GCL reported 2H11 solar business revenue/gross margin of HK$7.75bn/ 29%vs. our estimates of HK$7.62 bn/33%, mainly due to lower-than-expected waferASP partially offset by better-than-expected unit cost structure. Total wafer/polyshipment was in-line with our expectation, despite different product mix.

Significantly higher-than-expected OPEX expense and higher borrowingexpense negatively impacted earnings. GCL reported diluted 2011 EPS ofHK$0.28 vs. our estimate of HK$0.33.

Key takeaways from the call: (1) Progress in GCL’s cost reduction efforts inpoly/wafer were better than we expected, reaching US$18.6/kg and US$0.13/wat Dec-end; (2) we believe GCL has a clear roadmap to continue with verticalintegration at the solar upstream level (i.e. self-development of enlarged CVDreactors, and ingot furnaces; 100% in-house manufacturing of G5/G6 crucibles;and recycling of 70%-90% silicon carbides and cutting fluid); (3) reducing its highleverage ratio is the key area to improve on in 2012, in our view.

What to do with the stock。

We fine-tune our 2012E-2014E EPS. We believe recent negative news flow onthe sector’s 4Q earnings outlook and Germany’s FiT cut have been mostlypriced into the stock’s price. Late 4Q11 was a difficult period for many tier-1 polymaker (including GCL), given the large amount of raw material destocking.

Ongoing solar trading negotiations between the US and China could also pose arisk to GCL, although we believe the company will have the ability to transfersome of its customer base to other regions, if necessary, e.g., Taiwan and NorthAmerica. Hence, we maintain our Buy rating on GCL with Director’s Cut-based12-m target price of HK$2.8, implying 12% upside. The stock is trading at 2012EEV/EBITDA of 7X vs. peer average of 8X. Risks: lower-than-expected globaldemand/ASP; higher-than-expected costs.

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