GCL New Energy reported 1H18 revenue of Rmb2.7bn （+49.2% YoY） and net profit of Rmb345m （-28.9% YoY）。 We revise down our EPS forecast from Rmb0.05 to Rmb0.04 in 18E （flat YoY）， fromRmb0.05 to Rmb0.04 in 19E （flat YoY） and maintain our forecast at Rmb0.05 in 20E （+25% YoY）。 Werevise down our target price from HK$0.59 to HK$0.30. With 0% upside, we downgrade to Hold.
Finance cost rally. The strong increase in revenue was mainly due to a 59% YoY increase in sales ofsolar power. Gross margin declined from 70.8% in 1H17 to 68.7% for 1H18, mainly attributable totariff cuts for projects connected to the grid after 30 June 2017. The average tariff （tax exclusive）was c.Rmb0.76/kWh, compared with Rmb0.80/kWh last year. Finance cost rallied 75% YoY toRmb1.1bn for 1H18, mainly due to a significant increase in borrowings, even as the average cost ofborrowing declined from 6.8% in 2017 to 6.5% in 2018.
High gearing concern. The company’s total borrowings amounted to Rmb37.4bn by June 2018,comparing with Rmb35.4bn by end-2017. Net debt to total equity ratio reached 364% for 1H18 vs330% at end-2017. The increasing in borrowings are mainly used in solar power capacity expansionover 1H18. By end-June 2018, receivables from government subsidies owed amounted to Rmb6.1bn（Rmb4.2bn for 2017）， of which Rmb3bn are non-current receivables to be registered for from laterrounds of subsidy awards. We expect for 2H18, payments of subsidies may accelerate and alleviatethe firm’s current portion of its receivables. However, for the non-current portion, we holdconservative view as to whether the government will release a new catalogue of eligible projects forsubsidies, given that the gap between subsidies due and funds available has enlarged to more thanRmb120bn by June.
Capacity expansion. In 1H18, the company’s newly installed capacity was 1.2GW, bringing totalinstalled capacity by end-June to 7.1GW （+41% YoY）， of which, grid-connected capacity amountedto 6.1GW. More than 89% of domestic solar capacity is located in regions where curtailment issuesare limited. In addition, nationwide newly installed capacity in 1H18 was eligible for tariffs beforeadjustments and was nearly free from the impact of the “531 policy”。 We see the averageconstruction cost per watt for solar power plants decreased to Rmb5.9 in 1H18 from Rmb6.3 in1H17 （-6% YoY）。 We expect average construction cost will drop further in 2H18 to below Rmb5.9/W.
Downgrade to Hold. We revise down our EPS forecasts from Rmb0.05 to Rmb0.04 in 18E （flatincrease）， from Rmb0.05 to Rmb0.04 in 19E （flat increase） and maintain at Rmb0.05 in 20E （+25%YoY）。 We revise down our target price from HK$0.59 to HK$0.30, representing 6x 18E PE and 0.7x18E PB. With 0% upside, we downgrade to Hold.