2Q24 results are in line with our expectations

The company announced 2Q24 results: achieved revenue of 1.602 billion yuan, -64.1% year-on-year and -46.3% month-on-month; realized net profit to mother of 1.001 billion yuan, with year-on-month losses converted to losses of about 0.78 billion yuan. The 2Q24 results were in line with our expectations.

Review of the company's 2Q24 operating indicators: 1) Shipment volume: 2Q24 achieved sales of 0.0431 million tons of polysilicon, -16.4% YoY/-20.2% month-on-month. According to the US stock DQ.US performance exchange, current inventory is around 0.028 million tons. 2) Price: The average sales price in 2Q24 (excluding tax) was 0.0371 million yuan/ton, -57% YoY/-32.5% month-on-month. The decline was mainly due to declining prices in the industrial chain. 3) Cost: The unit sales cost of 2Q24 is about 0.0459 million/ton, -8.9% YoY /-0.1% month-on-month. Cost optimization mainly benefits from reduced energy consumption and increased yield. 4) Profit: 2Q24's net loss per unit of polysilicon (net profit margin after asset impairment losses) was approximately 0.01 million yuan/ton, compared to the same period last year.

Development trends

Net operating cash outflows due to bottoming silicon prices, and a low balance ratio helped cross the cycle. Since April, silicon prices have shown a sharp downward trend. According to the Silicon Industry Association, the average transaction price of 2Q24 N-type/monocrystalline dense material was 46.3 yuan/kg and 41.2 yuan/kg respectively, down 34.8% and 30.6% respectively from the average price in 1Q24. As of August 21, the price of silicon material still touched the cash cost line of all companies. In this context, the company's net cash flow from 1H24 operating activities was 3.5 billion yuan, and cash in hand (monetary capital+transactional financial assets+current fixed deposit assets) remained at a high level of about 14.7 billion yuan.

The company has no accounts receivable and no long-term loans. As of 1H24, the balance ratio was only 11.4%, which is the lowest level for major photovoltaic companies. We are optimistic that the company's sound financial statements will support it through the industry cycle.

Product cost quality continued to be optimized, and annual production guidelines were lowered. 1) Product side: 2Q24's Inner Mongolia Phase II commencement of 0.1 million tons of polysilicon successfully led to quarterly output exceeding previous guidelines. According to the US stock DQ.US results announcement, new production capacity accounts for 12% of quarterly output, 70% of N-type output during the production period, and 73% of 2Q24's overall N-type output ratio. The company expects to reach 100% by the end of next year. 2) Cost side: The 2Q24 company's cash cost was 0.0402 million/ton (excluding tax), and it has declined quarterly since 4Q22. The leading cost advantage in the bottom cycle is prominent. 3) Market side: The company plans to increase overseas channel development and seek to enhance overall profitability in overseas high-premium markets. 4) Business goals: Taking into account cost control and reducing cash consumption, the company lengthens the maintenance window and reduces production load. The 3Q24 output is 0.043-0.046 million tons, and 2024 annual output is 0.21-0.22 million tons, down from the previous quarter's annual guideline (0.28-0.3 million tons). We estimate the corresponding annual capacity utilization rate of about 70%-80%.

Profit forecasting and valuation

Based on expectations that silicon prices will continue to decline, we lowered our previous 2024/2025 net profit forecast of 0.8/1.8 billion yuan to -1.5/1 billion yuan. Considering that silicon prices are expected to recover in 2025 to drive a rebound in performance, switching the valuation year to 2025, the company is currently trading at 39x 25e P/E. At the same time, considering the company's leading product cost and quality advantage and the accelerated pace of supply-side adjustments in the industry, the target price was lowered by 5% to 28.5 yuan (based on 58x 25e P/E) to maintain the industry rating. There is room for 51% increase.

risks

PV supply-side improvements fell short of expectations, and PV demand fell short of expectations.