-Not Vested
Stock jumps up 5%++ today based on ratings outlook by Fitch
FITCH rates China's GCL-Poly 'BBB-'; outlook stable - Thu May 12, 2011 10:27pm EDT
(The following was released by the rating agency)
May 12 (Fitch) Fitch Ratings has assigned GCL-Poly Energy Holdings Limited (GCL-Poly) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-'. The Outlook on the IDR is Stable. At the same time, Fitch has also assigned a foreign-currency senior unsecured rating of 'BBB-' to the company and an expected rating of 'BBB-(exp)' to GCL-Poly's proposed USD senior unsecured notes. GCL-Poly is the largest Chinese producer of polysilicon (poly), which is the raw material used for the production of solar panels.
GCL-Poly's ratings are supported by its strong market position as one of the top three global producers of poly with a capacity of 21,000 metric tons (MT), and of photovoltaic (PV) wafer at a 3,500 mega watts (MW) capacity as at financial year end (FYE) Dec 2010. Other factors backing Fitch's assessment are GCL-Poly's low cost position, its strong order book and the Chinese government's policy that supports poly production by large scale producers. However, the volatile nature of the PV system market due to chunky capacity expansion and the lack of a strong PV technological leadership constrain its ratings.
Fitch noted that 60% of downstream production capacities - including PV wafers, cells, panels and modules - are based in China. GCL-Poly's close proximity to customers in China gives it an advantage over its overseas competitors. GCL-Poly's location advantage supports its cost leadership position by reducing expensive packaging and shipping costs. The cost leadership is also achieved through the integration of by-product recycling into its poly production process. Fitch notes GCL-Poly has a meaningful technological head-start against any future competitors particularly in by-product recycling.
Fitch also takes comfort in GCL-Poly's strong order book, which lasts until 2016. This counters, to some extent, the demand volatility in the PV system industry. Since August 2010, GCL-Poly has signed a number of long-term supply contracts with an order book of over 50,000MW as at end-Dec 2010. This is about 7.7 times GCL-Poly's expected 2011 capacity of 6,500MW and provides support to GCL-Poly's aggressive capacity expansion plan.
The volatility of the poly and PV system markets is a source of uncertainty affecting GCL-Poly's operating performances and constrains its ratings. Any large scale capacity expansion by poly producers can create short-term volatility in pricing environment. This may result in a more volatile financial profile for GCL-Poly. While the company's order book provides future volume certainty, it is still exposed to price volatility.
Furthermore, while Fitch recognises GCL-Poly's technical strength in its production process, the agency believes that barriers to entry are not insurmountable for large corporations with strong cash flows as the technical aspect of the production process is readily available.
The Stable Outlook reflects GCL's strong order book and its continuing efforts to drive down production costs; while selling price is supported by robust demand outlook due to continuing government support towards the development of solar power globally.
Factors that may negatively affect GCL-Poly's ratings include EBITDA margin falling below 35% on a sustained basis, failure to maintain its position among the top three producers in poly and PV wafer, and net debt/EBITDA sustained above 1.0x.
Factors that may lead to positive rating actions include the company's ability to consistently generate positive free cash flow (FCF) and maintain net debt/EBITDA below 0.5x. Fitch would also consider upgrading GCL-Poly if the company becomes the largest poly and PV wafer producer in the world.
Source Reuters