Back to profit in 2H13, but margin improvement seems to have been priced-in

GCL’s FY13 net loss of c.HK$664m was less than consensus' HK$1-1.1bn andour recurring loss estimate of HK$1bn. We see margins further improving withhigher polysilicon and wafer prices in 1H14. However, the market seems tohave already built in a higher poly price expectation and there can be risk ofslowing seasonal demand and softening pricing stepping into 2Q14. We viewthe risk-adjusted reward as unattractive at the current levels; reiterating Hold.

A loss making FY13, but a turnaround in 2H13

GCL reported a FY13 net loss of HK$664m, improved from a net loss ofHK$3.5bn in FY12. The narrower loss yoy was mainly due to reducedimpairments and better margins from the polysilicon and wafer business inFY13. Stripping out one-offs, recurring net loss was c.HK$700-800m in FY13.Poly production and wafer processing costs further reduced to US$16.4/kg andUS$0.09/W in 4Q13, respectively.

Captive power plant and FBR capacity to start operation in May and late 2014

GCL indicates that its captive power project is scheduled to becomeoperational in May and can help reduce electricity costs by over 50%. The FBRupgrade is targeted to start operation in 2H14 and become fully operational in2015. GCL is also planning to add another 5GW of wafer production capacityand increase its total manufacturing capacity to 15GW p.a.

DCF-based valuation of HK$2.15; risks

Our target price is based on DCF, assuming 11.2% WACC (3.1% risk-free rate,1.8 beta, 5.6% equity risk premium, 5.3% after-tax cost of debt, 25% targetdebt to total capital). Key upside/downside risks: change in government policy,lower-/higher-than-expected decline in polysilicon and wafer ASP,greater/lower-than-expected demand for solar products and faster-/slowerthan-expected drop in production costs (p.6).

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