Affected by the release of production capacity and the increasing pressure on oversupply in the silicon industry, the price of silicon materials has dropped sharply since 2023, and the company's profitability has clearly declined as a result. However, by continuously improving the production capacity layout and optimizing product quality and cost control capabilities, the company is expected to maintain a strong competitive advantage in the market and steady profitability. We lowered the company's 2023-25 EPS forecast to 2.85/2.03/2.29 yuan. Based on the average valuation of comparable companies, we gave the company a target price of 43 yuan for 2023, and lowered the rating to “increase in holdings.”

Dragged down by sharp price cuts for silicon materials, the company's profit declined markedly. The company 2023H1 achieved operating income of 9.325 billion yuan (-42.9% YoY), net profit of 4.426 billion yuan (-53.5% YoY), corresponding gross profit margin of 57.7% (-12.8pcts YoY); of these, 23Q2 achieved revenue of 4.468 billion yuan (-45.6% YoY, -8.0% QoQ), net profit of 1,515 billion yuan (-70.9% YoY, -48.0% QoQ), gross profit margin of 41.9% (-34.9pcts YoY, - 30.3pcts QoQ). The company's 2023H1 performance declined markedly, mainly due to the reversal of supply and demand patterns due to the release of production capacity in the silicon industry and a sharp drop in prices.

Production and sales of silicon materials have increased, and inventories have been removed, and new production capacity is expected to be released quickly. The company's 2023H1 polysilicon production and sales volume reached 792/77,800 tons (+18.7%/+0.6% YoY), respectively, ranking first in the industry. Among them, 23Q1/2 output was 3.38/45,300 tons, and sales volume was 2.53/51,500 tons, respectively. The sharp increase in Q2 sales volume was mainly due to the removal of inventory accumulated in Q1 and the release of 100,000 tons of new production capacity in Inner Mongolia. The company's monocrystalline silicon wafer output ratio has reached more than 99%, and has achieved mass sales of N-type silicon materials, so it is expected to enjoy a certain product premium. Currently, the company's silicon production capacity is 205,000 tons. With Baotou Phase II's 100,000 ton production capacity expected to be completed and put into operation by the end of 2023, the polysilicon production capacity will reach 305,000 tons at that time. Moreover, the company's first phase of the 150,000 ton industrial silicon project is also scheduled to be completed and put into operation in 2023Q3, which is expected to achieve a high proportion of self-sufficiency in industrial silicon raw materials and optimize costs. Taking into account factors such as rising new production capacity and annual maintenance, the company expects its 2023Q3 polysilicon production to reach 55,57,000 tons, and annual output to reach 193-198,000 tons, a slight increase of 30,000 tons from the guidelines at the beginning of the year.

The price of silicon materials is under pressure, but the company continues to optimize costs and its profitability has returned to a reasonable level. Affected by cyclical inventory consumption and the release of new production capacity in the silicon industry, domestic polysilicon supply has increased dramatically since the end of 2022, leading to a rapid decline in polysilicon prices. The company's 2023H1 silicon ASP was 120.52 yuan/kg (-43.4% YoY), of which Q2 dropped to 86.35 yuan/kg (-45.3% QoQ); silicon production costs and cash costs were 51.36 and 45.05 yuan/kg (-18.7%/-22.1% YoY), respectively, where Q2 was 50.34 and 44.13 yuan/kg (-5.8%/-6.1% QoQ), and the cost declined with the price reduction of raw materials.

We estimated that the company's gross margin of 2023H1 silicon material was 57.4%, of which Q2 was 41.7%, and the average net profit per ton of Q2 dropped to 29,000 yuan. We expect that the silicon industry will still face the risk of oversupply in the next 1-2 years. Prices may remain relatively low overall, and the profitability of the industry may weaken markedly. Meanwhile, with product quality and cost advantages, the company is expected to maintain a reasonable and stable profit level.

Risk factors: PV installed capacity falls short of expectations; silicon prices continue to drop sharply; competition in the polysilicon industry intensifies; company capacity release falls short of expectations; silicon costs fall short of expectations.

Profit forecast, valuation and rating: Since 2023Q2 silicon prices fell more than expected and the industry still faced the risk of overcapacity, we lowered our net profit forecast for 2023-25 to 61.0/43.3/4.9 billion yuan (the original forecast value was 128.8/98.9/10.24 billion yuan). The corresponding EPS forecast was 2.85/2.03/229 yuan, and the PE corresponding to the current price was 14/20/17 times. Based on current industry comparable companies (Tongwei Co., Ltd., TBEA, Hesheng Silicon), Wind's average profit forecast for 2023 is about 2.1 times the average PB, giving the company a target price of 43 yuan; considering that overcapacity pressure in the silicon industry is expected to continue and that profit recovery flexibility is limited, the company's rating was lowered to “increase holdings.”