DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 25 June 2014 Asia Pacific/China Equity Research Capital Goods (Capital Goods CN (Asia)) China Solar Sector INITIATION Leverage on better demand outlook Figure 1: IRRs look attractive under new subsidy policy Areas Tariff (Rmb) Utilisation hours Unlevered IRR Gearing Levered IRR Class I 0.9/kWh 1,500 9.5% 70% 16.3% Class II 0.95/kWh 1,300 8.3% 70% 12.8% Class III 1.0/kWh 1,100 6.8% 70% 9.0% Distributed 0.42/kWh + normal tariff 1,100 9.6% 70% 14.1% No local subsidy is included; Source: NEA, MOF, Credit Suisse estimates ■ Favourable policies stimuate demand. We are optimistic on the Chinese solar market, which should be driven by favourable government targets (70 GW by 2017) and feed-in tariffs that should secure volume growth and attractive returns. Our global solar team forecasts Chinese solar demand will grow 39%/15% YoY in 2015/16 with a 16/18 GW addition after a slight contraction in 2014. Despite the slow development of distributed generation (DG) projects YTD, it is encouraging to see that recent policies and initiatives all point in a favourable direction to speed up DG. We estimate that a typical solar project can achieve an unlevered IRR of 9-10%, which is attractive for companies with strong balance sheets that can gear up. ■ Downstream and polysilicon players look well positioned. We believe solar EPC companies are direct beneficiaries of better volume. Solar project operators should enjoy visible returns and those with access to low-cost funding can leverage for much high equity IRRs. We also like upstream polysilicon cost leaders for the improving supply-demand balance. In the context of rising global solar trade disputes, a bigger domestic market would mean lower volatility for upstream players used to relying on foreign demand. ■ Stock calls: We initiate on China's solar sector with an OVERWEIGHT and initiate coverage on Singyes and GCL. We believe companies with a strong track record (Singyes), and/or protected by high entry barriers (GCL), and/or with access to low-cost capital will be beneficiaries. We believe Singyes (OP, TP HK$16.4) offers attractive risk-reward for the potential DG market ramp-up on its experience and strong track record in BIPV and Golden Sun, and healthy balance sheet. We like GCL (OP, TP HK$3.1) for its large scale and sustainable cost leadership. In the context of the improving supply-demand balance for polysilicon and wafer, we expect GCL to benefit from margin expansion. Key risks to our view include trade disputes, slow subsidy payments and potential curtailment. Research Analysts Baiding Rong 852 2101 6703 baiding.rong@credit-suisse.com Edmond Huang, CFA 852 2101 6701 edmond.huang@credit-suisse.com Patrick Jobin 212 325 0843 patrick.jobin@credit-suisse.com Maheep Mandloi 212 325 2345 maheep.mandloi@credit-suisse.com 25 June 2014 China Solar Sector 2 Table of contents Focus charts and tables 3 Leverage on better demand outlook 4 Valuation summary 5 Favourable government policies stimulate demand 6 Downstream and polysilicon players look well positioned 9 Stock calls 12 Key risks 13 China Singyes Solar Technologies Hldgs 15 GCL-Poly Energy Holdings 38 25 June 2014 China Solar Sector 3 Focus charts and tables Figure 2: Solar installation as a % of total power (GW) Figure 3: China should become a major solar end user 0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5% - 200 400 600 800 1,000 1,200 1,400 1,600 1,8002011201220132014E2015E2016ECoalHydroWindNuclearSolarSolar % of total (RHS) 0%10%20%30%40%50%60%70%80%90%100%200520072009201120132015EChinaUSJapanEUOthers% of US (RHS) Source: NEA, CEIC, Credit Suisse estimates Source: Government data, SolarBuzz, GTM/SEIA, Company data, Credit Suisse estimates Figure 4: IRR comparison Areas Tariff (Rmb) Utilisation hours Unlevered IRR Gearing Levered IRR Class I 0.9/kWh 1,500 9.5% 70% 16.3% Class II 0.95/kWh 1,300 8.3% 70% 12.8% Class III 1.0/kWh 1,100 6.8% 70% 9.0% Distributed 0.42/kWh on top of normal tariff 1,100 9.6% 70% 14.1% Golden Sun* 5.5/W initial investment 1,100 13.7% **70% 25.3% *Golden Sun subsidy ended in 2013; **70% leverage of post-subsidy investment Source: NEA, MOF, Credit Suisse estimates Figure 5: Cash cost below US$19/kg should be competitive in 2014 Figure 6: Singyes has strong