GCL-Poly: ‘wafer and poly prices have already started recovery’

In a bullish market update, GCL-Poly has claimed silicon and wafer prices have already rebounded from rock bottom prices following the Chinese government's decision to clamp down on solar subsidies.

Revealing figures buffeted, but not crippled, by the May 31 policy about-turn from Beijing, GCL chief executive Zhu Zhanjun claimed the poly, wafer and ingot manufacturer had seen prices hit their lowest point two months ago before recovering, in a claim at variance with the doom-mongering predictions of some solar industry analysts.

Chairman and majority shareholder Zhu Gongshan predicted China will see grid parity in the second half of next year, a development accelerated by the Chinese government's decision to wean PV companies off public subsidies.

Predicting the policy change will serve to sort the wheat from the chaff in the Chinese solar manufacturing industry, the chairman of the world's biggest poly maker wrote – in the update, published on the Hong Kong exchange today: “The domestic market opportunities will not be eliminated due to the 531 PV New Policy [to remove subsidies] but will be captured by the enterprises with stronger strengths and better products.”

Far from reining in the mega company's plans to expand poly production volumes, the chairman announced GCL will forge ahead with plans to complete the first, 20,000 tonne phase of production capacity at its new Xinjiang factory – which it says was due to be complete by the start of this month. Mr Zhu said the second 20,000-tonne phase will be complete by the end of the year with a final 20,000-tonne expansion – switched from GCL's Xuzhou production line – in place by the end of 2020. Only the most pendantic of investors, surely, will note the “subject to the prevailing market conditions” rider to the final stage of the new facilities.

Global ambition

Under the strategy, GCL is due to have expanded from an annual poly production capacity of 70,000 to 115,000 tonnes by the end of 2020, part of a plan to “become one of the polysilicon manufacturers with [the] lowest production cost in the world”.

There is little sign of any planned moderation in the group's ambitions, with the acquired GNE downstream business reaping the rewards of a rapid expansion of solar farm development in China as PV project revenues rocketed from RMB1.85 billion ($270 million) this time last year, to RMB2.78bn.

But that was down to project development during the Chinese boom which ended so abruptly in May and the decision by the Chinese authorities to put the brakes on solar subsidies had an effect on GCL's first-half figures.

Group revenues fell 3.2%, year on year, to RMB11bn, with gross profit following suit to fall 11% to RMB3.3bn, and although a higher volume of wafers was sold to external customers, revenue fell 13.4% to RMB8bn – thanks mainly to an average selling price that dropped to RMB0.7 per Watt. The poly price also retreated – to RMB103.4/kg – as GCL's module business saw profits tumble from RMB789m to RMB256m.

The problems facing manufacturers are starkly illustrated by GCL's decision to write down RMB114m on its unsold products “because the cost of certain inventories [was] higher than their net realisable values”.

None of which amounts to disaster for a world leader which appears to have enough scale to weather the headwinds because, as the chairman predicts “after 2020, there will be a huge wave of ‘global grid-parity cycle' in the global PV industry”.

What's the catch?

However there is one fly in the ointment – the group's asset-to-liability ratio.

Auditor Deloitte's concerns force the GCL directors to acknowledge the gulf which, at the end of June, saw liabilities outweigh assets by RMB14.4bn. GCL Poly group at that point held cash and equivalents of RMB7.9bn against borrowing of RMB61.3bn – RMB21.4bn of which is due for repayment by July. Deloitte points out it is the booming GNE business that must shoulder the blame, with RMB9.05bn more in liabilities than assets, and with capital commitments of RMB5.83bn. In its words, that constitutes “a material uncertainty … that may cause significant doubt on the company's ability to continue as a going concern”.

GCL's board says it is confident its funding lines and undrawn overdrafts will see it through but the situation places a question mark over GNE's stated expansionary ambitions, not least in a Chinese market which has seen the subsidy drawbridge pulled up.

The question facing investors is whether the predicted – post-2020 – golden future for solar, in part driven by Chinese grid parity expected next year, will materialize in timely fashion. Shareholders may also be wondering whether the chief executive's breezy dismissal of the price problems afflicting wafers may prove a tad premature.