Xinte Energy’s earnings met expectations in 1H22. Its silicon feedstock business has seen an increase in both shipment and price, while its new energy power station development and operation business has been growing steadily. Considering the larger-than-expected increase in silicon feedstock price and its accelerating capacity expansion, we raise our 2022E/23E/24E net profit forecasts to Rmb13.50bn/15.46bn/11.08bn (from original forecasts of Rmb8.54bn/7.81bn/7.12bn), corresponding to EPS forecasts of Rmb9.44/10.81/7.75 (equivalent to HK$11.04/12.64/9.06) and 1.9x/1.6x/2.3x PE at the current price. We assign 3x 2022E PE to arrive at a target price of HK$33 and reiterate the “BUY” rating.
1H22 earnings in line with expectations In 1H22, Xinte Energy posted operating revenue of Rmb14.576bn (+87.2% YoY), and attributable net profit (ANP) of Rmb5.617bn (+357.4% YoY). In 2Q22 alone, the Company achieved operating revenue of Rmb7.864bn (+61.7% YoY, +17.2% QoQ) and ANP of Rmb3.126bn (+216.9% YoY, +25.5% QoQ). Its robust earnings growth was mainly attributable to the large increase in profit from silicon feedstocks.
Polysilicon: Higher silicon feedstock shipment and price bring a surge in earnings.
In 1H22, Xinte Energy’s polysilicon business achieved operating revenue of Rmb10.361bn (+193.3% YoY), corresponding to a gross profit margin (GPM) of 66.0% (+21.8ppts YoY). Thanks to surging silicon feedstock prices, the Company’s profitability improved significantly. In 1H22, Xinte Energy’s silicon feedstock output/shipment stood at 46.2kt/47.7kt (+29% YoY/+36% YoY); its average price/cost per tonne tallied at Rmb217,200/73,900 (+118% YoY/ +35% YoY). The cost spike was mainly due to the higher price of industrial silicon. At present, the Company’s polysilicon production capacity is about 100kt. Its 100kt production capacity in Baotou will be commissioned for a capacity ramp-up in 3Q22 and may achieve full production capacity in 4Q22.
Its 200kt production capacity in Zhundong, Xinjiang, may be commissioned in two phases in 2023-24. We estimate that Xinte Energy’s silicon feedstock output will exceed 110kt/230kt in 2022/23, and the non-silicon cost will decrease further. Despite the potential silicon feedstock price downtrend in 2023, Xinte may maintain steady earnings growth with a larger shipment.
New energy power stations: Development and construction are well underway with conspicuous short-term improvement in GPM.
In 1H22, Xinte Energy’s power station construction segment achieved operating revenue of Rmb2.459bn (-18.0% YoY). The decline was mainly due to lower per-watt contract revenue of projects. The segment’s GPM increased to 24.5% (+13.8ppts YoY), mainly thanks to the collective confirmation of some high-quality projects, but the GPM will gradually fall back to the conventional level. In 1H22, the Company acquired a quota of over 2GW for photovoltaic (PV) and wind power projects, with about 1GW completed and confirmed. The Company plans to construct 2GW-2.5GW of new energy projects in 2022, leading us to expect accelerating progress in 2H22.
Wind and PV power station operations: Steadily expanding amid growing revenue from electricity charges In 1H22, Xinte Energy’s power station operations business achieved operating revenue of Rmb1.213bn (+66.9% YoY) and a GPM of 65.6% (- 5.8ppts YoY). By the end of 1H22, the Company owned 2.37GW (in operation)/c. 1GW (under construction) of wind and PV power stations, which may be connected to the power grid in 2H22 and 2023 successively. In 2H22, Xinte Energy may accelerate the expansion of self-owned new energy power stations. It plans to expand the installed capacity to 2.5GW-3GW by the end of 2022, which will continuously contribute key increments to the Company’s earnings.
Potential risks: Disappointing demand for PV installations; intensified competition in the PV glass segment; rising raw material costs; disappointing capacity expansion.
Investment recommendation: Considering the larger-than-expected increase in silicon feedstock price and the Company’s accelerating capacity expansion, we raise our 2022E/23E/24E net profit forecasts to Rmb13.5bn/15.46bn/11.08bn (from the original forecasts of Rmb8.54bn/7.81bn/7.12bn), corresponding to EPS forecasts of Rmb9.44/10.81/7.75 (equivalent to HK$11.04/12.64/9.06) and 1.9x/1.6x/2.3x PE at the current price. Based on the average valuation of 8x 2022E PE for comparable companies in the silicon feedstock segment, namely GCL Technology (03800.HK), Daqo New Energy(688303.SH) and Tongwei (600438.SH), and considering Xinte Energy’s discount due to low liquidity in the Hong Kong stock market, we assign 3x 2022E PE to derive a target price of HK$33 and reiterate the “BUY” rating.