The full production process at the Malaysian plant has been slower than expected-the company said the Malaysian wafer plant would start production in the second quarter of 2016, seriously lagging behind expectations that it would start production by the end of 2015. We believe that its full capacity of 300 megawatts will be delayed until at least the fourth quarter.
High uncertainty in downstream business-the company plans to work with strategic investors introduced in January 2016 to develop its solar business (mainly distributed photovoltaic solar) through self-construction or acquisition, with the goal of achieving 200MW within the next two years. At present, the competition for photovoltaic power generation is fierce, and distributed photovoltaic solar energy is easy to cause property rights disputes, so we estimate that only 30MW projects can be realized in 16 financial years. As a reference, it took Societe Generale (750HK) nearly six months to get its full 50MW installed capacity online in Guangdong, which is considered one of the easiest places to get an Internet license.
Profit margins in the single crystal wafer business are likely to improve in 16 years-the prices of both 156mmX156mm and 125mmX125mm wafers fell 23.13 per cent and 14.1 per cent respectively in fiscal 15. We expect its gross profit margin to increase in fiscal year 16 for the following reasons: 1) We believe that the average selling price of single crystal silicon wafers has bottomed out at the end of February 2016, and the current moderate upward trend will continue; 2) the average selling price of major raw materials (polysilicon) will not rise significantly in 2016; 3) the potential for lower production costs brought about by production in Malaysia (processing costs can be reduced to up to US $0.11 / W). We estimate that the gross profit margin of single crystal silicon wafers in fiscal year 16 is about 5% (15% is about 2%).
The heavy contract burden will be alleviated-the company has suffered huge impairment losses since 2012 due to several irrevocable contracts for the purchase of raw materials (the contract period runs to 2018). In early 2016, the company successfully negotiated with the supplier to waive the contract minimum purchase quantity and waive / reduce the contract purchase price. Starting from 2016, we believe that the impairment loss from the contract will be less than 20 million yuan (the impairment loss from the contract for the 15 fiscal year is 153 million yuan).
Fiscal year 16 is likely to break even and upgrade to buy-despite serious delays in capacity construction in Malaysia and uncertain prospects for solar power plants, however, we believe that the potential for improved profit margins and the mitigation of the adverse effects of inventory impairment and onerous contracts will reduce 16-year losses to 13 million yuan. Combined with the average selling price of the latest photovoltaic solar products and risk considerations, the target price is reduced to HK $0.777, meaning 0.92 times 16-year price-to-book ratio. The rating was upgraded to buy.