CSCI-Glass-Xinyi Glass (868 HK)：Paving the way for stronger growth ahead - 20180503

Paving the way for stronger growth ahead  

• On the back of favourable industry dynamics and rising contribution from its Malacca project, Xinyi Glass is expected to see continuous margin expansion before end-2018, in our view.
• We remain positive on the outlook of China’s float glass industry, in view of the strengthening supply-side structural reform.
• Based on our latest update with the management, we believe Xinyi Glass would post another year of earnings growth in 2018. In addition, we expect Xinyi to enjoy a stronger volume growth from 2019 onwards, given its existing project expansion plan in both China and overseas. Thus, we maintain a Buy rating.

Another year of strong growth ahead. According to industry data, 5mm float glass price in Guangzhou grew 12.0% YoY YTD versus soda ash price in South China fell 7.0% YoY YTD, which might continue improving GPM of Xinyi’s related products this year, in our view. The company’s overall production cost would maintain stable amid stable gas price after the winter warming season. According to our estimation, the full-year contribution from Phase I 1x1,200tpd float glass production line in Malacca as well as the upcoming commencement of Phase II 1x800tpd and 1x1,200tpd will boost production volume growth in the next two years. Leveraging on its Low-E glass sales growth and auto glass production expansion, Xinyi Glass would be able to cement its industry leading position going forward, in our view.

Eyes on significant expansion of float glass market shares by 2020. According to Xinyi’s latest development plan, the company has acquired the approval for building glass production lines in Guangxi Zhuang Autonomous Region, with design capacity of 4x800tpd. The project is scheduled to commence operation by mid-2019 at the earliest. Considering the company’s announced expansion plan in North America incl Canada, we believe that Xinyi Glass would see a significant market share gain going forward.

Beneficiary of industry consolidation amid higher environmental protection standards. The Chinese government continued tightening the policy of constructing new float glass production lines and phasing out the obsolete and non-compliant float glass production lines over the past few years. According to the industry data, China’s top five producers (incl. Xinyi Glass) accounted for 32% of the daily melting capacity in China by late-April 2018. We believe the industry’s consolidation ratio will further increase this year.

Still room for re-rating. According to the management guidance, we revised up our revenue and net profit estimates for FY18E by 4.9%/12.3% respectively. Given our expectation of Xinyi’s strong float glass profitability this year and a unique market position for long-term development, we raised our price target to HKD13.0, based on +1SD to 5-yr average ex-Xinyi Solar contribution PER at 12.0x PER, from previous 9.0x. Maintain Buy.