GCL-Poly Eyes More Debt Reduction With Potential STAR Market Listing

Key Takeaways:

• GCL-Poly says it is studying the possibility of a secondary listing on the Chinese mainland
• Such a listing would most likely occur on the Nasdaq-style STAR Market, which has rewarded such secondary listings with high valuations

By Doug Young

First it was skyrocketing polysilicon prices that saved producer GCL-Poly Energy Holdings Ltd. (3800.HK) from collapsing under a mountain of debt. Now, the polysilicon maker is hoping to further bolster its financial position through a potential listing on the Chinese mainland, which has handsomely rewarded such newcomers with very high valuations.

The Hong Kong-listed GCL-Poly was reportedly mulling a listing on one of mainland China’s A-share markets as early as 2017, following a trend for overseas-listed Chinese companies to privatize and relist on the mainland in hopes of getting better valuations. That trend has changed slightly over the past two years, following China’s launch of its Nasdaq-style STAR Market that allows firms like GCL-Poly to maintain their overseas listings while also floating shares at home.

GCL-Poly announced last Thursday that it has launched “a feasibility study to explore the possibility of, and plan for, a listing of the company on a stock exchange” on the Chinese mainland. It wasn’t more specific. But such a listing would almost certainly be on the STAR Market, which has enthusiastically welcomed such secondary listings by offshore-traded Chinese companies in emerging areas like new energy.

GCL-Poly’s rival Daqo DQ made a similar STAR Market listing last July, raising 6.5 billion yuan ($1 billion). More recently, Daqo announced it would raise another 11 billion yuan through the STAR Market-listed unit to fund a major expansion. It’s taking advantage of the China-listed unit’s high valuation to raise cash far more cheaply than it could using the U.S.-listed company. Right now the China-listed Daqo trades at a price-to-earnings (P/E) ratio of 16, or five times the P/E of just 3 for the New York-listed Daqo.

GCL-Poly, which was struggling under a heavy debt burden that resulted in defaults several years ago, would most likely see a STAR listing serving a similar purpose, allowing it to raise funds more cheaply than it could through floating new shares in Hong Kong.

Investors didn’t seem too excited at the news, bidding up GCL-Poly shares a scant 2.8% in Thursday trade after the announcement, only to give all of that back on Friday and in early Monday trade. At their latest price of HK$2.42, the stock is now about 3% below where it was before the new China listing announcement.

Frankly speaking, GCL-Poly’s shares have done quite well lately considering all the controversy dogging it over the last few years. The company is one of the world’s top makers of raw polysilicon and polysilicon wafers, the main materials used to make solar panels that are rapidly becoming commercially competitive with traditional fossil fuel-powered electricity.

Its shares were suspended for much of last year after it failed to submit its 2020 annual report on time due to a dispute with its auditor. The stock was frozen at HK$1.98 between March and the start of November, but then shot up 80% when trading finally resumed. It has since given back a lot of those initial gains, but is still up more than 20% from pre-suspension levels.

No matter how you slice it, the shares are doing quite well these days when one considers they were trading as low as HK$0.22 as recently as 2020 when the company was still mired in its debt crisis.

Save by soaring prices

While a new STAR Market listing could help GCL-Poly further pay down its debt, the real catalyst behind the company’s strong rebound has been a surge in polysilicon prices that resulted in huge revenue and profit gains for major producers.

In late January, the company issued a positive profit alert, saying it expected to report a 2.6 billion yuan profit in the second half of 2021, representing a huge swing from the 3.7 billion yuan loss it reported in the year-ago period. It didn’t give a revenue forecast for the period. But a good comparison is Daqo, which reported its revenue rose more than fourfold to $586 million in last year’s third quarter from $125 million a year earlier.

Another major Chinese polysilicon maker, Hong Kong-listed Xinte (1799.HK), gave its own similar positive profit alert last month, saying it expected to report a 5 billion yuan profit for 2021, up sevenfold from its 695 million yuan profit in the previous year.

While these three major players are all benefiting from soaring prices, each has its separate major risks in the background. For Daqo and Xinte the risk is geographic, since both are based in the sensitive Xinjiang region where the west has accused China of abusive labor practices and other violations.

For GCL-Poly the risk has been due to its heavy debt. But the big jump in polysilicon prices last year helped the company to pare that debt significantly, with the figure falling by nearly half to about 26 billion yuan by the middle of 2021 from 44 billion yuan a year earlier. If GCL-Poly were to raise money as aggressively as Daqo did through a new STAR Market listing, it could use those funds alone to reduce its remaining debt by more than half.

If it does make a STAR Market listing, GCL-Poly is unlikely to get quite as big a valuation gap as Daqo did between its U.S. and STAR listings. While the U.S.-listed Daqo trades at a forward P/E ratio of just 3, GCL-Poly’s Hong Kong shares trade at a much higher 11. That means a STAR Market valuation of 16 similar to Daqo’s would be higher than the ratio for its Hong Kong-listed shares, but by a much smaller amount.

By comparison, Xinte trades at P/E of 9, while Germany’s Wacker Chemie (WCH.DE) trades at a P/E of 12, putting GCL-Poly roughly in the center of the group. At the end of the day, all of these ratios are likely to come down sharply this year, since all of the companies are likely to report big profit declines as polysilicon prices are expected to peak and start trending downward.