Sale of rod-shaped silicon shares and recovery of 5.5 billion yuan: At the end of December, the company announced the sale of all 38.5% of the shares directly held by Gones, the rod-shaped silicon asset. After the transaction was completed, Xuzhou Fund, an associated company with 40.3% of the company's shares, held 100% of its shares, and the company will further dispose of them in the future. The transaction confirmed a book loss of 3.97 billion yuan, of which goodwill affected 2.42 billion yuan, but recovered capital of 5.47 billion yuan (based on this estimate, sale valuation is 0.92 times net market ratio), which had a positive impact on the balance sheet. Other than Gones, the company has no other rod-shaped silicon assets. We believe that selling Gones will recover a large amount of capital for the company, which will help the company focus on granular silicon and promote overseas factory construction.

It plans to build a factory in the Middle East and is expected to enjoy high overseas polysilicon premiums: The company plans to build 120,000 tons of granular silicon production capacity in the Middle East. It is expected to start construction in 2024 and put into operation in 2026. It will be the first polysilicon project for a Chinese company overseas. Due to the high cost of labor, raw materials, and electricity, the company estimates that its cost will be 20,000 yuan/ton higher than the same production capacity in the mainland. Currently, the premium of overseas polysilicon is as high as 80,000 yuan/ton compared to the mainland. We expect the premium to narrow significantly after the production capacity is put into operation, but its profit per ton will still be more than 10,000 yuan higher than in the mainland.

Polysilicon prices are expected to rebound steadily in the second quarter, and granular silicon is still discounted: According to the Silicon Industry Branch, the average price per ton of dense material has continued to drop from 80,000 yuan to 58,000 yuan at present. With the rapid increase in the share of N-type silicon wafers, there is a certain shortage of N-type silicon, and the excess P-type material is becoming more serious, and the N/P price difference widens to 90,000 yuan; the average price of N-type granular silicon is 59,000 yuan, which is still slightly higher than P-type silicon. We expect that in the short term, the average sales price of the company will still be significantly lower than that of rod-shaped silicone faucets, which mainly produce N-type materials. Silicon wafer production will be drastically cut in January due to the off-season, while polysilicon production will continue to increase due to new production capacity and production rigidity, and oversupply will intensify. We expect polysilicon prices to continue to fall in the first quarter, but there is limited room for N-type materials to fall due to rapid growth in demand. As high-cost production capacity withdraws and demand grows, it is expected to rebound steadily in the second quarter.

The company will use cost advantages to increase its market share at the bottom of the cycle: we lowered the company's 2023-25 average price forecast for a single ton of polysilicon from 10.3/6.6/63,000 yuan to 9.4/5.7/56,000 yuan. As polysilicon prices fell more than expected, we lowered our 2023-25 profit forecast by 10%/33%/30% (without considering the financial impact of selling Gones). The target price was lowered to HK$1.56 (previously HK$1.91) based on 12 times the 2024 price-earnings ratio. We believe that although the company's granular silicon is discounted, the cost is one of the lowest in the industry, and the profit advantage of a single ton is still obvious. It will increase its market share and maintain purchases at the bottom of this cycle.