Discontinuation and impairment of rod-shaped silicon production capacity dragged down performance: the company's net profit for the first half of the year fell 21.9% year on year to 5.52 billion yuan, of which 1.43 billion yuan in the second quarter, down 65.1% from the previous month. It was lower than our expectations, mainly due to Xuzhou's 45,000 tons of rod-shaped silicon production capacity being discontinued and replaced with granular silicon in June, accounting for 800 million yuan in fixed asset impairment. In the first half of the year, polysilicon produced 11,000 tons (82,000 tons of granulated silicon), shipped 101,000 tons (720,000 tons of granulated silicon), 90,000 tons of foreign sales (65,000 tons of granulated silicon), average sales price of 124,000 yuan/ton, revenue of 1.1 billion yuan; 257 gigawatts of silicon wafers (self-produced 13.6 gigawatts), revenue of 8.1 billion yuan. The sharp drop in polysilicon prices led to a year-on-year decline in gross margin of the PV materials segment by 6.1 percentage points to 41.9%.

The cost advantage of granular silicon is obvious, and the increase in single-module production capacity will further reduce the cost: the company currently has a production capacity of 280,000 tons of polysilicon holding capacity, and all of it is low-cost granular silicon. Due to factors such as falling industrial silicon prices and reduced fixed costs shared per unit of product after full production, the production cost at the Leshan base dropped sharply from 46,200 yuan/ton at the end of March to 35,500 yuan/ton in July, which is at the lowest level in the industry. The 100,000-ton base in Hohhot, which began construction in November last year, is scheduled to be put into operation in October. After production is put into operation, the company's granular silicon production capacity will increase to 400,000 tons. The company expects that after full production, the production cost at the Xuzhou base will be 2,000 yuan/ton higher than Leshan, and that the Baotou and Hohhot bases will be close to Leshan. The company plans to increase the single module size of the proposed project from 20,000 tons to 60,000 tons, which can reduce the investment amount per unit of production capacity by 30%, save energy consumption, etc., which will further reduce the cost of granulated silicon. Until the 60,000-ton module design was perfected, the company had no proposed construction projects.

The quality of granulated silicon continues to improve: At present, the proportion of the company's products with a total metal impurity content of less than 0.5 ppbw (meeting the most stringent N-type requirements) of granular silicon has reached 70%, and some bases have reached 85%. At present, the company accounts for more than 20% of the N-type supply share of domestic suppliers, exceeding 15% of its overall market share, reflecting that granular silicon still has strong competitiveness in the N-type market. However, at present, granular silicon still has disadvantages such as the breakage rate being higher than that of the dense material of the rod-shaped silicon faucet. As a result, the granular silicon used for N-type has not yet been sold at the price of the N-type material.

The cost advantage will drive a rapid increase in market share, reaffirming purchases: we expect the company's granular silicon equity production to increase from 214,000 tons in 23 to 356,000 tons in 25. The price of polysilicon fell faster than expected from the beginning of the year to now. We expect the company's average sales price to drop 58% year on year this year, and further drop to 66,000 yuan per ton next year (the current price is 80,000 yuan), but the cost will continue to drop. We lowered our profit forecast for 2023-25 by 41%/17%/8%, and lowered our target price from HK$2.70 to HK$1.91, based on 0.88 times the forecast market account rate for 2024 (average over the past 5 years). We are still optimistic that the company will quickly increase its market share with cost advantages and renew its purchase.