Polydemandpickingupwithlimitednewcapacitycomingin
TakeawaysfromDay2ofoursolarfieldtrip:(1)DrivenbystrongChinademandandtheprohibitionofprocessingbasedimportpoly,domesticpolymakerslikeTBEA(600089.SS,NotCovered)andDAQO(DQ,NotCovered)arerunningatfullutilizationratecurrently.Inventoryhasdecreasedsignificantlyin3Q14vs.2Q14.(2)Mosttier-1domesticpolymakersincreasedtheirsellingpricesinceSeptember,bringingtheASPtothecurrentUS$22.3/kg,3%higherthan2Q14.(3)Domesticpolymakersexpecttheshipmentgrowthtobeacceleratedin4Q14,contributedbyhighersolarinstallationandlowerpolyimport.AsthecurrentpolyASPisevenlowerthanthecashcostofsmall/mediumpolymakersinChina,plusthenewcapacity(DAQO’s6,000MT,TBEAdoesnothavecapacityexpansionplan)willonlycomeintooperationsince2Q15,weexpectthepolysupply/demandtobetighterin4Q14,whichprovidessupportforpolypriceinthecomingmonths.
HigherreturnpotentialofD/Gprojectsattractingmoreattention
ThecurrentunleveredIRRfordistributedsolar(D/G)projectsisover10%vs.utility-scaleprojects’8%-9%.D/Gprojectsalsohavehigherlocalsubsidiesinsomeprovinces(e.g.,Zhejiang,Anhui)andhavebetterpaymentscheme(electricityincomenormallybeingpaidmonthlyorquarterly).Meanwhile,theinstallationcostofD/GprojectsfellfromRmb7.5-8/Win1H14tothecurrentRmb7-7.2/W.Theprojectdevelopersexpecttheinstallationcostmayfurtherfallby5%-10%annuallyinthenext2-3years,providingmoreattractivereturnsforD/Gprojects.Theyalsoexpectthedomesticsolarinstallationwillcontinuetobehigherin2015vs.2014,withmorecontributionfromD/Ginstallations.
GCL-Poly(3800.HK,Buy)wellpositionedfrombetterpoly/waferoutlookandfutureverticalintegration
Webelievethepositiveoutlookonpolypricewouldalsorendersupportonwaferprice,thusbenefitingGCL-Poly.GCL-PolywillalsobenefitfromitssubsidiaryGCLNewEnergy’s(451.HK,NotCovered)projectdevelopmentplan:completing500-600MWprojectsbytheendof2014andtotalconnectedprojectsreaching1GWin2015.Meanwhile,asGCL-Poly’sparentcompanyisparticipatingincell/modulemakerChaoRi’sannounceddebtrestructuring,weexpectthiswillbeanimportantstepforGCL-Poly’sfurtherverticalintegrationalongthesolarvaluechain,whichwillhelpitlockinhighermarginsfromupstreampolytodownstreamproject.KeepBuyonGCL-Polyand12mEV/GCIvs.CROCI/WACCbasedTPofHK$3.4.Risks:Lower-than-expectedASP.