The performance fell short of expectations, and costs will drop sharply after production line optimization is completed: the company's net loss to mother was 1.48 billion yuan in the first half of the year, slightly exceeding the performance forecast of 1.45 billion yuan, of which 1.51 billion yuan in the second quarter was lower than our expectations. In the first half of the year, granular silicon production/shipment volume was 0.136/0.126 million tons (0.071/0.061 million tons in the second quarter, +8%/-6% month-on-month), and the average sales price per ton was 0.0403 million yuan (we estimated 0.031-0.032 million yuan in the second quarter). Production costs were high due to low operating rates. At the same time, the silicon wafer business also lost gross profit due to a sharp drop in sales prices, resulting in a gross profit margin of -6.6% in the photovoltaic materials division and 0.82 billion yuan in inventory Impairment. The company began a system optimization project for the granular silicon production line in May. Although the operating rate declined in a short period of time, production indicators were greatly optimized. With the completion of the optimization, production will increase in September, and production will be full before the end of the year. At that time, the cash cost per ton will drop below 0.03 million yuan, far lower than the 0.04 million yuan of rod-shaped silicon faucets. The quality of granular silicon continues to improve. The proportion of N-type (901A and above) exceeded 96% in July and was highly recognized by customers. Currently, the inventory is less than two weeks, the lowest in the industry. The company's silane gas production capacity ranks first in the world. The export volume currently accounts for 1/3 of the country, and it has an overwhelming cost advantage. As demand grows rapidly, it will become a new profit growth point.

Polysilicon prices have rebounded steadily since the end of March due to continued growth in supply and increased oversupply due to reduced silicon wafer production. According to Infolink, the price of a single ton of dense material/granular silicon fell from 0.068/0.061 million yuan to a minimum of 0.039/0.036 million yuan, which is only 0.035/0.032 million yuan without tax, which is already lower than the cash cost of all companies. Under huge losses and inventory pressure, China's monthly production fell 32% from 0.1918 million tons in April to 0.13 million tons in August, driving a sharp narrowing of the gap between supply and demand. Currently, there is a basic balance between supply and demand. Prices have remained stable since July and rebounded more than 1% in August. We expect that prices have bottomed out, and there may still be room for continued rebound in the short term.

Maintaining neutrality: As product prices fell more than expected and performance fell short of expectations, we lowered our profit forecast. Based on the market value of 0.7 billion dollars per 10,000 tons of production capacity (about 45% discount compared to A-share Daquan Energy (688303 CH)), we gave the polysilicon business a valuation of 27.1 billion yuan, referring to the primary market and listed companies in the same industry, and gave a 5 billion dollar valuation for new businesses such as perovskite and silane gas, for a total of 32.1 billion yuan, and lowered the target price to HK$1.31 (previously HK$1.62), corresponding 12.2 times the 2026 price-earnings ratio. We are optimistic that the company will continue to increase its market share with its cost advantage, but before the price of polysilicon clearly rebounds, the increase in valuation is yet to be realized by a sharp reduction in costs and remain neutral.