China, also utilizes the Siemens-hydrochlorination process, but Sichuan Yongxiang has just started its plants in Jul-09 with a recycling rate of 40% while LDK has just successfully completed the first production run and initiated production ramp-up of its first 5,000t plant in Sep-09. Therefore, GCL’s major competitors may require months or even years to narrow the cost gap.
Further cost cut by direct electricity supply
3) Applying direct electricity supply. The Chinese government recently has kicked off the direct electricity supply program through approving the Fushun aluminum plant to get direct electricity supply from a nearby power plant of Huaneng Power. The Chinese government has been investigating the possibility of direct electricity supply for large electricity consumers for some months so as to lower the reliance on the grids and lower the electricity tariff. GCL has obtained approval from the Jiangsu government to buy electricity directly from power plants but still awaiting the central government's nod. On the back of the central government's intention to promote direct electricity supply, we believe GCL’s application will be approved by FY10. Electricity accounted for 33% of production cost in 2Q09 and we believe electricity tariff will be reduced by 20-30%, therefore the production cost will drop by US$2.4-3.6/kg. Est. polysilicon production cost of GCL 45 40 35
US$/kg
30 25 20 15 10 5 0 2Q09
2009F TCS
Electricity
2010F
2011F
Depreciation
Labour
2012F
2013F
Others
Source: Company data & Kingsway Research estimate
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Beware of technology obsolescence risk Newer technologies post risk to the company, but it isn’t unprepared
There are a number of new production methods with lower production cost to replace the Siemens process. One of them is called Fluidized Bed Reactor method, which is under trial production by REC, which claims that FBR can substantially lower the production cost by lowering energy input and continuous production process. However, we believe the commercialization of these technologies may take years and the market will remain dominated by the Siemens process in the near future. GCL has setup a research centre in the US to mitigate the risk so that the company may build FBR plants when the technology becomes more mature.
Siemens process (with hydrochlorination)
Source: Photon International, industry sources & Kingsway Research estimate
Fluidized Bed Reactor vs Siemens process
Source: REC ASA
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Geographical advantages to traditional top players Production cost is slightly higher than top players, but making up by shorter delivery lead time and good quality
Current production cost of GCL is still ~20% or ~US$6/kg higher than that of leading polysilicon producers as the latter enjoy >95% TCS recycling percentage and lower depreciation expense as equipment costs are lower. However, all leading players are foreign companies and GCL’s major customers, i.e. Suntech, Trina Solar, Yingli, Solargreen, are located near its production plants in Xuzhou in China, which enables GCL to supply polysilicon with a shorter lead time than its foreign rivals. Most of the midstream players have suffered from substantial inventory impairments during 4Q081H09 as polysilicon price plunged by as much as 85% during the period. Therefore, we believe the midstream player prefer purchasing polysilicon from GCL for more efficient inventory control.
Recent trend favours domestic polysilicon producers Scrap polysilicon embargo favors domestic polysilicon producers
The recent embargo on importation of scrap polysilicon has lowered polysilicon supply manufactured from scraps in China, hence less competition from this source. In addition, Chinese Customs has requested for more documentation works and has lengthened the administration processes for the importation of polysilicon so as to ensure there is no imported scrap polysilicon. Since the lead time for importing polysilicon has been lengthened and has become more uncertain, domestic producers including GCL become more attractive to domestic wafer makers due to more timely deliveries. We believe the production cost advantages of traditional top producers should be temporary as most domestic players are still too small to enjoy economies of scale and their TCS in-house production rates are still low. As the domestic palyers grow larger with better economies of scale, higher TCS in-house production rate and lower electricity costs, domestic players including GCL may even dominate the market in the Yangzhijiang Delta due to the geographical advantage.
Large and cost competitive customer base Compliments from customers reaffirm its advantages
GCL has established good business relationship with a number of famous solar cell and module producers including Suntech, JASolar, Solarfun, CanadianSolar, China Sunergy, Trinasolar and Solargiga. GCL has not only supplied polysilicon to them for more than one year, most of them have long-term contracts with minimum volume commitment with GCL. Although the actual volumes are renegotiable and the preset prices can be adjusted based on the spot prices according to some prescribed conditions, these contracts reflect GCL’s good relationships with its major customers and its cost advantages, satisfactory quality and timely deliveries. According to one of its major customers, GCL is one of the highest quality producers in China, though there is still a gap with those top-tier producers overseas. But, with shorter lead time and lower total purchase cost, this customer sees GCL as one of its major long-term suppliers.
Vertical integration to wafer production 1GW of wafer production capacity by 2010
GCL was approved last month by Xuzhou government to develop a 2GW wafer production plant at Xuzhou city in Jiangsu Province, where its polysilicon production is located, with a planned total investment of US$700m. Phase 1 of the project will have a production capacity of 1GW of wafers for an investment of US$300m. Construction of the project will be commenced in 4Q09 and it is expected to come into full operation by the end of 2010. The scope of production will include pulling of monocrystalline and multicrystalline silicon ingots and slicing and grinding the silicon wafers (156x156 mm). With 1GW production capacity, we believe GCL will have the critical mass to compete with other major wafer makers in China. Given our estimated conversion ratio of 7t/MW, full operation of the 1GW wafer production capacity will consume 7000t of internal-made polysilicon.
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
Long-term contracts safeguard aggressive expansion plan Further capacity expansion required to meet committed sales volume
We believe the six-fold increase in production capacity within one year in GCL is demanddriven as GCL has entered into polysilicon and wafer supply agreements with cell and module manufacturers to provide for aggregate sales of ~15.4GW of wafers and ~33,311t of polysilicon by 2015. Given our estimated conversion ratio of 7t/MW, GCL requires 109,200t of polysilicon for its 15.4GW of wafers. Thus, deducting our est. sales of 6,200t of polysilicon and 40MW of wafers in FY09, average yearly production volume for polysilicon and wafers could be 24,000t and 2.56GW respectively. Compared with the expected production capacity of 21,000t of polysilicon and 1GW of wafers by end-10, it implies that further capacity expansion could be required.
Eyes on downstream – PV farm operation Leveraging on experience in power generation business for potential solar farm investments
Leveraging on its long-standing development and operation experiences in power generation business, especially in the areas of cogeneration and Resources Comprehensive Utilization (RCU) plants operation, we believe GCL has a proven track record in running environmental-friendly power plants in China, which can enable GCL to source utility-scale solar farm projects in China. GCL is establishing development team and actively finding partnership opportunities so as to source profitable PV farm projects in the near future.
China’s PV power installed capacity target is likely to be lifted up substantially
China has set out aggressive growing plan on PV market in its “Medium and Long-Term Development Plan for Renewable Energy in China” in Sep-07. China planned to develop a PV market with 300MW by 2010 and 1.8GW by 2020. Compared with the cumulative PV power installed in end-08 of 145MW, this “original” plan implied a 44% annual growth rate until 2010. The current negligible domestic demand for PV panels has made China, the largest solar panel producer in the world, over-reliance on exports for mid-stream products, so we believe the domestic market target will be lifted up substantially. It was hinted by some officials from the National Development and Reform Commission (NDRC) that a new renewable energy stimulation plan is also under preparation for announcement soon. Several news reports have said that the cumulative PV market target will be substantially increased to 10-20GW by 2020 instead of the original 1.8GW. We believe this is a possible scenario as the PV market, in terms of installed capacity, of Germany and Spain in total has already reached ~10GW while their total country area is less than 10% of China. We believe solar farm will be one of the major growth drivers for China’s PV market as solar farm construction can consume large amount of over-supplied mid-stream PV products, as well as polysilicon, in China.
With grid parity still not reached, government policy is the key
Grid parity (the point at which the generation cost of PV electricity equals the retail price of electricity) still has a long way to reach in China. According to various news reports, the average cost of solar farms in China should be between Rmb1.5-2.0/kwh in China, compared with the conventional countrywide coal-fired on-grid electricity tariff of ~Rmb0.3/kwh, PV electricity is still not economical without considering its future potential and environmental positives. Therefore, PV market is highly dependent on government policies, especially the coming feed-in on-grid electricity tariff (FiT).
Jiangsu Province, where GCL is located, has set the official FiT for solar farm development
The NDRC of Jiangsu Province has announced its detail plans to promote PV industry in the province. In particular, the Jiangsu NDRC estimated that the industry average cost of on-grid PV system in the province is ~Rmb2.15/kwh and it targets to lower the cost to Rmb1.00/kwh in the long run, so FiTs in Jiangsu Province for on-the-ground PV farms are set to be Rmb2.15/kwh, Rmb1.70/kwh and Rmb1.40/kwh in 2009-11 respectively. Given GCL’s good relationship with those module suppliers and long-standing experiences in power plants operation, we believe its solar farm cost should be less than the industry average of Rmb2.15/kwh, therefore GCL is likely to make profit through solar farm operation based on a FiT of Rmb2.15/kwh.
Page 12
Kingsway Research We believe a reasonable countrywide FiT will be implemented soon
GCL Poly Energy (30 Oct 2009)
Some Chinese officials previously said the floor for a countrywide standardized FiT is Rmb1.09/kwh, we believe this is an misinterpretation because the physical and economic environments varies across China and different solar energy methods incur different costs, e.g. on-the-ground solar farm should be less costly than Building Integrated Photovoltaic (BIPV) and rooftop solar panel installations. Furthermore, as aforesaid, the average cost of solar farm should be between Rmb1.5-2.0/kwh in China, therefore we believe the FiT should be set at levels higher than this range. With reference to the solar energy development history in Germany and Spain, we believe FiT should be one of the most effective method to stimulate the industry and we believe China will outline the FiTs for different project types and regions in the near future instead of a standardized one applied for the whole country.
Power generation business to grow HoH Specializes in cogeneration power plants for higher profitability
Regarding the power generation division, GCL specializes in cogeneration power plants, which can generate both electricity and steam to achieve higher thermal efficiencies than that of conventional coal-fired plants. Typically, the thermal efficiencies of conventional coal-fired plants and cogeneration plants are 30-40% and 45-90% respectively. Cogeneration power plants are granted by the Chinese government to enjoy higher dispatch priority than that of traditional coal-fired power plants. Some of the cogeneration power plants are also Resources Comprehensive Utilization (RCU) plants or biomass plants, which enjoy even more preferential government supportive policies. We believe this explains why GCL can remain profitable while most of the conventional coalfired power generators were in red during 2008.
The division to grow HoH
On the back of economic recovery in China, nationwide utilization rate of power plants have been gradually improving. With co-generation and RCU power plants have priority access to grids, hence higher utilization than that of traditional coal-fired plants, we believe the utilization rates of the GCL's power plants should maintain satisfactory growth. In addition, coal prices in 3Q09 have been relatively stable, therefore we expect power generation business to grow HoH in 2H09. Although earnings contribution from this division will likely be diminishing due to our expectation of strong growth in the solar division, the power generation business is essential to fund the solar business development.
Macro environment of power generation industry in China Electricity industry in China 53% 52% 51% 50% 49% 48% 47% 46% 45% 44%
Power Coal price at mines (5000-5500 Calorie)
52% 50%
47% -4%
49%
52%
1%
50% 49%
-1%
1%
-2%
-2% -3%
2%
-3%
450
416 418 418 379
400
0% -1% -2%
387
378
390 397 397 395
382 359 361 353
350 329 300
-3% -4%
250
Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 YTD utilization rate
YTD electricity grow th YoY (%)
200 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
Source: Company data & Kingsway Research Estimates
Page 13
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Power generation process of cogeneration plant and conventional coal-fired power plant
Source: Company data
Summary of the power plants under GCL Electricity Sales (MWh)
Plant
Fuel
Kunshan cogeneration plant Haimen cogeneration plant Rudong cogeneration plant Huzhou cogeneration plant Taicang Poly cogeneration plant Jiaxing cogeneration plant Lianyungang Xinneng cogeneration plant Puyuan cogeneration plant Fengxian cogeneration plant Yangzhou cogeneration plant Dongtai cogeneration plant Peixian cogeneration plant Xuzhou cogeneration plant Suzhou cogeneration plant Baoying cogeneration plant Lianyungang Xiexin cogeneration plant Taicang Incineration plant Huitengliang Windpower plant
Coal Coal Coal Coal Coal Coal Coal/Sludge Coal Coal/Sludge/Gangue Coal/Sludge/Gangue Coal/Sludge Coal/Sludge/Gangue Coal/Sludge/Gangue Natural Gas Coal/Biomass Coal/Biomass Municipal Solid Water Wind
Equity interest
Sub-total (Subsidiaries power plants) Funing cogeneration plant Coal/Sludge China Resources Beijing cogeneration Plant Natural Gas
Installed capacity (MW/yr) FY07
FY08
Steam (tonne)
FY09F
1H09
51% 420,480 377,241 362,150 380,092 190,046 51% 262,800 175,450 136,350 148,456 73,060 100% 262,800 161,160 145,780 181,927 89,790 95% 262,800 178,936 174,208 178,722 88,187 100% 394,200 299,506 265,425 227,890 112,187 95% 315,360 179,195 208,640 228,590 112,904 100% 183,960 42,880 72,450 122,404 60,387 100% 315,360 61,482 154,781 223,599 110,396 51% 262,800 185,247 160,891 204,582 101,154 51% 420,480 328,540 277,310 272,201 134,220 100% 262,800 178,910 150,450 175,514 86,570 100% 262,800 192,920 138,623 194,087 95,873 75% 262,800 197,074 155,238 197,106 97,392 51% 3,153,600 1,634,911 1,738,923 2,057,377 1,013,481 100% 262,800 208,101 204,770 211,478 104,560 100% 262,800 193,202 202,327 195,611 96,631 100% 52,560 31,847 42,410 43,728 21,864 100% 433,620 N/A N/A N/A N/A
Steam extraction capacity (tonne/yr) 1,401,600 876,000 876,000 876,000 1,314,000 1,506,720 1,095,000 1,506,720 876,000 1,401,600 876,000 876,000 876,000 1,752,000 876,000 876,000 N/A N/A
FY07 448,092 351,952 422,340 244,474 462,799 627,825 172,221 126,090 292,748 226,874 348,171 177,186 166,838 432,288 144,013 44,101 N/A N/A
FY08
FY09F
483,221 317,597 433,498 348,777 420,365 749,232 194,691 579,192 246,091 167,628 370,072 170,747 176,395 469,363 151,007 85,832 N/A N/A
1H09
435,136 338,201 450,139 332,999 402,999 692,512 149,971 650,060 264,208 209,623 352,989 178,569 213,156 538,094 130,665 115,489 N/A N/A
217,568 165,167 221,276 162,328 196,013 339,528 70,214 317,894 128,367 99,193 172,641 85,780 102,906 261,215 61,966 54,152 N/A N/A
7,621,200 4,626,602 4,590,726 5,243,363 2,588,702 17,861,640 4,688,012 5,363,708 5,454,811 2,656,208 60% 262,800 49% 1,314,000
182,540 N/A
132,890 739,114
192,328 686,238
94,980 336,732
876,000 876,000
154,671 N/A
80,880 289,300
87,807 333,617
40,493 162,482
Sub-total (Associates power plants)
1,576,800
182,540
872,004
878,567
431,712
1,752,000
154,671
370,180
421,425
202,975
Total
9,198,000 4,809,142 5,462,730 6,121,930 3,020,414 19,613,640 4,842,683 5,733,888 5,876,236 2,859,183
YoY%
14
12
18
2
Source: Company data & Kingsway Research Estimates
Page 14
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Earnings forecasts & valuation To relieve part of the margin squeeze pressure through cost reductions
We believe the production cost for polysilicon will fall to US$34/kg in 2010 as TCS inhouse production is expected to reach 98.5% by end-10 from the current 76% and further drop to US$32/kg by 2011 due to the use of direct electricity supply. With est. production volume more than quadrupled in the coming two years, we believe the economies of scale will also contribute to the lower production costs. We assume the cost reduction in the wafer business will be similar to that of polysilicon business. However, we expect gross margin to be squeezed as polysilicon price is still falling faster than the cost reduction. Assuming no solar farm projects, we believe the power generation business will see fairly flat growth of 1-3% p.a. over the next three years, and therefore we expect the solar divisions will become the major revenue and gross profit contributors from next year onward.
Assumptions made in our forecasts Solar sector: Polysilicon (MT) Wafer (MW) Conversion amount (MT/MW) Polysilicon used for wafer production (MT) Total polysilicon production (MT) YoY%
2H09F 3,684 40 7.9 316 4,000 +116.2
2010F 10,517 500 7.2 3,600 14,117 +252.9
2011F 11,945 1,300 7.1 9,230 21,175 +50.0
2012F 9,030 2,340 7.0 16,380 25,410 +20.0
Polysilicon Capacity (MT) Sales (MT) ASP (US$/kg) Cost (US$/kg) Revenue (Rmb'm) Gross profit margin (%) Gross profit (Rmb'm)
18,000 3,684 63 37 1,578 41.3% 651
21,000 10,517 57 33 4,055 41.3% 1,675
21,000 11,945 52 30 4,237 41.6% 1,764
21,000 9,030 50 30 3,043 39.1% 1,190
Wafer Capacity (MT) Sales (MT) ASP (US$/kg) Cost (US$/kg) Revenue (Rmb'm) Gross profit margin (%) Gross profit (Rmb'm)
40 0.70 0.41 191 41.3% 79
1,000 500 0.63 0.38 2,151 39.2% 843
2,000 1,300 0.58 0.34 5,146 41.9% 2,158
2,800 2,340 0.55 0.32 8,800 41.3% 3,633
Source: Kingsway Research estimates
Change in sales mix 2008
2009F
2010F
Polysilicon 28%
Power generation
P ower g e n e ra t i o n & coal 39%
Pol ys i li c on 40%
Wafer 3%
& coal Power generation & coal
69% W afer 21%
100%
Source: Company data & Kingsway Research Estimates
Page 15
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Change in gross profit contributions from each division 2008
2009F
2010F Power generation & coal 18%
Power generation & coal
Polysilicon
43%
Polysilicon
51%
55% Wafer 27% Power generation
Wafer
& coal
6%
100%
Source: Company data & Kingsway Research Estimates
Valuation With 30% upside, we initiate coverage with a BUY recommendation
We use DCF model for valuation, which values the company at HK$2.60 per share. We use a WACC of 12.5% with a terminal growth rate of 2%. In the calculation of WACC, we estimate beta and debt ratio from its peers by weighting 60%, 20% and 20% on polysilicon, wafer and IPP stocks respectively with reference to their earnings contribution from each divisions in FY10F. The company is currently trading at par with the blended average forward FY09 and FY10 PERs of its peers, but trading at a 20% discount to the industry’s average in FY11. Given its first mover advantages among Chinese polysilicon players, proven cost saving records and the aforesaid competitive advantages, the discount looks unjustifiable. Our valuation of HK$2.60 per share implies a 11F PER of 12.0x, which is about in line with the industry’s average. Therefore we set our target price at HK$2.60/share. With upside potential for 30%, we initiate coverage with a BUY recommendation.
DCF Model EBITDA Chg in working cap Adjusted tax Capex Unleveraged FCF YoY%
FY09 1,391 (1,296) (163) (2,930) (2,997) -2359%
DCF 11-17 PV (Terminal value) EV (End-10) (Rmb'm) Yer-end net cash/(debts) F.D. equity value (End-10) (Rmb'm) F.D. no. of shares (m) F.D. equity value/share (Rmb) F.D. equity value/share (HK$)
10,610 30,470 41,080 (12,687) 28,393 12,363 2.30 2.60
Risk-free rate Risk premium Beta Cost of equity Cost of debt Tax rate After-tax cost of debt Debt to total capital WACC Terminal growth
FY10 3,162 (423) (465) (3,731) (1,457) -51%
FY11 4,561 (281) (770) (3,724) (213) -85%
FY12 5,505 (254) (1,020) (3,556) 675 -416%
FY13 6,374 (233) (1,277) (4,589) 275 -59%
FY14 7,611 (285) (1,531) (4,445) 1,351 391%
FY15 8,887 (235) (1,810) (2,106) 4,735 251%
FY16 8,992 4 (1,826) (150) 7,021 48%
FY17 9,094 13 (1,856) (150) 7,101 1%
3.0% 10.0% 1.30 16.0% 5.6% 25.0% 4.2% 30.0% 12.5% 2.0%
Source: Kingsway Research estimates
Page 16
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Peers Comparison
Company name
Ticker
Closing price
Market Cap (USD in Mn)
Revenue (USD in Mn)
Net income (USD in Mn)
Net debt (USD in Mn)
Debttocapital ratio (%)
Net debt ratio (%)
Gross margin (%)
Net margin (%)
ROE (%)
Est. Div yield (%)
Hist PE (X)
1Yr PE (X)
2Yr PE (X)
3Yr PE (X)
Beta
1.2
Polysilicon manufacturers Wacker Chemie
WCH GR
104.95
8119.0
6322.0
646.3
(45.9)
11.6
(1.4)
27.6
10.2
22.4
1.2
57.0
40.7
13.8
10.7
Renewable Energy
REC NO
36.23
4264.5
1470.6
550.1
876.0
28.5
26.4
N/A
37.4
21.7
0.0
N/A
N/A
16.7
9.8
1.2
Tokuyama
4043 JP
575.00
2201.8
3007.5
(55.9)
401.3
33.6
14.0
28.8
(1.9)
(2.9)
1.0
N/A
23.4
18.3
13.2
1.1
12.72
2843.6
2004.5
387.4
(1104.5)
1.5
(51.4)
50.1
19.3
18.8
0.0
43.9
N/A
14.5
9.9
1.3
215500.00
3805.8
1963.7
294.1
103.5
29.7
7.4
33.8
15.0
27.8
0.9
13.8
N/A
N/A
N/A
1.3
21.0
(1.0)
35.1
16.0
17.6
0.6
38.2
32.0
15.8
10.9
1.2
MEMC
WFR US
OCI
010060 KS Average
Wafer manufacturers LDK Solar
LDK US
7.14
808.3
1643.5
70.2
1005.0
61.9
49.4
5.4
4.3
9.6
0.0
N/A
N/A
21.4
9.0
1.8
Solargiga
757 HK
1.84
405.3
214.9
12.0
(4.2)
16.1
(1.9)
15.1
5.6
8.8
0.2
31.7
N/A
22.5
20.4
N/A
Trina Solar
TSL US
33.86
1176.9
831.9
61.4
267.9
48.0
32.2
19.8
7.4
15.3
0.0
18.1
18.5
14.5
11.7
1.8
GT Solar
SOLR US
5.36
768.7
541.0
88.0
(107.1)
0.0
(130.8)
39.1
16.3
101.4
N/A
8.0
10.3
9.2
8.9
N/A
Solarworld
SWV GR
15.25
2527.2
1324.3
218.7
(190.5)
Average
45.4
(8.9)
N/A
16.5
19.4
1.0
15.1
16.4
14.6
11.8
1.5
34.3
(12.0)
19.8
10.0
30.9
0.3
18.2
15.1
16.4
12.4
1.7
IPP in China China Resources Power
836 HK
16.22
9787.2
3438.4
220.6
4215.4
55.8
47.8
N/A
6.4
6.6
1.9
23.4
15.4
12.8
11.0
0.9
Huaneng Power
902 HK
5.10
12212.7
9710.0
(566.8)
15190.4
72.0
68.3
N/A
(5.8)
(9.4)
4.5
N/A
10.7
10.6
10.6
0.9
Datang International Power
991 HK
3.68
12210.6
5302.2
109.6
15683.4
78.5
75.0
N/A
2.1
2.7
2.5
35.5
19.8
14.8
13.0
1.2
Huadian
1071 HK
2.20
3881.7
4317.9
(368.5)
8460.8
78.9
76.4
N/A
(8.5)
(19.9)
3.2
N/A
9.3
7.4
8.0
1.0
China Power International
2380 HK
2.17
1009.5
1386.5
(98.4)
1513.8
GCL Poly Energy At target price
58.9
52.2
N/A
(7.1)
(7.1)
2.6
N/A
12.7
9.9
9.5
0.9
Average
68.8
64.0
N/A
(2.6)
(5.4)
2.9
29.4
13.6
11.1
10.4
1.0
Weighted average
33.2
9.8
31.3
11.1
15.6
1.0
32.5
24.9
15.0
11.6
1.3
54.5
47.9
13.5
3.6
5.6
0.5
14.2
24.5
14.6
9.2
1.3
31.9
19.0
12.0
3800 HK
1.99
3174.5
2.60
4113.4
474.3
16.9
383.5
Source: Bloomberg & Kingsway Research estimates Closing price @ Oct 29, 2009
Key risks 1) With grid party still not reached, government policies in each country are the keys. 2) Polysilicon price is expected to be under pressure due to overcapacity. 3) The amount of new polysilicon production capacity to be built is highly uncertain. 4) Cost saving measures may not achieve on time. 5) Direct electricity supply is subject to central government’s approval. 6) Short-listing history. 7) Expansion to other solar farm operation. 8) Technology obsolescence risk 9) High gearing implies high equity funding risk.
Page 17
Kingsway Research
GCL Poly Energy (30 Oct 2009)
Financial forecast Year ended 31 Dec Income Statement (Rmbm) Polysilicon Wafer Power generation Coal trading Turnover YoY% COGS Gross profit Gross margin Other income Selling & distribution Admin Other opex Total opex Operating profit (EBIT) Operating margin Provisions Finance costs Profit after financing costs Associated companies & JVs Pre-tax profit Tax Minority interests Net profit YoY% Net margin Gross profit by divisions Polysilicon
2007
2008
2009F
2010F
2011F
0 0 1,845 0 1,845 98 (1,482) 362 19.6%
0 0 3,057 637 3,693 100 (3,196) 497 13.5%
1,585 191 3,337 562 5,675 54 (4,385) 1,291 22.7%
4,073 2,151 3,403 562 10,190 80 (7,092) 3,097 30.4%
4,256 5,146 3,471 562 13,436 32 (8,923) 4,513 33.6%
109
168
97
98
100
0 (143) (67) (209)
(7) (213) (24) (245)
(11) (397) (37) (446)
(20) (688) (61) (769)
(26) (873) (67) (966)
262 14.2% (337) (162)
421 11.4% 0 (259)
942 16.6% 0 (299)
2,427 23.8% 0 (509)
3,647 27.1% 0 (579)
(236) 20 (216) 4 (55) (267) (546) -14.5%
162 45 207 (27) (48) 131 (149) 3.6%
642 19 661 (112) (67) 482 267 8.5%
1,918 19 1,937 (368) (68) 1,501 211 14.7%
3,068 20 3,088 (648) (70) 2,369 58 17.6%
0
0
654
1,683
1,771
Wafer Power generation Coal trading
0 362 0
0 459 38
79 524 33
843 538 33
2,158 550 33
EBITDA EBITDA margin
75 4.0%
649 17.6%
1,391 24.5%
3,162 31.0%
4,561 33.9%
EPS (Rmb) YoY% DPS (Rmb)
(0.274) (279) 0.000
0.130 (147) 0.023
0.072 (45) 0.007
0.121 68 0.012
0.191 58 0.019
Year ended 31 Dec Cash Flow (Rmbm) EBITDA Chg in working cap Others Operating cash Tax Net cash from operations
2007E
2008E
2009F
2010F
2011F
408 (191) (1) 216 (3) 213
683 (23) (31) 630 (17) 613
1,391 (1,296) 0 96 (8) 87
3,162 (423) 0 2,739 (157) 2,582
4,561 (281) 0 4,281 (368) 3,913
(264) (115) 53 10 191 (124)
(338) (129) 19 18 (21) (452)
(2,930) 0 0 3 0 (2,926)
(3,731) 0 0 4 0 (3,727)
(3,724) 0 0 7 0 (3,717)
89
161
(2,839)
(1,144)
195
1,048 (329) (162) (47) 179 (150) 539
0 0 (259) (46) (230) (3) (539)
0 0 (299) 22 500 0 223
0 0 (509) (89) 2,000 0 1,402
0 0 (579) (150) 1,500 0 771
628 188 0 (12) 804
(378) 804 0 (13) 414
(2,616) 414 2,419 0 216
258 216 0 0 474
967 474 0 0 1,441
0.053
0.364
(0.017)
0.168
0.270
Capex Investment Dividend received Interests received Others Investing cash FCF Issue of shares Buy back Interests paid Dividend paid Net change in bank loans Others Financing cash Net change in cash Opening cash Cash from acquisition Adjustment Closing cash CFPS (Rmb)
Source: Company data & Kingsway Research estimate
Year ended 31 Dec Ratios Gross margin (%) Operating margin (%) Net margin (%) Selling & dist'n exp/Sales (%) Admin exp/Sales (%) Payout ratio (%) Effective tax (%)
2007
2008
2009F
2010F
2011F
19.6 14.2 (14.5) 0.0 7.7 0.0 1.9
13.5 11.4 3.6 0.2 5.8 17.8 13.1
22.7 16.6 8.5 0.2 7.0 10.0 17.0
30.4 23.8 14.7 0.2 6.8 10.0 19.0
33.6 27.1 17.6 0.2 6.5 10.0 21.0
Total debt/equity (%) Net debt/equity (%) Current ratio (x) Quick ratio (x)
153.1 107.1 0.81 0.75
134.5 105.5 0.55 0.45
141.4 132.0 0.43 0.30
141.4 130.7 0.57 0.38
127.7 110.9 0.74 0.52
Inventory T/O (days) AR T/O (days)
21 49
27 37
70 40
70 40
70 40
AP T/O (days)
24
28
28
28
28
Cash conversion cycle (days)
45
35
81
81
81
Asset turnover (x) Financial leverage (x) EBIT margin (%)
0.27 3.02 14.2%
0.52 2.93 11.4%
0.37 2.90 16.6%
0.39 2.91 23.8%
0.44 2.84 27.1%
Interest burden (x) Tax burden (x) Return on equity (%)
(0.82) 1.24 (11.7)
0.49 0.63 5.4
0.70 0.73 9.0
0.80 0.77 16.7
0.85 0.77 21.9
Year ended 31 Dec Balance Sheet (Rmbm) Fixed assets Goodwill Associated companies & JVs Long-term investments Other non-current assets Non-current assets
2007
2008
2009F
2010F
2011F
4,901 117 73 12 26 5,128
5,185 116 245 65 60 5,671
14,123 6,845 264 65 41 21,338
17,114 6,845 284 65 41 24,348
19,917 6,845 303 65 41 27,171
Inventories AR Prepayments & deposits Other current assets Cash Current assets
126 380 166 262 804 1,739
259 366 102 258 414 1,399
841 620 157 831 216 2,666
1,361 1,114 283 831 474 4,062
1,712 1,468 373 831 1,441 5,825
Total assets
6,867
7,070
24,004
28,410
32,996
AP Tax Accruals & other payables Bank loans Convertible loan notes
159 5 456 1,492 0
246 8 581 1,652 0
219 157 893 2,648 498
224 368 1,604 2,648 498
228 648 2,115 2,648 498
Senior notes Other current liabilities Current liabilities
0 46 2,157
0 54 2,542
1,587 164 6,167
1,587 164 7,093
1,587 164 7,889
Bank loans Senior notes Deferred tax Deferred income Embedded derivatives Advances from customers MI Non-current liabilities
1,988 0 22 62 0 0 364 2,437
1,597 0 32 75 0 0 408 2,112
6,198 793 101 216 10 1,752 475 9,544
8,198 793 101 216 10 1,752 543 11,613
9,698 793 101 216 10 1,752 613 13,183
Total net assets
2,273
2,416
8,293
9,704
11,924
Shareholder's equity Share capital Reserves
2,273 93 2,180
2,416 93 2,323
8,293 973 7,319
9,704 973 8,731
11,924 973 10,951
2.34
2.48
0.67
0.78
0.96
3,480 (2,434)
3,249 (2,548)
11,725 (10,944)
13,725 (12,687)
15,225 (13,220)
Book NAV (Rmb) Total debts Net cash/(debts)
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Kingsway Research
GCL Poly Energy (30 Oct 2009)
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