Lower prices of polysilicon and silicon wafers dragged down performance growth. The company recently announced its results for the first quarter of '24. Q1 achieved revenue of 5.47 billion yuan and net profit to mother of 0.3 billion yuan, down 51.1% and 99.2%, respectively. The decline in revenue and net profit due mainly to (1) the average price of polysilicon in the first quarter of 2024 was roughly 60,000-70,000 yuan/ton, a sharp drop of about 60%-70% from the price of 150,000-230,000 yuan/ton in the same period last year; (2) the new production capacity of the company's Hohhot project is climbing. It is expected that after production is fully achieved in the second half of '24, there is still room for further reduction in the average cost of granular silicon; (3) R&D expenses in the first quarter of 2024 exceeded 400 million yuan; (4) the silicon wafer end business lost more than 400 million yuan.

The market share of granular silicon continues to increase. In the first quarter of 2024, the company produced 65,500 tons of granular silicon and shipped 65,200 tons (including 0.33 million tons of internal sales), an increase of 120.6%/18.7% year-on-year respectively. Q1 The average foreign sales price of the company's granular silicon (tax included) is 55,000 yuan/ton. By the end of 2023, the company's effective production capacity will reach 340,000 tons. The Inner Mongolia Hohhot Xinhuan Project is expected to be fully produced in the second half of '24, and the effective production capacity of the company's granular silicon is expected to reach 480,000 tons by the end of '24. We expect the company's granular silicon production to reach about 400,000 tons in '24. As the market's acceptance of granular silicon continues to increase, its market share will increase to about 25%.

The cost advantage of granular silicon gradually became apparent, and the industrialization process of perovskite accelerated. (1) Since the second quarter, polysilicon prices have continued to decline. We expect polysilicon prices to maintain the bottom trend throughout '24. The total cost of the company's granular silicon is expected to be less than 50,000 yuan/ton, and the net profit per ton may reach about 0.5-10,000 yuan. (2) The photoelectric conversion efficiency of the company's perovskite single-junction modules has reached 19%, and the conversion efficiency of laminated components has reached 26.3%. The megawatt-scale perovskite demonstration project has been fully put into operation, and the company's perovskite industrialization process has accelerated.

Share repurchase/dividend plans help boost market confidence. The company announced a repurchase/dividend plan. It will carry out share repurchases (cancellation) or dividends of no less than 2.6 billion yuan within three years from 24-26. This move will help boost market confidence, raise the company's valuation level, and demonstrate confidence in the company's development.

Profit forecast and valuation: We expect the company's polysilicon production to reach 42/50/550,000 tons respectively in 24-26, with net profit of 22/32.8/4.25 billion yuan, corresponding EPS of 0.08/0.16 yuan. Although the industry is currently still in a period of adjustment, we expect that the cost advantages brought by granular silicon in terms of electricity consumption will enable the company to show good profitability during the industry's trough. Maintain the company's target price of HK$1.80, corresponding to 25-year PE 13.9 X, and maintain a “buy” investment rating.

Risk warning: The scale of new PV installations fell short of expectations; the price adjustment of polysilicon materials exceeded expectations; the release of granular silicon production capacity fell short of expectations; CCZ technology R&D and promotion fell short of expectations.