What’s new
Based on 3Q’s unaudited financial data released earlier, total turnover in the nine months ended September 30, 2011, was aboutRmb830.72mn, representing 54% of our prior full-year estimate. Gross profit during the same period totaled at Rmb160.92mn, largely contributed by 1H11’s Rmb135.43mn, as 3Q’s GM slipped to 10.0% due to continuous downward pressure on wafer ASPs. In light of the challenging environment, the management made a decision to defer the original expansion plan until market conditions start to showsigns of clear improvement.
Concerns
Wafer shipments in 3Q were slightly over 60MW, indicating a slower demand recovery than expected, especially from Europe, where prevailing debt crisis and tightening financing conditions have put adamper on demand for solar components despite relatively attractive IRR on PV projects. Wafer ASP for Comtec in 3Q was ~US$ 0.61/W, down roughly 26% from that in 1H11. We believe the wafer ASP hasn’t bottomed out yet, as overcapacity in supplies still remains, with additional burden arising from piled up inventories.
Trends to watch
Polysilicon cost expected to trend down further in 4Q, which could deliver positive surprises for Comtec and help sustain a healthy gross margin in low to mid teens. We expect processing cost to remain flattish in 2H11, as the company is still on a learning curve while gradually integrating its Super Mono wafer production. As such, we forecast gross margin for 2H11 to be 12.0%, and 18.3% overall for 2011. Margin pressure could be further alleviated as demand for its high conversion efficiency Super Mono wafers picks up; they are priced at a 15% premium. We favor Comtec’s strategy to defer capacity expansion, as it can relieve the pressure on its balance sheet from the market which is expected to remain volatile.
Valuation and recommendation
We revise down our EPS forecast for 2011e/12e to Rmb0.11/0.09from Rmb0.21/0.28. The stock is currently trading at 8.1x/9.7x 2011e/12e P/E. We reiterate our BUY rating but lower our 12-month TP to HK$1.45. Risks include delayed demand pickup and margin pressure due to continuously declining ASPs.