China-based GCL-Poly Energy Holdings Limited (HKG:3800), the world’s leading polysilicon and wafer manufacturer, has reported a loss for the first half of 2012, after successfully recording profits since the second half of 2009. The unaudited half-yearly report was published on the company website on Thursday after the markets closed. The loss was attributed to “cyclical oversupply of the industry, the European debt crisis and the European subsidy policy changes.” Like its peers, GCL-Poly’s gross profit margins have decreased significantly year-on-year from 38.6% in H1 of 2011 to the current 14.3%, wiping out profitability. The drop is even more overwhelming in the group’s solar business,which witnessed a gross profit margin decline from 44.2% for the six months ending June 30, 2011, to 15.5% in 2012 during the corresponding period. 

The impact of this news will become clear when markets open Friday morning. The company’s shares had closed up 2.5% at $0.158 (HK$1.23) on Thursday. However, this comes as no surprise to the industry, as the wafer prices continue to fall globally as the problems associated with oversupply persist. According to analysts, the wafer prices have fallen by 44%, while polysilicon prices dropped 23%. GCL-Poly had already issued a “Profit Warning” for investors on August 9th. 

GCL’s revenues have fallen by 22.4% from $1.95B in H1-2011 to $1.528B in H2-2012, while the company has gone from making a profit of $457M to a loss of $42.5M, a loss per share of $0.27, in the same period. On a positive note, the group’s polysilicon sales increased by five-fold from 1,508MT in H1-2011 to 9,012MT in H1-2012, while wafer shipments also increased by 50% from 2,119MW in H1-2011 to 3,186MW in H2-2012. However, due to falling price levels, revenues from the solar materials business have fallen by 34.2% from $1.6B in H1 of 2011 to $1.07B in H1 of 2012. 

The falling revenues were further worsened by increases in virtually all expense heads. The distribution and selling expenses have increased by 103.7%, administrative expenses by 18.5%, and interest expenses by 146.2%. The company is pursuing an aggressive selling strategy and undergoing expansion in the solar business, which has led to an increase in expenses. 

Average Selling Prices (ASP) for polysilicon was $23.2 per kilogram, and the wafer price was $0.27 per watt. The corresponding 2011 ASP for polysilicon and wafer were $62 and $0.69, respectively. The company was able to reduce polysilicon production costs by 12.5% from $22.1 per kg in H1-2011 to $18.9 per kg in H1-2012. Wafer production costs have also fallen by almost 50% from $0.26per watt in H1 of 2011 to $0.13per watt in H1 of 2012. 

In short, polysilicon sales volume has increased by 498%, and wafer by 50%, while production costs have dropped 15% and 41%, respectively;however, the massive decline in selling prices of 63% and 61%,coupled with across-the-board increases in expenses meant that the company still ended up losing money. 

By the end of June 30, 2012, GCL-Poly hada pipeline of 469MW of solar power plant projects while its 16MW projects are currently operational in the US. The company is currently working on 20% (95MW) of them, while construction of the rest, i.e. 80% (374MW), which are located in the US and Puerto Rico, will start by the end of the current year. A month ago, the business had sold 92MW of projects in the US to California-based Consolidated Edison, Inc.(NYSE:ED).

Earlier in August, Trina Solar Limited (ADR) (NYSE: TSL), one of the leading solar panel manufacturers, had also reduced its shipment guidance by 100MW,while about a week ago, Daqo New Energy Corp (NYSE: DQ), GCL’s competitor, had also reported falling revenues. The problems of oversupply and falling prices are also evident in the falling share prices throughout the industry. Since the beginning of the current year, Trina’s share prices have fallen by 24.1%, Daqo’s by 42.9% and GCL’s by 43%. Even those companies that have posted better results for Q2-2012, such as First Solar, Inc. (NASDAQ:FSLR) and Canadian Solar (NASDAQ: CSIQ),have also witnessed a decline in share prices of 28.46% and 11.27%, respectively. 

GCL-Poly expects global PV demand in the current year to reach 30GW, with most of the growth occurring in China, India, the US, Japan, Korea, Australia and Brazil, while the European demand will remain stable. The company expects the current Chinese FiT to remain at present levels for the next two years. It is also hopeful that the Chinese government will enforce a “renewable energy portfolio standard” in all the Chinese provinces, which would further fuel the solar sector’s growth. Amid US sanctions and looming threats of an increase in tariff from the EU, the diversification in the solar market offers other areas for the business to grow. While the current downward trend in prices is continuing, they have started to show stability from the second quarter and GCL-Poly expects them to further stabilize in the coming periods. 

GCL-Poly’s Chairman Zhu Gong Shan believes that the current results reveal that his company has “achieve[d] encouraging financial results in the first half of 2012 when compared with the industry average.” While the solar sector continues to struggle, the group’s power business development unit was relatively stable with electricity and steam power showing a year-on-year increase of 8% and 10%. The group has recorded an increase in revenues from sale of electricity, steam and coal. However, with a 56.6% contribution to GCL-Poly’s total revenues, the “wafer sale” remains the dominant business area of the company. It has asserted that “GCL-Poly will continue to enhance its technology roadmap with the development and application of new techniques in polysilicon manufacturing.” The chairman believes that “[the] current challenges are only temporary, the bright prospects of PV industry remain unchanged and GCL-Poly will maintain its current leading position in the global PV industry.”