Initiating coverage with Buy rating
We initiate coverage on GCL System Integration (GCL), one of the largest solar cell/module manufacturers in China, with a Buy rating. We believe the company willleverage its parent GCL Group's advantages along the entire solar value chain andbenefit from expanding into new businesses like energy storage and electric vehiclecharging pile manufacturing. We expect GCL to post a 2015-18 earnings CAGR of46%. However, we don't think the market has fully priced in its supply chainadvantages and new earnings growth drivers, which is why our 2017/18 EPS estimatesare 14%/33% higher than consensus.
Leveraging supply chain advantages to capture the solar installation boom
Parent GCL Group is the first company in the world to own an entire solar supply chain,including: 1) Upstream: GCL-Poly (3800.HK), the world's largest global polysilicon/wafermanufacturer; 2) Midstream: GCL System Integration (002506.SZ), a cell/modulemanufacturer; 3) Downstream: GCL New Energy (0451.HK), one of the largestdomestic solar power plant developers. We believe the company will benefit from GCLPoly'sability to fully supply it with high-quality, low-cost wafers and from orders fromGCL New Energy. GCL targets 6GW of solar module shipments in 2017 and enteringthe global top 3 in terms of shipments.
Expanding from solar manufacturer into new areas
In addition to its core solar cell/module manufacturing, GCL also targets expanding GCLGroup's presence along the value chain in new-energy-related areas, including: 1) onestopsolar service; 2) supply chain financing services; 3) energy storage products; and4) charging pile manufacturing. We estimate its new businesses will contributeRmb110/300/550m in revenue in 2016/17/18.
Valuation: DCF-based price target of Rmb8.1
The company is currently trading at 25.7x 2017E PE, in line with the A-share listed solarcompany average of 25.1x, while we forecast its 2018 EPS growth at 33%, above thesector average of 27%. We estimate its 2017-18 PEG ratio at 0.8, lower than the sectoraverage of 1.2. Our DCF-based price target is Rmb8.1 (WACC = 7.9%), implying2017/18E PE of 34.2x/25.6x vs. the sector average of 25.1x/18.7x.
