Price cuts and impairment affect performance: Revenue for the full year of 2023 was 33.7 billion yuan, down 6.2% year on year, gross margin fell 14 ppts to 34.7% year on year, and shareholders' net profit fell 84.7% year on year to 2.51 billion yuan; the profit side decline was mainly due to a sharp drop in the price of silicon materials and silicon wafers and the impairment impact of some project announcements. 2024Q1 performance remained under pressure, with shareholder profit of 0.3 million yuan, a sharp decline over the previous year. Mainly affected by (1) the year-on-year decline in the average price of silicon materials and silicon wafers (Q1), the average price of silicon wafers (including tax) was 55 yuan per kilogram, down nearly 70% year on year), losses in the silicon wafer business: (2) cost reduction due to the recent rise in new production capacity in Hohhot: (3) 24Q1 R&D expenses remained high. The company announced the 2024-26 shareholder return plan and plans to make share repurchases or dividends of no less than 2.6 billion yuan within three years.

Production capacity climbing and process improvement: The company achieved a significant increase in granular silicon production capacity and output. By the end of 2023, the effective production capacity reached 340,000 tons, an increase of 200,000 tons over the beginning of the year, and achieved 226,000 tons of silicon shipments, an increase of 141% over the previous year. Shipments of 2024Q1 granular silicon were 65,000 tons, up 120% and 19% year-on-year respectively. We expect to ship around 350,000 tons throughout 2024. Currently, the turbidity level of granular silicon has basically been reduced to less than 120 NTU, and the proportion of products below 100 NTU has reached 75%, and the reduction in turbidity is expected to effectively improve the yield level of downstream customers; at the same time, the proportion of products with total metal impurities of 5 elements of granular silicon less than 0.5 ppbw exceeds 90% (2023Q4 is 75%), and the proportion of products with 18 element total metal impurities less than 1 ppbw exceeds 60% (2023Q4 is 43%), and the application effect in the downstream N type market is in the leading position.

The cost advantage of granular silicon has been further improved: at the end of 2023, the company's average manufacturing cost of granular silicon was 27% lower than at the end of 2022, and is already at the leading level in the industry. At the end of 2023, the average production cost of Baotou Xinyuan was as low as 35.9 yuan per kilogram. We expect that with the gradual arrival of the company's new production capacity, the improvement of electricity security measures, and the improvement of related auxiliary materials bottlenecks such as clean materials, the production capacity of the company's four major bases is expected to maintain a high operating rate after 2024Q2. Overall, the cash cost/total cost is expected to reach 34 yuan/40 yuan per kilogram or less by the end of the year, respectively. Compared with the 35 yuan per kilogram cash cost range of leading Siemens process quality companies, there is still a clear advantage.

The target price is HK$2, maintaining the purchase rating: The current price of silicon is close to the cash cost level of leading companies, and the supply and demand situation of silicon materials has not seen any real improvement. Prices are expected to remain low, and short-term profits will still be under pressure. However, as new production capacity climbs, the company's cost side is expected to continue to be optimized, and quarterly results are expected to improve significantly from month to month. We are still optimistic about the company's long-term logic of crossing the bottom of the industry cycle with cost and quality advantages. In summary, we adjusted the company's 2024-2026 profit forecast accordingly to reflect the low price consolidation of silicon materials and the low cost advantages of granular silicon. The company's net profit for 2024-2026 is expected to be 23/38/46 billion yuan, and the target price for the next 12 months is HK$2, corresponding to the predicted price-earnings ratio of 20/12/10 times 2024 to 2026, and maintain the purchase rating.

Risk warning: Production and operation progress falls short of expectations, industry supply contraction falls short of expectations