The sharp drop in costs drove the polysilicon sector to reverse losses in the first quarter: the company achieved revenue/net profit of 56.0/359 million yuan (RMB, same below) in the first quarter, down 26% month-on-month; gross margin/net profit margin of 23.4%/6.4%, up 8.8/16.2 percentage points from month to month. As the three bases gradually reached capacity, the company's polysilicon production/sales volume increased 22%/1% month-on-month to 78,000 tons in the first quarter, and drove a sharp drop in single-ton production costs from 53,400 yuan to 48,500 yuan (full cost 50,500 yuan), and further reduced to 46,000 yuan in April. The sales price of a single ton including tax fell from 64,000 yuan to 61,000 yuan month-on-month, and the polysilicon sector changed from a slight loss to profit of 190 million yuan month-on-month after excluding the effects of impairment values. Other sectors, such as power plants, made a profit of 170 million yuan.

The price of polysilicon has declined, but we expect it to have almost bottomed out: due to continued growth in supply, the price of polysilicon has declined since the end of March. According to Infolink, the price of a single ton of dense material/granular silicon has dropped from 68/610,000 yuan to the current 4.4/4.1 million yuan, which corresponds to a price of only 39/36,000 yuan without tax. We expect it to be lower than the cash costs of all rod-shaped silicon companies and the production costs of granular silicon companies.

Under loss and inventory pressure, the Silicon Industry Branch expects that in May, a large number of production lines (including the company's Fort Ganquan base) will be overhauled ahead of schedule. Monthly production will remain flat month-on-month, and the continuous growth trend will be suspended. We expect that the current cash loss situation of the vast majority of leaders will be difficult to maintain for a long time. Polysilicon prices have basically bottomed out, and are expected to bottom up in the 3rd quarter.

The valuation at the bottom of the cycle is attractive, maintaining purchases: as polysilicon prices fell more than expected, we lowered net profit to mother in 2024-26 to 3.5/8.2/2.07 billion yuan, of which the steadily growing power plant sector contributed 9.9/12.9/1.49 billion yuan. If we give the power plant sector 6 times the price-earnings ratio of 2024, the market value of the polysilicon sector is only 6 billion yuan, and the market value of a single ton is only 210 million yuan based on current market value. The company's polysilicon production costs have now been reduced to basically the same as Daquan Energy (688303 SH) (the latter is 46,000 yuan/ton in the first quarter), and equity production capacity is also close (company/daquan was 277/305,000 tons). We think the two are highly comparable. Currently, the market value of A-shares is as high as 54.4 billion yuan, and the market value per ton is as high as 1.78 billion yuan. Even considering the AH premium and the company's higher debt ratio, we think the company is still seriously undervalued compared to Daquan. Based on the market value of the polysilicon sector of $360 million per ton (compared to the full discount of 80%) and the price-earnings ratio of the power plant sector 6 times the 2024 price-earnings ratio, we lowered the target price to HK$12.04 (previously HK$12.80), corresponding to 46/19/8 times the price-earnings ratio for 2024-26, of which the power plant sector is worth HK$4.52 per share. Performance is under pressure at the bottom of the cycle, but we believe that the company, as a polysilicon leader, will remain competitive for a long time. The current valuation is attractive, and it maintains purchases.