 Sector has appreciated on strong policy expectations; in this report, we answer some of the key questions from investors 

 On an enhanced industry outlook, TPs are lifted with more bullish assumptions; next catalysts and risks are highlighted 

 Stocks: Buys on Xinyi Solar (glass), Tongwei (poly), Xinyi Energy (farm); upgrade GCL (poly) to Hold (from Reduce)  

Understanding this solar boom: The recent surge in solar stocks, in our view, could be explained by 1) recent news (bjx, 14 Sep) on some bullish targets for the upcoming 14th Five Year Plan (FYP) by 2025, such as a combined installation for solar and wind of c.100GW p.a. (2016-19: 54-68GW p.a.), and 2) President Xi Jinping’s recent target to achieve carbon neutrality by 2060. While these bode well for solar energy over the long term, we stay selective across the supply chain in terms of subsets/stocks. This report highlights our answers to some key investor questions:  

1. What are the implications of China’s new 2060 pledge? We expect climate issues will become an even higher priority in China's 14th FYP, implying stronger growth rates in non-fossil fuels, especially solar and wind. However, we also recognize the potential challenges, such as the grid’s capacity for integrated renewables, limiting upside for the near term. So far, no details have been released as to how carbon neutrality will be achieved (see China's new climate ambition, 29 Sep). 

2. What are the next catalysts and risks to watch? The 14th FYP is still being drafted and we believe consultation papers may potentially be circulated within the industry in Nov 2020, after the 5th Plenary Session of the 19th party meeting. Any public details could reset expectations. We continue to see risks in solar wafers because of high input costs and overcapacity in 2020-21 (see Polysilicon price hikes could squeeze wafer margins, 23 Sep). 

3. Will recent price hikes in solar products discourage demand? Given supply tightness, module prices have risen 1-6% since July. We believe certain installations may be delayed into 2021 as operators are hoping module prices will retreat after the current spike. We maintain our 40GW installation in China for 2020, versus the market’s more optimistic 45GW (see Reassessing the demand curve, 23 Sep). 

4. Stocks: Moving into bullish scenarios? We continue to favour polysilicon, solar glass and solar farms. For major solar glass maker Xinyi Solar (XYS, 968 HK), we lift TP to HKD16 (from HKD12) because of more bullish assumptions in the medium-term where our shipment numbers imply a national market of 60-85GW p.a. during 2023-25 (global: 168-127GW) based on the same market share, vs our current house view of 40-47GW p.a. for 2020-22. Similarly, we raise TP for solar farm operator Xinyi Energy (XYE, 3868 HK) to HKD4.8 (from HKD3.7) by assuming more capacity additions. We upgrade GCL Poly to Hold (from Reduce) and lift TP to HKD0.40 (from HKD0.22) based on a better shipment outlook, despite its liquidity risks.