China Solar_ Our thoughts on the sector rally; what to chase and what to avoid; placing Daqo on Positive Catalyst Watch. Fri Feb 07 2025

Summary of Key Points from the Conference Call Industry Overview - Industry: China Solar - Recent Performance: China solar names' share prices increased by 5% on February 7, 2025, outperforming the SHCOMP Index (+1%) and SZCOMP Index (+2%) [1][5][15] Core Insights and Arguments - Demand and Supply Expectations: Anticipation of sequential improvement in demand and supply post-Chinese New Year (CNY) is driving market optimism, alongside hopes for policy intervention to curb supply [1][5][15] - Polysilicon Price Outlook: Polysilicon is expected to see a meaningful price increase around mid-to-end of Q2 2025 due to demand seasonality and current production utilization levels [1][5][11] - Daqo's Position: Daqo is placed on Positive Catalyst Watch due to its favorable risk/reward profile, especially if a price increase occurs [1][11][15] - Valuation Ratings: - Daqo (DQ US): Overweight (OW) rating with a price target of $27.10 [3][14][22] - Tongwei (600438 CH): Underweight (UW) rating due to excessive valuation despite potential benefits from polysilicon price hikes [1][29][36] Company-Specific Insights Daqo - Market Cap: $1.296 billion [3] - Financial Estimates: - FY24E Revenue: $1.188 billion, Adj. EPS: -$3.12 [17][26] - FY25E Revenue: $1.928 billion, Adj. EPS: $0.32 [17][26] - Catalyst Watch: Expected price reaction to polysilicon prices starting around May 6, 2025, with potential consensus earnings lift [11][16] - Asset Impairment: Recent profit warning indicates a clearing event, with expectations of improved profitability in 2025 [11][22] Tongwei - Market Cap: $14.051 billion [28] - Financial Estimates: - FY24E Revenue: Rmb117.953 million, Adj. EPS: -Rmb1.14 [28][32] - FY25E Revenue: Rmb153.793 million, Adj. EPS: Rmb0.05 [28][32] - Valuation Concerns: Current valuation at 2.0x FY25 P/BV is considered excessive, leading to an Underweight rating [1][29][36] Additional Important Insights - Polysilicon Supply and Demand: Expected polysilicon supply in January 2025 is 98,000 tons, while demand is projected at 101,000 tons, indicating a potential undersupply situation [11][12] - Production Challenges: Polysilicon producers face longer ramp-up times for production compared to wafer/cell/module manufacturers, which may lead to temporary undersupply in Q2 2025 [6][11] - Risks to Ratings: Downside risks include lower-than-expected polysilicon prices, slower production ramp-up, and higher power costs [24][40] Conclusion - The China solar sector is experiencing a rally driven by demand expectations and potential price increases in polysilicon. Daqo is highlighted as a key player with a favorable outlook, while Tongwei faces valuation challenges despite potential market benefits.