China / Hong Kong Industry Focus

Solar Power Sector

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Jan 2017

Normalisation begins
HSI: 22,718
Lower-than-expected FIT cut, positive for
downstream developers

Market has over-penalised the solar glass ANALYST

Patricia YEUNG +852 2863 8908
industry on potential oversupply situation patricia_yeung@dbs.com
Solar power installation to normalise in 2017 Tony WU CFA
tonywuh@dbs.com
Xinyi Solar will be the major beneficiary from
recovery of solar glass ASP and installation Recommendation & valuation
starting 1Q17. Reiterate BUY with TP trimmed to
HK$3.00 T arg et M ark et F Y 1 7 F
Co mp an y Pric e Pric e R ec Cap PE
HK $ HK $ U S$ m X
Acceptable FIT cut. The solar power feed-in-tariff (FIT) was cut
again in December 2016 to Rmb0.65/watt, Rmb0.75/watt,
Xiny i Solar *
Rmb0.85/watt in zones 1, 2, and 3 respectively. The magnitude 2.57 3.0 BUY 2,239 7.6
(968 HK)
of the cut was lower than expected, which is positive for Gcl New Energy
downstream operators such as Xinyi Solar (968 HK), GCL New 0.4 n.a. NR 984 7.5
(451 HK)
Energy (451 HK), and United PV (686 HK). We reckon the cut United Photov oltaics
0.69 n.a. NR 441 n.a.
in FIT will not adversely affect IRR due to the c.25% drop in (686 HK)
construction cost within two years.
Source: Thomson Reuters, *DBS Vickers
Oversupply in solar glass will not be too severe. While the
supply of solar glass industry is expanding at a faster pace than
demand, we reckon the market is over-concerned and has too
harshly penalised the industry. We expect the growth in
effective production capacity for the solar glass industry to be
less than the market anticipated due to shutdown for
maintenance. Thus, we estimate the effective capacity to grow
at only 15% and 18% y-o-y to c.92GW and 108GW in 2017
and 2018 respectively. According to Bloomberg New Energy
Finance (BNEF), the global solar new installation will grow at
8% and 15% y-o-y to 75GW and 88GW in 2017 and 2018,
which implies the industry will remain at a similar oversupplied
level of c.19% compared to 2015. Hence, oversupply situation
in solar glass should not become more severe in these two
years.

Xinyi Solar (XYS) is trading at attractive level. XYS's capacity

expansion plan will put it in a solid position to ride on the
pickup in installation demand and solar glass ASP starting in
1Q17. The stock has fallen by more than 20% since peaking in
August last year, which we believe is overdone given the
lower-than-expected FIT cut and sharp drop in construction
cost. Trading at trough valuation level of 7.6x FY17F PE, we
reiterate our BUY call for the stock with TP trimmed to HK$3
due to the weaker solar glass sales outlook and slower-than-
expected solar farm on-grid progress.

ed-TH/ sa- DL
Industry Focus
Solar Power Sector

Back to normal such as Anhui, Hebei, Henan, and Jiangxi have filed
applications for additional quota. We estimate that more than
Less-than-expected FIT cut. The National Development and
6GW of extra quota will be granted. Most of the projects
Reform Commission (NDRC) issued the official FIT adjustment
included in the additional quota have already started or
for solar power in December. The solar power FIT will be
completed construction.
lowered to Rmb0.65/kwh (-18.8%), Rmb0.75/kwh (-14.8%),
and Rmb0.85/kwh (-13.3%) for zones 1, 2 and 3 respectively.
Meanwhile, the first batch under the poverty alleviation
The FIT for distributive photovoltaic (PV) projects remains
programme released in 2H16 with installation size of 5.16GW
unchanged at Rmb0.42/kwh, in line with the governments
(2.98GW of ground-mounted solar plants). We believe the
effort to promote a larger portion of distributive PV projects.
document can push local governments to speed up the
The magnitude of the FIT cut is lower than expected in the
construction progress of the poverty alleviation programme.
previous opinion seeking document issued in late September
We expect the first batch to take two years to complete, which
(Rmb0.55/kwh, Rmb0.65/kwh, and Rmb0.75/kwh). The lower-
will provide support for installation demand in 2017 and 2018.
than-expected cut is positive for downstream developers such
We forecast the new installation to normalise in 2017 and
as Xinyi Solar (968.hk), GCL New Energy (451.hk) and United
reach 23GW. The installation is expected to accelerate in 1Q17
PV (686.hk).
as the on-grid deadline for FIT cut is set for June 2017. We are
positive on upstream component manufacturers as the
Latest solar power FIT
acceleration in installation will lead to potential ASP lift from
So lar p o w er F IT the downtrend in 2H16.
( R mb / w at t ) IR R c h an g e
R eg io n B ef o re A f t er % c h an g e Installation quota
Zone 1 0.80 0.65 -18.8% 0.5% - 1%
T o p - A d d it io n al Po v ert y
Zone 2 0.88 0.75 -14.8% 1% - 2%
N o rmal ru n n er q u o t a allev iat io n T o t al
Zone 3 0.98 0.85 -13.3% 1% - 2%
2015 17.8 GW 1 GW 5.3 GW n/a 24.1 GW
Source: NDRC, DBS Vickers 5.16GW,
assuming
2016 12.6 GW 5.5 GW >6 GW >26 GW
We reckon the FIT cut is justified by the decline in construction finish in tw o
costs as solar component price experienced a sharp drop in y ears
2016, especially after the installation rush in 1H16. Taking into Source: NEA, DBS Vickers
consideration of the FIT cut and assuming that average
construction cost drops from Rmb8/watt at the beginning of Total solar power installation - China
2016 to Rmb6/watt in 2017, we forecast the project IRR to
increase by 0.5-1% for zone 1 and 1-2% for zone 2 and 3. GW GW
160 35
Normalisation of new installation. China is on its way to 140 30
achieve its target to reach >110GW of installed capacity by 120 25
2020. We estimate the cumulative installation to exceed the 100
20
target and reach 150GW by 2020. By the end of 2016, the 80
15
cumulative installed capacity is expected to reach 74GW. New 60
installation is estimated to reach a historical high of >30GW in 40 10
2016. The reason behind the high installation was that some 20 5
solar power developers completed construction of solar farms 0 0
2016F

2017F

2018F

2019F

2020F

without obtaining quota beforehand. Thus, additional quotas

2012

2013

2014

2015

are released to absorb some of these solar farms.

At the end of December, the National Energy Administration Cumulative (LHS) New (RHS)
(NEA) issued the notice to adjust for additional solar power
quota. Each province cannot apply for more than 1GW of
Source: NEA, DBS Vickers
quota and additional quotas will be subtracted from the quota
in 2017. Each project included in the additional quota will need
to go through the competitive bidding process. Many provinces

Page 2
 Industry Focus
Solar Power Sector

Over-concern on solar glass overcapacity. The upstream Reduced reliance on subsidies. As the government subsidy
segment of the solar power sector has been expanding at a depends on the difference between the on-gird FIT and local
rapid pace in recent years as the installation experienced robust coal-fire tariff, the decline in FIT will reduce the demand for
growth. The market is concerned on that the overcapacity subsidies. We estimate the amount of subsidy needed for new
situation be more severe in the next few years. However, we projects under the latest FIT adjustment to reduce by 20-30%.
believe the market has over-penalised the industry for the According to BNEF, the average cost of new solar projects
supply growth. The total production capacity for the solar glass dropped below wind projects in emerging markets. As the unit
industry is expected to increase 21% and 25% in 2016 and capex continues to go down and solar power FIT approaches
2017 respectively. A bulk of the existing production capacity grid-parity level, operators will rely less on government
will be due for maintenance in the next few years. According subsidies.
to our channel checks, solar glass producers are planning to
shut down part of their production capacities for maintenance The Ministry of Finance (MOF) announced the sixth batch of FIT
depending on market conditions. XYS and Flat Glass Group subsidy catalogue in September 2016 for solar/wind/biomass
(6865 HK) both have 1,000 tons/day of production capacity power projects connected on-grid before the end of February
that needs to undergo maintenance in the next 2-3 years. After 2015. We see that the payment progress is on track as the
taking into account of the maintenance capacity, we expect government is already making partial payments, which can
the effective production capacity to grow at a lower rate of alleviate the capex burden of solar power developers. As
15% and 18% to 92GW and 108GW in 2017 and 2018 250MW of solar power plants are included in the catalogue for
respectively. According to Bloomberg New Energy Finance XYS, we expect its cash flow to improve by Rmb200m/yr in the
(BNEF), global solar power new installation is expected to next two years.
increase 8% and 15% to 75GW and 88GW in 2017 and 2018
respectively. The global solar glass effective capacity is Subsidies included in sixth batch
estimated to reach c.70GW in 2015 compared to 56GW of
Pro jec t Est imat ed
new installation, which implies the industry will remain at a
siz e o u t st an d in g su b sid y
similar oversupplied level of c.19% in 2017/2018 compared to
Co mp an y (M W) b y D ec 1 6 ( R mb m)
2015. Thus, we believe the market has over-reacted to the Xiny i Solar (968 HK) 250 404
overcapacity concern in solar glass. GCL New Energy (451 HK) 500 808
United PV (686 HK) 630 1,567
Effective production capacity solar glass
Source: Company, DBS Vickers
Tons/day
25,000 20%
18%
20,000 16%
14%
15,000 12%
10%
10,000 8%
6%
5,000 4%
2%
0 0%
2015 2016F 2017F 2018F
Effective production capacity Growth Rate

Source: SCI99, DBS Vickers

Page 3
Industry Focus
Solar Power Sector

Attractive valuation for Xinyi Solar The on-grid process for the solar farm projects was slower than
expected and we expect XYS to miss its target to reach 1.7GW
The solar glass sector slowed down after the installation rush in
of on-grid capacity by the end of 2016. Nevertheless, we are
1H16 and ASP dropped more than 10% during 2H16. We
confident in its strong project acquisition ability and it should
estimate the GPM for solar glass to drop from 46.4% in 1H16
be able to get the momentum rolling during 1H17. We
to 35% in 2H16. The positive profit alert announced in
estimate that 600MW of on-grid capacity will be added in each
December indicated that the sales volume for solar glass
of the next three years. On a positive note, the utilisation hour
increased c.10% during 2016, fell short of our estimate. Two
for the solar farm projects is expected to remain relatively
solar glass production facilities in Malaysia (900 tons/day) and
stable at around 1,100 hours in 2016. XYS continues to be the
Anhui (1,000 tons/day) begun trial production in 4Q16 and
low cost solar farm developer as its current construction cost is
they are expected to make significant contribution in 2017.
estimated to reach Rmb5/watt, which will allow it to reach a
Another production plant in Anhui with 1,000 tons/day of
project IRR of >11% with the drop in FIT.
capacity is expected to commence operation by the end of
1Q17. After taking into consideration of c.500 tons/day of
We maintain our BUY rating on Xinyi Solar but lower our TP to
capacity under maintenance, we expect the effective
HK$3. We lower our target PE multiple for solar glass to 10x
production capacity to increase 36% in FY17. We believe XYS
given the slightly weaker sales outlook, while solar farm and
top notch solar glass quality and well-timed capacity expansion
EPC business remain unchanged at 8x and 5x respectively. We
will allow the company to grab market share from the pickup
revise down our earnings estimate by 6% and 16% for FY16
in installation demand starting 1Q17.
and FY17 respectively to reflect the solar power FIT adjustment,
delayed on-grid process and lower solar glass sales volume. The
Solar glass ASP vs share price
share price has corrected by more than 20% since peaking in
August, which we believe is overdone given the construction
Rebased 30 Oct 15 = 100
cost decline and higher-than expected FIT. The pickup in solar
140
glass demand starting 1Q17 will boost ASP, which will serve as
120
a re-rating catalyst. Trading at trough valuation level of 7.6x
100 FY17F PE, we believe it is time to accumulate the stock.
80
60
40
20
0
May-16
Oct-15

Feb-16

Oct-16
Mar-16
Apr-16

Sep-16
Jan-16

Aug-16
Dec-15

Jun-16
Nov-15

Jul-16

Nov-16

ASP XYS share price

Source: SCI99, DBS Vickers

Page 4
 Industry Focus
Solar Power Sector

Solar peers table

3 m av g
daily
M k t t rading EPS grow t h PE PE PEG Y ield Y ield P/Bk P/ Bk RO E RO E
Pric e Cap v alue 1 7F 1 8F 17F 18F 17F 17 F 18F 17F 18F 17 F 18F
Company Name Cod e L oc al$ US$m US$m % % x x x % % x x % %
So lar
HK solar equipmen t supp liers
Gcl-Poly Energy Holdings 3800 HK 0.94 2,253 7.6 4.3 6.6 6.8 6.4 1.3 0.0 0.0 0.7 0.6 10.5 10.4
Xiny i Solar Holdings* 968 HK 2.57 2,239 5.8 19.4 27.0 7.6 6.0 0.3 6.6 8.4 2.1 1.8 30.1 32.1
China Sy e.Slr.Techs.Hdg. 750 HK 3.56 383 1.2 0.8 8.6 5.3 4.9 1.1 1.2 1.2 0.6 0.5 11.4 11.1
6 .6 5.8 0.9 2 .6 3 .2 1.1 1.0 17 .3 17.9
So lar pow er pro v ider
Gcl New Energy Holdings 451 HK 0.4 984 0.7 120.8 35.8 7.5 5.6 0.1 0.0 0.0 1.3 1.0 18.4 21.6
United Photov oltaics Gp. 686 HK 0.69 441 0.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
7 .5 5.6 0.1 0 .0 0 .0 1.3 1.0 18 .4 21.6
So lar / ot her glass suppliers
Csg Holding 'A' 000012 CH 11.4 3,432 96.1 23.4 20.3 21.0 17.5 1.0 1.3 1.5 2.6 2.3 11.5 12.5
F lat Glass Group 'H' 6865 HK 1.64 95 0.2 4.7 23.7 4.6 3.7 0.3 6.0 7.0 n.a. n.a. 20.2 20.5
Asahi Glass 5201 J P 826 8,561 34.5 31.5 12.7 19.4 17.2 0.9 2.2 2.2 0.9 0.9 4.9 5.2
15 .0 12.8 0.7 3 .2 3 .5 1.8 1.6 12 .2 12.7
Non- HK solar equ ip ment su ppliers
F irst Solar F SLR US 35.75 3,715 111.2 (90.7) 194.7 82.0 27.8 (1.7) 0.0 0.0 0.7 0.7 0.8 2.3
Sunpower SPWR US 7.45 1,031 20.5 n.a. n.a. n.a. 16.4 n.a. 0.0 0.0 1.0 1.0 (3.9) 6.8
Canadian Solar CSIQ US 12.45 715 19.0 18.0 (15.7) 6.4 7.6 (23.4) 0.0 0.0 0.6 0.5 11.3 8.5
Trina Solar Adr 1:50 TSL US 10.12 936 12.4 (57.8) 24.0 22.1 17.8 (0.8) 0.0 0.0 0.7 0.6 3.8 6.5
J inkosolar Holding Adr 1:4 J KS US 15.71 496 6.4 (22.3) 43.2 5.4 3.7 1.0 0.0 0.0 0.5 0.4 10.8 10.1
Oci 010060 KS 81500 1,655 0.0 (65.0) 27.6 19.5 15.3 (0.6) 0.2 0.2 0.6 0.6 3.5 4.2
Motech Industries 6244 TT 28.25 437 3.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.0 n.a. (8.7) n.a.
Hanwha Q Cells Adr 1:50 HQCL US 8.45 703 0.4 (82.8) 6.5 27.3 25.6 (0.5) n.a. n.a. n.a. n.a. 3.4 2.0
J a Solar Hdg.Adr 1:5 J ASO US 4.9 233 2.1 (147.3) n.a. n.a. 13.2 n.a. n.a. n.a. 0.3 0.3 (1.8) 1.8
Beijing J ingy untong Tech.'A' 601908 CH 6.87 1,990 11.4 46.1 33.8 19.5 14.6 0.5 1.2 2.0 1.9 1.8 10.5 12.4
Wacker Chemie WCH GR 109.82 6,096 0.0 58.9 23.9 22.3 18.0 0.6 2.2 2.6 2.4 2.1 13.9 12.5
25 .5 16.0 (3.1) 0 .4 0 .6 1.0 0.9 4.0 6.7

# FY16: FY17; FY17: FY18

Source: Thomson Reuters, *DBS Vickers

Page 5
Industry Focus
Solar Power Sector

DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 16 Jan 2017 17:33:56 (HKT)

Dissemination Date: 16 Jan 2017 19:30:19 (HKT)

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 Industry Focus
Solar Power Sector

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securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for
jurisdictions qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such
jurisdictions.
DBS Vickers (Hong Kong) Limited
th
18 Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong
Tel: (852) 2820-4888, Fax: (852) 2868-1523
Company Regn. No. 31758

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