DBS downgraded GCL TECH to "Hold" with a target price reduced to HKD 1.12

DBS Bank published a research report, downgrading the investment rating of GCL TECH (03800.HK) to "Hold," with the target price significantly reduced from HKD 1.65 to HKD 1.12. The report pointed out that although the company is a major global producer of granular silicon and production costs continue to decline, the industry's consolidation process has become unclear due to policy intervention, coupled with recent related acquisitions being priced too high, leading to a downgrade in its valuation expectations.

The report indicated that GCL TECH holds a technological leading position in the granular silicon field, with its fluidized bed reactor production process consuming about 70% less electricity than the traditional Siemens method. Cash production costs have decreased from RMB 37.8 per kilogram in the first quarter of last year to approximately RMB 24.16 in the third quarter of this year, with a downward trend expected to continue. However, recent regulatory interventions regarding industry "self-discipline" and "anti-involution" measures have increased uncertainty regarding the integration of excess capacity through acquisition funds. Although solar module prices have recently shown resilience, analysts believe that market consolidation will take longer and will rely more on government policy support.

The company previously acquired an additional 42.5% stake in Inner Mongolia Xinyuan Silicon Material Technology for HKD 2 billion. The report believes that the transaction values the target asset at a premium of over 10% compared to its net asset value, indicating a high price. The transaction is conducted through a limited partnership structure in cooperation with China Cinda, with Cinda contributing approximately HKD 1.3 billion and GCL contributing HKD 700 million. Cinda enjoys a fixed annual return of 6.5%, while GCL must redeem its equity after three years. The funding source is from the company's equity placement at the end of last year. After completing the equity placement, the company's balance sheet has significantly improved, with a projected net debt-to-equity ratio of less than 10%. The report believes that this transaction will have a limited short-term financial impact on the company, but under the current regulatory environment, capacity consolidation activities face greater uncertainty