1. Focus on silicon materials for more than 60 years to form a new energy and semiconductor dual industry chain development model. The predecessor of TCL Zhonghuan, Tianjin Semiconductor Materials Factory, was established in 1958. It is a domestic electronic grade semiconductor monocrystalline silicon material manufacturer with a long history and leading technology. It has been deeply involved in the industry for more than 60 years. The company adheres to innovation-driven development, and has always led the industrialized application of advanced technology and advanced manufacturing methods in the industry. Its main business revolves around silicon materials to form a dual industry chain development model for new energy and semiconductors.

2. The rapid rise and fall in silicon prices has a great impact on downstream profits: (1) when silicon prices rise rapidly, the main photovoltaic industry chain benefits; (2) when silicon prices fall rapidly, the main photovoltaic industry chain will be affected by obvious impairment losses of raw materials; (3) when silicon prices slow down or rise slowly, if the rate of silicon increase is less than that of components, the downstream profit trend of silicon materials is expected to maintain a good trend, and vice versa, there is downward pressure on profits. Entering the Q3 of 2024, the prices of silicon materials, silicon wafers, and components remained stable, mainly due to cost side support. We believe that industry prices have basically bottomed out, and the company's profits are expected to bottom up.

3. The company's silicon wafer competitive advantage is remarkable, and all indicators are at the forefront of the industry: (1) shipping side: the company's market share is relatively stable, and the industry has a stable oligopoly pattern; (2) profit side: the company's gross margin is one of the best levels in the industry; (3) cost side: the company's production efficiency, cost control and other indicators are clearly superior to second-tier enterprises; in addition, the company's R&D investment, per capita income generation, per capita remuneration, and balance ratio are all at one of the best levels in the industry, and the competitive advantage is remarkable. With the production capacity layout in the Middle East, it is expected that the company's global channels and production capacity advantages will be further enhanced.

4. Profit forecast and investment advice: We lowered the company's 2024 profit forecast and added a profit forecast for 2025-2026. The estimated operating income for 2024-2026 is 35.7/41.3/46.7 billion yuan (original value of 100.2 billion yuan in 2024), and net profit to mother is -3/2.1/3.3 billion yuan (original value of 10.5 billion yuan in 2024), and the corresponding EPS is -0.75/0.51/0.81 yuan (original value for 2024) 3.25 yuan). We believe that the company has a clear competitive advantage and significant ability to cross the cycle. As prices in the industrial chain bottom, the company's profit is expected to gradually bottom out. Currently, the company's PB is at its lowest position in history, relatively undervalued, and maintains a “buy” rating.

Risk warning: downstream demand falls short of expectations; overseas trade policies are being strengthened; supply-side releases exceed expectations.