保利协鑫能源(03800) 　　GCL announced its 9M16 business performance and hosted a conference callon 16 Nov after market close. We think 3Q16 has hit the trough in terms ofwafer margin. Going into 2017, with continuous cost cut efforts, recoveringwafer price, visible demand outlook and a prudent provision recognition thisyear, we forecast a resilient reported earnings outlook while the likely retreat inrecurrent earnings is well expected and priced in at current valuations.Moreover, there could be earnings upside from downstream businessexpansion and further cost reduction on FBR technology. To reflect 9M16results and an updated operation outlook, we tuned our FY16-18 earningsforecasts by -8%/11%/7%. Maintain Buy with target price of HK$1.5. 　　3Q16 operational recap: wafer volume and ASP decline as anticipated 　　Hit by domestic solar demand brake in 3Q, poly/wafer shipment volume in theperiod dropped 70%/5% yoy, or 54%/14% qoq, respectively. Poly/wafer ASP in3Q dropped 7%/20% qoq in USD terms to c.US$15.6/kg/US$0.146/w, anddown 6%/19% qoq in Rmb. As a result of wafer price slump, we estimate thatGPM for wafer dropped to US$0.017/w, compared to US$0.04/w in 3Q15 andUS$0.03/w in 2Q16. At such level of wafer gross margin, GCL-Poly (Suzhou) �Cthe major wafer plant of the company �C was just breakeven in the period,though it fared much better than many loss-making domestic peers. 　　ASP under recovery + further cost cut = wafer margin bottomed-out 　　Per PV insight, poly/wafer ASP has restored by 14%/30% since end of Sep,driven by a rush order ahead of potential solar tariff cut in 2H17. On the costfront, it is confident to achieve at least 5-10% yoy decline in non-silicon cost in2016/17, through captive plant ramp-up and other tech-upgrade efforts suchas further ramp up in application of diamond wire saw. For its FBR poly plant,it is still under internal trial operation and is yet to reach enough scale forexternal sales in the near term. 　　17-18GW wafer shipment guidance maintained; mono now at full utilization 　　GCL further expanded wafer capacity from 17GW by end-2Q16 to 18.5GWnow (incl. 1GW from mono-wafer added in 2Q), through de-bottleneckingwithout spending additional Capex. With more overseas orders (Vietnam,Thailand and India) and stronger domestic orders likely on rush installation in4Q, management expects to achieve 17-18GW of wafer shipment in 2016(2015: 15.2GW). Also for 2017, mgmt guides a similar level of wafer shipmentand expect wafer capacity to run at full-utilization except for maintenanceperiod. For their 1GW mono-wafer capacity in Ningxia which commencedcommercial operation this March, mgmt advised that it has ramped up to fullutilization as of now and demand has been strong with orders being higherthan capacity. They expect market share of mono to edge up in the future withmore distributed solar projects. While cost/margin is not disclosed, they areconfident to achieve a competitive cost level with industry leaders next year.