Hengdian East magnetic: huge investment in polysilicon to open up the photovoltaic industry chain upstream

Matters Hengdian East recently announced that the company and the Wuhai Municipal People's Government signed a project investment contract and plans to invest about 4 billion yuan in building a polysilicon project. The first-phase production capacity of the project is about 6,000 tons. It is planned to start construction in August this year and reach the end of 2012.

The main point of view is that the industrial chain will benefit the photovoltaic industry for a long time. The 6,000-ton project is only the company's polysilicon phase I project, and we believe that the company's overall polysilicon plan should match the downstream production capacity of the company's own industrial chain and is expected to reach 10,000 tons or more. Based on the current steady decline in the price of polysilicon, investment in this sector is relatively risky in the short term. However, from the perspective of the long-term development of the photovoltaic industry, controlling the supply of raw materials in the upstream is conducive to the stability of overall profitability and the orderly development of capacity expansion. Therefore, large-scale investment in polysilicon has become a bold and ambitious move, showing the company's long-term commitment to the photovoltaic industry.

Cost control becomes the key to the project. We believe that the gross profit margin for polysilicon manufacturing after 2013 should be 35% to 40%, which guarantees about 10% to 12% of ROE to attract investment steadily. At that time, the sales price of polysilicon is expected to be around 40 US dollars/kg or less. Therefore, reducing the cost to less than US$24/kg has become the key to the success of the project from a financial perspective. Based on the company's cost control and production management capabilities demonstrated in other industries, we are optimistic about the project.

The photovoltaic industry entered the industrial integration period. At present, large-scale midstream and downstream manufacturers generally ship smoothly, while small businesses and new industry entrants are generally more difficult. Currently, the company's solar cell production capacity has exceeded 500 MW. However, due to insufficient accumulation of customers in the industry, the current capacity utilization rate is still lower than that of large-scale manufacturers. However, with the strengthening of the company's industry accumulation, the advantages of its flexible mechanism will be gradually reflected in the downstream competition.

The magnet business remains stable. Magnets business is expected to be the company's major cash flow protection in the future, and there is still much room for the growth of high-end businesses such as automotive magnetic tiles. The company's rare earth business is experiencing rapid growth. Lithium iron phosphate business technology has matured, is in the customer's reserve phase and expects the industry to break out.

Earnings and Forecasts We revise our 2011, 2012, and 2013 EPS estimates to 0.71, 1.55, and 2.91 yuan, respectively. The financial expenses brought by equity incentives and huge investments have a certain impact on the company's net profit in the next three years, and we have accordingly adjusted EPS forecasts accordingly. Given 20 times PE in 2012, the target price will be adjusted to 31.1 yuan, giving a "hold" rating. We are still optimistic about the company for a long time.