GCL TECH (03800.HK) recently released its semi-annual report for the first half of 2022.

In the first half of 2022, GCL TECH achieved a revenue of RMB 15.326 billion with a year-on-year increase of 74.1%, and a net profit attributable to the parent company of RMB 6.909 billion with a year-on-year increase of 187.1%. The output of polysilicon was 40,100 tons (excluding 32,300 tons from associated companies), which far surpassed the total output for the previous year, and marks GCL TECH's most outstanding "achievement" since its public listing.

GCL TECH said that thanks to its core advantages, namely the low cost and high efficiency of granular silicon as well as the rapid growth of the photovoltaic industry, GCL has achieved unprecedented levels of growth in its performance.

As the company's projects in Xuzhou, Leshan, and Baotou are put into production and reach the target output, the core advantages of granular silicon such as low cost, high-tech content, and low carbon emissions will become more prominent, and the company's performance and product quality will continue to improve.

It is worth noting that in the first quarter of 2022, GCL TECH achieved a net profit of RMB 3.03 billion attributable to the parent company, and its polysilicon output was 18,600 tons (excluding 15,800 tons from associated companies). This means that in the second quarter alone, its net profit attributable to the parent company reached about RMB 3.88 billion, and its polysilicon output was 21,500 tons (excluding 16,500 tons from associated companies). When the profit growth due to the price factor is excluded, the granular silicon capacity increase has delivered clear excess earnings.

Comprehensive growth in all key data

According to GCL TECH's financial report, key data such as the output and revenue of silicon wafers and silicon materials have all witnessed growth.

In the first half of 2022, GCL TECH reported the production of a total of 11,216 tons of granular silicon, 28,866 tons of rod-shaped polysilicon (excluding 32,318 tons from associated companies), and 24,173 megawatts of silicon wafers.

Correspondingly, revenue from its photovoltaic materials also reached RMB 14.679 billion in the first half of 2022, and the segment profit was RMB 7.234 billion.

More specifically, the sales revenue of silicon wafers reached RMB 6.275 billion, while that of polysilicon was RMB 6.883 billion. At the same time, the processing business also contributed more than RMB 1 billion; both of these figures far exceeded the corresponding revenue figures for the same period in 2021.

In addition, the company’s gross profit was approximately RMB 7.335 billion, with an increase of 102.4% over the same period in 2021. The gross profit per unit of rod-shaped silicon was RMB 109.1 yuan/kg, and that of granular silicon was RMB 154.7 yuan/kg, with the gross profit margin of the latter consistently higher than that of the former by over 15%.

In the first half of 2022 the price of electricity in Xuzhou reportedly exceeded RMB 0.6 yuan/kWh. With such an unfavorable electricity price, it was not easy for gross profits to reach the highest level in China.

GCL TECH said in a statement that "Thanks to the strong supply and demand in the photovoltaic market, our photovoltaic material business performed exceptionally well in the first half of the year. In particular, since our granular silicon capacity reached 60,000 tons in the first half of the year, we are able to effectively alleviate the market's voracious demand for granular silicon.”

Industry analysts believe that in the first half of 2022, the amount of installed photovoltaic capacity worldwide will continue to boom, and that the end user demand in the world's three major photovoltaic markets will remain strong.

During the period from January to June 2022, China's newly installed photovoltaic capacity was 30.88GW, with an increase of 17.87GW compared with the same period in 2021 and year-on-year growth of 137%. At the same time, the European and the United States continued to step up policy support for the development of new energy, and the amount of installed photovoltaic capacity worldwide continued to far exceed expectations.

Rapid downstream growth has greatly stimulated the demand for upstream raw materials. In the first half of 2022, photovoltaic silicon materials were very difficult to obtain, which drove explosive growth for the entire industry.

In addition to its booming performance, GCL TECH continued to reduce its debt ratio while maintaining high levels of R&D investment.

In the first half of 2022, GCL TECH's asset-liability ratio was only 44.9%, nearly 5% less than the 49.6% in the same period in 2021.

At the same time, R&D expenses reached RMB 689 million, 210 million more than the same period in 2021 and representing an increase of 44%.

Zhu Gongshan, chairman of the board of directors of GCL TECH, said that the most important factor behind GCL's high-quality development in recent years is the scientific research and new technologies that have consistently been taking place for 32 years.

He said that "GCL has spent tens of billions in research and development, and granular silicon has also continued to grow despite much criticism and concern, but I have always believed that technology leads the development of the company."

It is worth noting that perovskite technology, the other major "black technology" in GCL TECH's repertoire, accounted for much of the content of this financial report.

The company said that in order to make full use of the vitality and dynamism that technology has given GCL TECH, and to inherit and develop the company's tradition of scientific research, the company will make every effort to prepare its reserves of cutting-edge technologies and focus on the perovskite technology, which is one of the most promising next-generation optoelectronic materials.

At present, GCL TECH has the world's largest perovskite module with a size of 1m x 2m, and it has now been rolled off the production line. The world's first 100MW mass production line is also under construction in Kunshan with the plants and major facilities already completed, and it is expected to begin mass production in 2022.

It has been reported that Kunshan GCL Photoelectric Materials Co., Ltd., the GCL perovskite project company, has completed round B of financing, with the main investor being Guangxi Tencent Venture Capital Co., Ltd.

Perovskite modules have cost advantages. In the future, they are expected to cost only 70% of crystalline silicon modules, and to have higher efficiency potential as well.

Granular silicon modularization is ramping up

2022 marks the first year for GCL TECH's large-scale production of granular silicon.

In the first half of the year, GCL TECH achieved significant progress in the construction of its granular silicon production capacity.

At the company's Xuzhou base, the world's first 20,000-ton production module of granular silicon officially reached its target capacity in the first quarter of 2022, signaling that granular silicon has now officially reached the stage of modularized mass production.

Shortly after that, the newly added 30,000-ton granular silicon capacity in Xuzhou was completed ahead of schedule and successfully put into operation during the second quarter of 2022. In combination with the previous 30,000-ton project that had been fully put into production at GCL TECH's Xuzhou base, the Xuzhou base's granular silicon capacity has now entered the "60,000-ton Era" and become the world's largest R&D and manufacturing matrix of monomer granular silicon thus far.

Meanwhile, at the Leshan base, a 100,000-ton granular silicon monomer project has been newly constructed and put into operation, making it the world's first project of its kind to fully adopt the design concept of "systematization, standardization, digitization, integration, intelligence, and modularization". It officially began production in July, and has since been producing high-quality granular silicon products.

The 100,000-ton granular silicon base at Leshan has since been further optimized in many aspects. Its production process is now more simplified, its planning is more economical, and it is more conducive to production operations. Also, its process configuration is more reasonable, it can achieve more potential output per unit time, and it has more room available for reducing the consumption of raw materials and energy. There is also now more production experience, thanks in part to drawing on the construction, production and management experience of the Xuzhou base, and with the guidance of the Xuzhou Jiangsu Zhongneng team, the fault tolerance rate in construction and production has been greatly improved as well.

GCL TECH also said that the successful commissioning and operation of several major projects means that the capacity of granular silicon has now officially reached the stage of modularized expansion, which will effectively make it easier to reach the global energy goal of "carbon neutrality".

In addition, the two 100,000-ton granular silicon bases planned and constructed by GCL TECH in Inner Mongolia are rapidly advancing.

Of these, the Phase I 100,000-ton granular silicon production base in Baotou and its supporting 150,000-ton high-purity nano-silicon capacity are expected to officially begin production in the fourth quarter of 2022.

The company said that the Baotou base will further develop its cost control and energy advantages by drawing on the experience of the two existing bases in Xuzhou and Leshan.

It will deploy its 150,000-ton high-purity nano-silicon capacity to form upstream and downstream interactions, ensure the security of its supply of raw materials, effectively utilize the high-purity nano-silicon by-product steam to supply its production of granular silicon, and optimize its cost control strategy.

In Hohhot, work has recently begun on the 10,000-ton electronic grade polysilicon and 100,000-ton granular silicon project. This project is the first granular silicon project involving the collaboration of GCL TECH and TCL, and also the fourth largest granular silicon project base deployed by GCL.

The company said that this move will make full use of the advantages of FBR granular silicon products, such as low investment, low production costs, low carbon emissions, and low energy consumption, and will reflect the company's advanced technology strategies in the field of semiconductor-grade polysilicon.

In the meantime, this move will strengthen in-depth collaboration with core customers, enhance the user stickiness of granular silicon products, and facilitate joint efforts with industry leaders to build a low-carbon photovoltaic industry chain.

Industry analysts believe that the 600,000-ton granular silicon capacity currently planned by GCL TECH is accelerating its way towards success.

"With the increase in the production of granular silicon, its market share will also increase rapidly. Granular silicon's advantages of low cost, high performance, and a low carbon footprint will be recognized by more and more downstream customers. It is very meaningful in terms of alleviating strong market demand and promoting industry-wide carbon control and reduction.”

Acceleration of A-share listing preparations

Released together with the semi-annual report is GCL TECH's resolution regarding its stock distribution.

The same night, another announcement from GCL TECH showed that the company’s board of directors had decided to distribute about 8.639 billion ordinary shares of GCL New Energy (00451.HK) in kind (currently held indirectly by GCL TECH’s wholly-owned subsidiary Elite Time Global Limited), and declared a conditional special interim dividend.

As of the announcement date, Elite Time Global Limited held approximately 44.44% of the shares of GCL New Energy. Based on the distribution of 318 shares in kind for every 1,000 shares held, the shares distributed in kind represent approximately 37% of the issued share capital of GCL New Energy.

Upon completion of the distribution, GCL TECH will hold the remaining 1.738 billion shares of GCL New Energy through Elite Time, representing approximately 7.44% of the issued share capital of GCL New Energy as of the date of this announcement.

This also means that if the share distribution plan is approved, GCL New Energy will no longer be a consolidated company belonging to GCL TECH.

Undoubtedly, there is also another condition for the approval of the share distribution plan, which is that independent shareholders must approve the continuation of the perpetual note agreement (the distribution in kind constitutes a connected transaction).

In 2016, a company under the GCL TECH umbrella entered into a perpetual note agreement with Nanjing GCL New Energy Development Co., Ltd., a subsidiary of GCL New Energy, with a principal of RMB 1.8 billion. This perpetual note has been exempted from default.

The announcement stated that the distribution in kind can maximize the value of the company's proposed A-share listing, which is like a return for shareholder support, while also enabling the company to strengthen its resources and concentrate them on its core business.

At the same time, the distribution in kind provides shareholders with an opportunity to directly participate in the growth and future prospects of GCL New Energy.

In addition, the company stated that the continuation of the perpetual notes will provide the necessary liquidity for GCL New Energy to maintain its operations, while the termination of the perpetual notes could have significant financial consequences for Nanjing GCL New Energy Development Co., Ltd. and GCL New Energy as a whole. This in turn could then jeopardize the existing business relationship between GCL TECH and GCL New Energy.

"Given the performance of GCL New Energy, it has in fact become a burden on GCL TECH during the past two years. Removing this burden would allow GCL TECH to move forward more easily and fully prepare for its A-share listing."

An industry analyst told the reporter: "The continuation of the perpetual bond does not actually impact shareholders. Regardless of whether the share distribution is implemented, the perpetual bond will always exist, but given the current state of GCL New Energy, it is not realistic to expect that this will be fully repaid in the short term."

The reporter noted that Zhu Gongshan, chairman of the board of directors of GCL TECH, had said a few days ago that "GCL TECH is unswerving in its determination to be listed in both locations at the same time, and will make every effort to make its A-share listing next year."

Getting rid of GCL New Energy, which has been in the red for nearly two years and is undergoing a business transformation, would essentially clear the way for GCL TECH to list in mainland China.

An industry analyst also expressed a similar view: "The current businesses of GCL TECH and GCL New Energy are not synergistic, and the latter's losses will offset part of the former's profits. Therefore, getting rid of GCL New Energy would be a boon for GCL TECH."