Losses narrowed slightly in the third quarter, and technical reforms led to a marked reduction in costs: the company's net loss to mother for the 3rd quarter of 2024 was 1.492 billion yuan (RMB, same below) (loss of 2.971 billion yuan in the first three quarters), which narrowed 0.02 billion yuan month-on-month, mainly due to reduced inventory impairment. The PV materials segment lost 1.8 billion yuan (including minority shareholders' profit and loss). The production/shipment volume of granular silicon was 0.062/0.0809 million tons, -13%/+32% month-on-month, with stocks falling sharply by 0.0189 million tons (down 0.009 million tons in the first three quarters), the average sales price of a ton was 0.029 million yuan, down 0.0025 million yuan month-on-month, and the cash cost per ton (including R&D expenses) was 0.0332 million yuan, which declined month-on-month even as capacity utilization decreased due to technological changes 0.002 million yuan. The technical reform achieved remarkable results. The tonne production cash loss was 0.0042 million yuan, which was only a slight increase of 0.0004 million yuan over the previous month. As production gradually reaches full capacity after the completion of technical reforms, we expect that the company's goal of reducing cash costs to less than 0.03 million yuan can be achieved in the first quarter of next year. At that time, the company is expected to become the first company in the industry to produce cash to reverse losses.

Supply-side reforms are expected to be introduced, and the advantages of low power consumption of granular silicon will expand: after serious losses, the industry is calling for supply-side reforms recently. We expect that the government may introduce policies such as raising electricity consumption standards to speed up the clean-up of the industry's supply and price recovery, and amplify the low electricity consumption advantages of granular silicon (the company's total electricity consumption is only 13.8 kilowatt-hours per kilogram, while rod-shaped silicon faucets are about 50 kilowatt-hours), driving up its market share more rapidly. If policies to raise the electricity price of rod-shaped silicon can be introduced, the cost advantage of granular silicon will be significantly amplified. All of the company's polysilicon production capacity is advanced granular silicon production capacity built in recent years. We anticipate that the company may be the only leading enterprise in the industry that does not need to shut down old production capacity.

A further increase in valuation is subject to favorable actual implementation of the policy and remain neutral: we lowered our 2024 profit from -1.907 billion yuan to -3.839 billion yuan, but raised the 2025/26 profit from -1.056/2.631 billion yuan to -0.857/3.085 billion yuan. We expect the average price of granular silicon including tax in 2026 to 0.055 million/ton, which is a reasonable price that can be maintained for a long time. Due to increased visibility of profit recovery in 2025-26, we raised the valuation benchmark for the company's polysilicon sector from 0.7 billion yuan to 1 billion yuan (63% discount compared to A-share Daquan Energy (688303 CH)), and raised the target price to HK$1.77 (previously HK$1.31). We are optimistic that the company will use the cost advantage to increase the global market share of granular silicon from 14% in 2024 to 20%/22% in 2025/26, but the recent sharp rise in stock prices fully reflects favorable expectations of supply-side reforms. Further improvements in valuation are subject to policy implementation to maintain neutrality.