Shares in Chinese solar materials firm GCL Poly fall after profit comes in below expectations

Strong performance in its solar farms business is not enough to offset declines in materials due to stiff price competition

PUBLISHED : Thursday, 31 August, 2017, 1:07pm
UPDATED : Thursday, 31 August, 2017, 10:24pm

Shares of GCL-Poly Energy, the world’s largest producer of materials for solar panels, fell on Thursday after it posted a 13 per cent decline in interim profit, with a strong performance in its solar farms business unable to offset the impact of price competition in materials.

The Jiangsu province-based firm, controlled by tycoon Zhu Gongshan, reported a net profit of 1.2 billion yuan (US$182 million), down from 1.38 billion yuan in the same period a year earlier, it said in a filing to the Hong Kong stock exchange late on Wednesday.

The figure was 5.8 per cent short of the 1.27 billion yuan average estimate of two analysts polled by Bloomberg, and amounted to 61.6 per cent of the 1.94 billion yuan full-year estimate of 19 analysts.

GCL-Poly shares fell 3.3 per cent to 87 HK cents and its solar farms subsidiary GCL New Energy slid 1.8 per cent to 42 HK cents by 2.53pm, underperforming the Hang Seng Index’s 0.6 per cent decline.

GCL attributed a fall in the net profit margin of its solar materials business to 8.5 per cent from 15.6 per cent to a “significant decrease in the average selling price of wafers”, without giving figures.

“Excluding one-off items, the recurring net profit declined even more by 37 per cent year on year ... this set of weak results missed our expectations,” Daiwa Capital Market’s head of utilities and renewables research Dennis Ip wrote in a note.

China to erect fewer farms, generate less solar power in 2017

According to Ip, its average polysilicon price fell 1 per cent year on year in the first half, while that of wafers sank 30 per cent. GCL uses close to 90 per cent of its polysilicon output internally for wafer production.

“The average selling price declined faster than cost savings, leading to margin contractions ... although management claims 10 per cent production cost savings per year,” Ip wrote.

He estimated the company’s wafer gross margins had fallen to 23 per cent from 32 per cent in the first half of last year.

Higher finance costs and lower income from government grants also contributed to the decline in profit.

The lower margin came even as GCL’s wafer sales grew 19.5 per cent year on year to 10.61 gigawatts (GW) in the first half, during which period China installed a record 24.4GW of solar farm capacity – up 9 per cent year on year.

GCL’s first-half revenue fell 8.2 per cent to 11.4 billion yuan. Excluding non-recurring accounting items, earnings before interest, taxes, depreciation and amortisation (Ebitda) of the material business fell 40.4 per cent to 2.85 billion yuan.

A bright spot was its solar farm operations, which saw a 136 per cent year on year jump in Ebitda to 1.83 billion yuan, but it was insufficient to offset the materials profit fall.

GCL New Energy operated 5GW of solar farms at the end of June, up 86 per cent from a year earlier. It plans to add 1.5 to 2GW of new capacity this year.

At the end of June, GCL had around 35 billion yuan of net debt, amounting to 142 per cent of its shareholders’ equity.

That ratio for GCL New Energy was much higher at 315 per cent, constraining its capacity to raise more debt.

To raise the funding needed for new projects, it is pursuing an “asset light” strategy by selling stakes in operating solar farms to investors seeking stable returns, and entering long-term lease agreements, GCL New Energy president Sun Xingping said on Thursday.

It has sold 0.35GW of projects in the first half to raise around 450 million yuan, and aims to sell 1GW to 1.5GW for the full year.

Beijing’s plan to require heavy polluters such as coal-fired power producers to buy so-called green certificates from clean-energy producers next year will provide supplementary income to the latter, rather than replacing the existing subsidy system, he added.

But the system’s sustainability has been thrown into doubt as it has run into hundreds of billion yuan of payment arrears that wind and solar farm operators can only collect over two years after they fall due.