Our view: GCL Technology takes the silicon materials business as the core of profit, as well as silicon wafers and photovoltaic power plant businesses, and lays out perovskite business through GCL Optoelectronics. The company anchors the granular silicon technology route, expands production capacity in an orderly manner, and remains in the lead. The power consumption per unit of granular silicon is low, and the cost advantage is outstanding, helping the company get through the cycle. The quality of granular silicon products is gradually improving. With the subsequent resolution of turbidity problems, it is expected that the price difference with rod-shaped silicon N-type products will be reduced. Furthermore, since the company's shareholding ratio in Leshan, Baotou, and Hohhot bases does not exceed 60%, it is expected that the net profit share of minority shareholders of subsequent companies will increase. Based on comprehensive considerations, we expect the company's net profit from 2023-2025 to be 71.21, 51.63, and 8.055 billion yuan respectively, or -55.6%, -27.5%, and +56.0% year-on-year respectively. According to the PE and PB valuation method, we gave the company a target price of HK$1.64. The PE corresponding to 2023-2025 is 6.8x, 9.4x, and 6.0x, respectively, and the corresponding PB is 1.0x, 0.9x, and 0.8x. The target price has room for 36.8% increase compared to the current price; the initial rating coverage gave the company a “increase in holdings” rating, so investors are advised to pay attention.

Granular silicon production capacity has been expanded, shipment volume has increased, cost advantages are remarkable, and product quality continues to improve:

Anchor the granular silicon route and expand production capacity: In June 2023, the company replaced Xuzhou rod-shaped silicon with granular silicon production capacity. Since then, the production capacity has been reduced to the granular silicon route. By the end of 2023Q3, Xuzhou, Leshan, and Baotou each had a full production capacity of 100,000 tons of granular silicon, with a total production capacity of 300,000 tons. In addition, the production capacity of 100,000 tons in Hohhot began sub-modules in September. After full production, the company's total granular silicon production capacity was 400,000 tons. Furthermore, the company plans to deploy granular silicon production capacity in Saudi Arabia.

The volume of granular silicon shipments increased significantly, and the market share increased: 2023H1, the company's granular silicon production was +634.3% year-on-year to 82,400 tons, accounting for 63.1% of shipments to the top three customers. 2023Q3, the company's granular silicon production is 53,600 tons and sales volume is 67,600 tons, including 64,000 tons of export sales, 0.36 million tons of internal crystallization, and removal of stocks. According to statistics from the Silicon Industry Branch of the China Nonferrous Metals Association, the national silicon production for 2023H1 and 2023Q3 is 651,700 tons, respectively. It is estimated that GCL's granular silicon market share will be 12.6% and 15.0% respectively; the Q4 market share is expected to increase further. The company's granular silicon products have been used on a large scale in leading companies such as Longji Green Energy, TCL Zhonghuan, and Jingao Technology.

The advantages of low power consumption, cost and carbon footprint are outstanding: 1) Low power consumption of granular silicon: According to the “China Photovoltaic Industry Development Roadmap (2022-2023)”, the average comprehensive power consumption of the silicon materials industry in 2022 was 60 kWh/kg-Si, and GCL's comprehensive power consumption of granular silicon was the lowest of 13.8 kWh/kg-Si (Xuzhou base) during the same period, bringing cost and carbon footprint advantages. 2) Increased share of production capacity in regions with low electricity prices: Electricity prices at the company's Xuzhou base are high; as production capacity at new bases such as Leshan, Baotou, and Hohhot with low electricity prices is released one after another, the company's unit electricity price in 2023 is expected to drop year-on-year. 3) Baotou project reduces industrial silicon costs: The Baotou project supports 150,000 tons of industrial silicon powder production capacity, which can partially stabilize upstream costs; furthermore, industrial silicon production has steam by-products, which can be used in silicon production, further reducing costs. 4) Overall: 2023Q1, GCL, Xuzhou granular silicon tax-inclusive electricity price is 0.62 yuan/kWh, cash cost is 34.24 yuan/kg, production cost is 40.15 yuan/kg; Leshan granular silicon tax-inclusive electricity price is 0.38 yuan/kWh, cash cost is 37.82 yuan/kg, and production cost is 46.19 yuan/kg; with full production capacity, production costs at the Leshan base have dropped to 35.68 yuan/kg in July 2023.

The quality of granular silicon continues to improve: 1) Metal impurities are reduced to a low level: metal impurities affect the performance of photovoltaic cells; from January to June 2023, the proportion of total metal impurities of GCL granular silicon less than 1 ppbw (electronic grade 1 standard) rose from 33% to 81%, and the proportion of impurities less than 0.5 ppbw increased from 11% to 67%. At the beginning of November 2023, the company announced that the proportion of granular silicon products with total metal impurities less than 0.5 ppbw was close to 90%. 2) There is room for improvement in the turbidity index: the high content of silicon powder will increase the pull-out rate, which in turn increases the unit non-silicon cost of the pull-crystal process; the company introduced the concept of “turbidity” to characterize the content of granular silicon powder and control the turbidity of granular silicon by improving processes and optimizing local systems; in July 2023, the company's granular silicon products with turbidity below 120 NTU increased by 140% compared to the beginning of 2023.

As product turbidity control continues to be optimized, the company's granular silicon is expected to narrow the price difference with rod-shaped silicon N-type products.

Perovskite layout and plans to build new GW-grade production lines: GCL Technology lays out perovskite business by holding GCL Optoelectronics (52.33% of shares at the end of 2023H1). GCL Optoelectronics has the world's first 100MW perovskite pilot production capacity. The photoelectric conversion efficiency of the 1m×2m largest perovskite module in the world has reached 16%, leading to 18% by 2023; it also plans to build a new GW grade perovskite production line. In September 2023, GCL Optoelectronics won the bid for the Huaneng perovskite demonstration power plant project.

2023Q3 performance is in line with expectations: 2023Q3, the company's photovoltaic materials business (silicone+silicon wafer) segment profit was 921 million yuan, -83% year-on-year, mainly due to the significant year-on-year decline in the average price of the Q3 silicon market. In the same period, the company's silicon chip production capacity was 14 and 55 GW respectively; in 2023Q3, the company's silicon wafer production was 15 GW (including OEM silicon wafers about 7 GW) and sales volume was 15 GW (including OEM silicon wafers about 6 GW).

Risk warning: silicon prices fluctuate, sales fall short of expectations, N-type use falls short of expectations, and technology leaks.