Company Profile

Xinyi Glass was founded in 1988, as a major supplier in the global supply chain, mainly focuses on producing float glass, automobile glass, construction glass and other related products, and accounts for over 20% of the world automobile glass replacement market, and around 15% of the LOW-E glass market in China.

Summary

-Company Profile: Xinyi Glass was founded in 1988, as a major supplier in the global supply chain, mainly focuses on producing float glass, automobile glass, construction glass and other related products, and accounts for over 20% of the world automobile glass replacement market, and around 15% of the LOW-E energy-conversation glass market in China. A subsidiary of the Company, Xinyi Slolar, controlled by Xinyi with the shares of 31.2%, was listed separately in stock market, which mainly focuses on producing solar glass and owns over 20% of the global solar glass market.

-FY2013 result increased strongly by 200% benefited from the industry recovery and large growth of disposable incomes: The Company's sales revenue and net profit amounted to HK$11.78 and 3.522 billion, up 20.4% and 196.4% y-y respectively. The diluted EPS was HK$0.891, up 184% y-y, and the DPS was HK$0.14 by the end of the year with the annual DPS of HK$0.27 in total.

The main reasons of sharp increase of profits are:

1) Disposable incomes from the spin-off and separating listing of Xinyi Solar (XYS), and the net profits increased by over 80% excluding such factor, the incomes increased by 17.8%;

2) Low base due to the industry depression in 2012;

3) Obvious development of main businesses benefited from the growth of demand and price under the good markets of float glass and solar glass, and the government's stimulated policies.

On a closer look, the sales of float glass, automobile glass, construction glass and solar glass increased by 19%, 7%, 36.8% and 36.5% respectively. The growth of the demand from the Mainland, which increased by 26.5% y-y, up 3.5ppts to 73.7% of total revenues, offset the impact of the declining of the European and American markets.

-Obvious improvement of the profitability: Due to the strong rebound of the profitability of float glass and solar glass, the Company's gross margin increased by 6ppts to 31.3% from 25.3% during the same period of last year. The gross margin of float glass and solar glass increased largely by 10.4ppts and 11.6ppts to 19% and 30% respectively, and the gross margin of automobile glass and architectural glass maintained stable as 43% and 40% respectively.

-The Spin-off of XYS was helpful to reduce the performance volatility: After the Spin-off of XYS by way of introduction, the Company's shares of XYS reduced from 100% to 31.2%. We believe the Spin-off of XYS will help Xinyi Glass to reduce the performance volatility considering the downstream demand of photovoltaic industry is still flat affected by the weakness of the global economy currently.

-The growth ratio of float glass decreased slightly in the short run. After the Spring Festival in 2014, the dealers completed the preparation of goods and due to the shortage of orders from the downstream property industry, the inventory of flat glass manufacturers increased largely, and the average glass price in main cities dropped from the peak in 2013, therefore we expect the price pressure will increase in the short term under the large growth of new capacity of the industry. In the medium and long term, the structure of the industrial demand and supply is expected to improve after the implementation of the policies of eliminating backward production capacity and the increase of glass consumption per property unit area.

-Good prospects of automobile glass aftermarket and energy-saving glass market. After the rapid growth in the last few years, China's vehicles amounted to 0.13 billion units, and would be over 0.3 billion as expectation in future, which shows a good prospect for the scale of the automobile aftermarket, the profit contribution of automobile glass was over 38% of the Company's total gross profits, and there is a good prospect for the Company's development as a leader in the automobile glass replacement market. According to the energy-saving construction glass, currently the proportion of China's energy-saving glass is below 10%, much lower than the popularizes degree of 50%-60% in the developed countries, and there is a great potential for the Company's Low-E glass market under the promotion of the nation's environmental protection and energy-saving policies. The Company plans to increase the capacities of automobile glass and construction glass by 10% and 40% respectively, and the capacity of float glass will be increased by 27%, the annual capital expenditure will go up to HK$2.2 billion as well.

-Pay close attention to the development of electronic glass project. The Company starts to expand the ultra-thin electronic glass business besides four main glass businesses in recent years, the ultra-thin electronic glass is one of the most widely used and the fastest-growing specialized glasses in high and new technology such as microelectronic, photoelectron, and new energy, and one of fundamental sources of the flat display, which is widely used in the high-tech smart phones (e.g. iPhone), touch screen of television and tablet computer, and so on. Currently there are good prospects for the ultra-thin electronic glass industry, which owns a great potential demand. The Company's first ultra-thin electronic glass production line put into operation in April 2013, and the second line will be put into operation this year, and the segment is expected to make the profit in 2014. It will improve the Company's incomes and profitability strongly and becomes the strong driving force for the growth if there are any breakthroughs in its technical formula and pass yield.

-Valuation and rating: Our target price for 12 months to HK$6.3, equivalent to 10/8.3/7.4xP/E and 1.8/1.6/1.4xP/B in 2014/2015/2016 respectively. We initiate “neutral” rating.

Risk

Lower-than-expected demand of Xinyi's product due to a Slower economy recovers.

Lower-than-expected removal of backward capacity

RM risks

Export risks

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