Losses are expected in the second quarter, and costs are expected to decrease in the third quarter: due to the sharp drop in the prices of polysilicon and silicon wafers, we expect the company to lose about 200 million yuan in the second quarter due to a sharp drop in short-term profit pressure. The company's net profit for the first quarter was only 0.3 million yuan (RMB, same below), lower than our expectations. Due to damage and shortage of clean materials due to extreme weather power outages in Xuzhou in February, the capacity utilization rate of granular silicon fell to only about 70% in the first quarter, and production fell 3% month-on-month to 65,500 tons (shipment volume 65,200 tons, including internal sales volume), which led to a month-on-month increase in costs. The average sales price including tax was 55,000 yuan/ton, lower than 61-65,000 yuan/ton of rod-shaped silicon companies. The cost of the Hohhot project during the crawling phase was high, accounting for 50 million yuan in inventory depreciation. The silicon wafer business lost 100 million yuan in the first quarter (including 50 million yuan of inventory impairment). However, at present, the utilization rate of granular silicon production capacity has risen to 80-90%. The company expects full production to begin in the 3rd quarter, and the total cost is expected to drop below 40,000 yuan/ton. In addition, the company signed a cooperation agreement with the UAE Sovereign Fund in May to discuss the cooperative construction of a local factory, which is expected to begin this year.

Recently, the price of polysilicon has plummeted, and the entire industry has suffered serious losses. The profit advantage of granular silicon has been highlighted: due to the continuous increase in supply, the price of polysilicon has dropped sharply since the end of March. According to Infolink, the price of a single ton of dense material/granular silicon fell from 68/610,000 yuan to the current 40/37,000 yuan (only 35/33,000 yuan excluding tax), falling below the cash costs of all companies other than the company, but as quality improved, the discount price of granular silicon narrowed sharply from 70,000 yuan to 0.3 million yuan. In April, the company signed a long order with silicon chip leader Longji, agreeing to sell 125/15/150,000 tons of granular silicon to it in 2024-26, accounting for 37%/32%/31% of our estimated annual output. We believe it is beneficial to the company's production capacity digestion, indicating that the quality of granular silicon has been fully recognized by the industry. With the sharp rise in electricity prices in major polysilicon production areas such as Sichuan, the cash cost of the lowest-cost rod-shaped silicon company also rose to close to 40,000 yuan/ton in the first quarter. The cost advantage of granular silicon with low electricity consumption expanded markedly. The company's current cash cost is 30,000 to 35,000 yuan/ton. We expect the gross margin advantage per ton to exceed 50,000 yuan compared to our peers, and the profit advantage is highlighted after the discount narrows.

Due to losses and inventory pressure, the country's production fell 4% month-on-month in May. The Silicon Industry Branch expects a sharp drop of 20% month-on-month in June, or is expected to begin storage. We expect that the current serious losses in the industry will be difficult to sustain. Polysilicon prices have bottomed out and will rise again in the 3rd quarter.

Performance at the bottom of the cycle was under pressure. After the surge, the valuation appeal was limited, and it was lowered to neutral: as product prices fell more than expected, we lowered our profit forecast. Performance at the bottom of the cycle was under pressure. Based on the market value of 902 million yuan per 10,000 tons of production capacity (50% discount compared to A-share Daquan Energy (688303 CH)), we gave the polysilicon business a valuation of 35.5 billion yuan, referring to the primary market and listed companies in the same industry, and gave a valuation of 5 billion yuan to new businesses such as perovskite and silane gas, totaling 40.5 billion yuan, and lowered the target price to HK$1.62 (originally HK$1.67). We are optimistic about the company's long-term development prospects and continued increase in market share, but after the recent sharp rise in stock prices, we believe that short-term valuations have limited appeal, and downgraded the rating from buying to neutral.