9M16 NP -44% YoY

GCL announced Q3 results: 9M16 net profit （NP） fell 44% YoY to Rmb210m, includinga 91% YoY drop in Q3 to Rmb16.14m, worse than we expected, which we mainlyattribute to major drops in solar module shipments and ASP during the quarter.

Q3 results hit by end of H1's solar installation rushThere was a rush to install solar capacity in H1 ahead of the 30 June tariff cut. Movinginto Q3, solar product shipments and ASP declined markedly following the end of theinstallation rush. ASP of the company's solar modules dropped over 25% to Rmb2.9-3.0/W in Q3 from Rmb3.8-3.9/W as of end-H1, a decline of over 30% vs. the sameperiod last year. Due to weak sector fundamentals in Q3, accounts receivable increasedfurther, to Rmb7.37bn at end-Q3 from Rmb6.57 as at end-H1. Meanwhile, financecosts jumped 205% YoY to Rmb130m in Q3 due to the company's ongoing expansion.

Earnings turnaround still likely in Q4

We believe earnings could improve visibly in Q3, mainly because: 1） Solar industrydemand has started recovering since the beginning of October, with across-the-boardASP increases, and we foresee another installation rush prior to the tariff adjustment in2017 （see Solar product prices rose for third straight week; near-term undersupply）。 2）When GCL System Integration was listed, parent company GCL Group pledged thatGCL System Integration would deliver full-year 2016 NP of at least Rmb800m. If thistarget is not reached, the parent will compensate the company in cash for the amountof the shortfall. This pledge remains in effect. 3） The company's new businesses, suchas Guoxin Investment （supply chain financing services）， manufacturing energy storagebatteries, distributed power generation and development of overseas business couldalso contribute more earnings in Q4.

Valuation: Rmb8.1 price target; Buy

Despite the worse-than-expected Q3 results, we remain optimistic that the solar sectorwill start improving in Q4, and we are positive on the company's strong advantages inmanufacturing of multi-silicon solar products. Therefore, we maintain our Buy ratingand Rmb8.1 DCF-based PT （WACC 7.9%）。