BOCOM INTL: New national standard reflects government's determination to combat internal competition, first choice GCL TECH (03800)

BOCOM INTL released a research report stating that the new national standard for energy consumption of polycrystalline silicon has been tightened beyond expectations. The bank believes that this reflects the government's firm determination to prevent the internal consumption of the photovoltaic industry. It is expected that a series of measures to prevent internal consumption will continue to be implemented, and a turnaround in the polycrystalline silicon sector can be expected. The bank's top pick in the industry with the lowest energy consumption and the most benefit from the new national standard is the leading polycrystalline silicon company, GCL TECH (03800/buy). Key points of BOCOM INTL: The new national standard for energy consumption of polycrystalline silicon has been released, further tightening compared to the consultation draft. The "Energy Consumption Limits for Unit Products of Polycrystalline Silicon and Germanium" have been officially released. Compared to the consultation draft from September last year, the comprehensive energy consumption limits for rod silicon/granular silicon have been further tightened from 6.4/5.0 kgce/kg to 6.3/4.6 kgce/kg. Although the limit for rod silicon seems to have been tightened by a smaller margin, it accurately corresponds to the energy consumption concentration area of existing production capacity. According to previous statistics, the industry output in the 6.3-6.4 range accounted for as high as 38% of total production, while the output below 6.3 accounted for only 45%. In order to prevent companies from lowering their nominal energy consumption by purchasing high-energy intermediate products externally, the formal draft specifies that if the silicon cores used by enterprises are mostly purchased externally (not outsourced processing), the energy consumption per unit product of the silicon core must be included in the limit of the polycrystalline silicon unit product at the 3rd level, closing the loophole of beautifying energy consumption data through the purchase of silicon cores. At the same time, the energy consumption conversion factor for hydrogen has been significantly increased from 0.2 kgce/Nm3 to 0.6 kgce/Nm3, making it significantly more difficult for companies to comply with the energy consumption standard. The new national standard is expected to accelerate the elimination of excess production capacity, and the extent of overcapacity is expected to be significantly reduced. The new national standard will officially come into effect on January 1, 2027, earlier than expected by the bank. At that time, companies that do not meet the 3rd level standard will be required to rectify within a specified period, and companies that fail to rectify by the deadline or still do not meet the 2nd level standard after rectification will be shut down. According to statistics from the Silicon Industry Association last year on the energy consumption standards in the consultation draft, the effective production capacity of polycrystalline silicon in mainland China will decrease to around 2.4 million tons, a significant reduction of 31.4% compared to the already built capacity of 3.5 million tons. Due to the further tightening of the formal draft standards, the bank expects that the effective production capacity of polycrystalline silicon in mainland China will drop to below 2 million tons, exceeding the estimated demand for 2027 by only 1/3, and the extent of overcapacity is expected to be significantly reduced.