Benefiting from the sharp rise in silicon prices and the continuous release of the company's production capacity, the company's 2022 performance ushered in significant growth. Since 2023, the company has accelerated the launch of new silicon production capacity, but considering that silicon prices may clearly fall, tons of profit will gradually return to normal levels. As a result, the company's 2023-24 EPS forecast was lowered to 6.03/4.63 yuan, and the new 2025 EPS forecast was 4.79 yuan. Based on the average valuation of comparable companies, the company was given 10 times PE in 2023, corresponding target price of 60 yuan (original target price 71 yuan), maintaining the “buy” rating.

Performance has increased dramatically, and profitability has increased. In 2022, the company achieved operating income of 30.940 billion yuan (+185.6% YoY), net profit of 19.121 billion yuan (+234.1% YoY), corresponding gross profit margin of 74.8% (+9.2pctSyOY); 22Q4 achieved revenue of 6.263 billion yuan (+147.8% YoY, -24.9% QoQ), and net profit of 4,036 billion yuan (+222.7% YoY, -27.4% QoQ), gross profit margin of 78.2% (+) 17.8pctsYOY, -2.7pcts QoQ). The company's performance increased dramatically in 2022, mainly due to the high price of silicon materials and the further release of the company's production capacity, which ushered in a sharp rise in volume and price.

Production and sales of silicon materials continue to increase, and new production capacity is expected to be implemented at an accelerated pace in 2023. The company's polysilicon production and sales volume in 2022 reached 1338/132,900 tons (+54.5%/+76.4% YoY) respectively, accounting for 16.2% of domestic production, ranking first in the industry. Among them, 22Q1-4 output was 3.14/3.53/3.34/33,300 tons respectively, and sales were 3.88/3.76/331/23,400 tons respectively. Of these, Q4 sales declined somewhat as the industry entered a low production season in December. The company's monocrystalline material output ratio reached more than 99% in 2022, more than 90% of its products reached electronic grade level, and N-type silicon materials have also been supplied in batches, which have been verified by mainstream downstream customers. Currently, the company has a total silicon production capacity of 105,000 tons. The company expects its new production capacity of 100,000 tons in Baotou Phase I in Inner Mongolia to be put into operation in April 2023 and reach production in June, and Baotou Phase II is expected to have 100,000 tons of production capacity completed and put into operation by the end of 2023. At that time, the nominal production capacity is expected to reach 305,000 tons. Taking into account factors such as rising new production capacity and annual maintenance, the company's polysilicon production is expected to reach 19-195,000 tons in 2023.

The profit of 22Q4 silicon tonnes reached a new high, and the profit of silicon material may gradually decline in 2023. Driven by insufficient supply of silicon materials, the company's silicon ASP in 2022 was 231.41 yuan/kg (+61.6% YoY), of which Q4 reached 266.01 yuan/kg (+6.7% QoQ), and silicon production costs and cash costs were 58.56 and 53.06 yuan/kg (+18.7% /+21.7% YoY) respectively. Among them, Q4 was 58.48 and 52.02 yuan/kg (+21.7%/21.4% QoQ), respectively. Costs rebounded as raw materials and electricity prices increased. We estimate that the company's average net profit per ton of silicon reached 144,000 yuan in 2022, of which Q4 reached 172,000 yuan (+2.4% QoQ). We expect that the silicon industry's production capacity will expand at an accelerated pace in 2023. The pattern of undersupply may be reversed, the price of silicon materials is expected to drop significantly, and the company's silicon profitability may gradually decline.

Promote the implementation of projects such as semiconductor-grade silicon materials, improve the industrial layout, and help long-term growth. The company has continuously carried out technological innovation and product upgrades, and introduced and trained a research and development team for melt-grade silicon materials in the semiconductor region. According to its announcement, the company expects the first phase of the 1,000-ton project out of 21,000 tons of semiconductor-grade silicon production capacity planned in Baotou, Inner Mongolia, to be put into operation in 2023Q3. After the product is verified by downstream customers, it will take the opportunity to build the next 20,000 tons of production capacity. Furthermore, the company is also steadily promoting vertical and horizontal expansion of industrial silicon, silicone, etc., improving the industrial layout and strengthening long-term growth capacity.

Risk factors: China's PV installation fell short of expectations; silicon prices continued to drop sharply; competition in the polysilicon industry intensified; the company's production capacity release fell short of expectations; and the decline in silicon costs fell short of expectations.

Profit forecast, valuation and rating: Based on the company's 2022 annual report, and considering that the decline in silicon prices since 2023 has exceeded expectations and that industry manufacturers have expanded production, silicon prices are expected to fall significantly. We lowered the company's 2023/24 net profit forecast to 128.8/9.89 billion yuan (the original forecast was 18994/137.1 billion yuan), adding the 2025 net profit forecast to 10.24 billion yuan. The corresponding 2023-25 EPS forecast is 6.03/4.63/4.79 yuan, corresponding to current prices, respectively. It's 8/11/10 times. Based on current industry-comparable companies (Tongwei Co., Ltd., TBEA, Hesheng Silicon), Wind's average PE in 2023 is about 10 times higher, giving the company a target price of 60 yuan (original target price of 71 yuan) to maintain the “buy” rating.