Investment Summary

Interim Result Exceeded Expectations, surge 76%

Recently, Flat Glass recorded, in the first half of 2020, revenue of RMB2.496 billion, a yoy increase of 22.69%; the net profit attributable to shareholders of listed company was RMB461 million, with a yoy increase of 76.27%, which was within the upper limit of the previous result forecast; the basic EPS was RMB0.24, and the interim dividend was planned to be RMB0.065 per share. The weighted return on equity was 10%, up by 3 ppts yoy.

Booming Production and Demand Increases Revenue Contribution of PV Glass to More than 85%

The gross margin was 38.14%, up 9.99 ppts yoy. The company's gross margin in the second quarter soared to 36.5%, up by 8.45 ppts yoy, and fell by 3.37 ppts qoq, which, nevertheless, was still at a historical high.

To be specific, the production and sales of PV glass were flourishing as revenue increased by 38.92% compared with the previous period, accounting for 85.3% of total revenue, an increase of 10 ppts. There were mainly two reasons: first, benefiting from production capacity expansion (a new production line of 1000 tons was put into operation in April last year) and the increase in demand for double-glazed panels, the sales of PV glass increased compared with the same period last year; second, although the price of PV glass in the second quarter of 2020 was affected by the COVID-19, there was an increase in the price of PV glass qoq, but the average price was still higher than the same period last year. In H1, coupled with the dropped price of some major raw materials including sodium carbonate, the gross margin of PV glass increased by 11.3 ppts to 40%.

Revenue from float glass plummeted by 95.41% compared with the same period in 2019, which was mainly due to the cold repair of a float glass furnace whose annual production capacity was 600 tons at the end of 2019, and more sales of float glass after deep processing. Owing to the epidemic, the average price of float glass declined, and the gross profit margin of the segment decreased by 10.5 ppts to 7.38%.

Revenue from home glass and engineering glass decreased by 23.62% and 8.94%, respectively, compared with the same period of last year, mainly due to the drop in sales orders caused by the epidemic. Moreover, the proportion of purchased original sheets increased, leading to an increase in costs, and the gross margin of the segments decreased by 5.5 ppts and 4.2 ppts, respectively.

Sales expenses, up by 42% yoy, were consistent with the increase in revenue, mainly due to the increase in transportation unit price. The administration expenses and R&D expenses were basically the same, which reflected the better scale positive benefit after the capacity expansion. 72% increase in financial expenses that amounted to RMB42.4 million was mainly due to the increase of interest of borrowings.

Further Expanded Demand in the Fourth Quarter Means Better Expectations on Market Performance

The scale of China's photovoltaic industry continued to grow. In H1, regardless of the impact of the epidemic, scale of installed capacity increased by 0.88% yoy. On June 28, the National Energy Administration announced the bidding results of state subsidies for photovoltaic power generation projects of 2020: the total installed capacity involved in the national bidding subsidy was 25.97 GW, up 13.95% from the previous year. With the implementation of domestic bidding projects, domestic demand will be released in the fourth quarter. In the medium and long term, the application of "charging pile + photovoltaic", "UHV + photovoltaic" and "big data centre + photovoltaic" will bring more development space to the photovoltaic industry. The rapid development of photovoltaic industry accompany growing demand for PV glass.

On the other hand, the penetration rate in markets of double-glazed modules in 2019 was only 14%. In the future, with high power generation efficiency and low attenuation rate gradually accepted and applied, as well as the gradual optimization of installation methods, the application scale of double-glazed modules will expand on end. As China Photovoltaic Industry Association (CPIA) predicts, the penetration rate of double-glazed modules is expected to reach as much as 60% by 2025, further increasing the demand in PV glass.

The Company Takes Lead in Capacity Expansion

By the end of 2019, the company's production capacity was 54 million tons, and the current is 48 million tons, mainly due to the cold repair of a 6-million-ton production line in May. Constrained by COVID-19, the Vietnam production line will be delayed until the end of 2020. Two 1200-ton production lines in Anhui Province funded are expected to initiate in H1 and H2 of 2021, respectively, and the other two 1200-ton production lines are planned to start in H2 of 2021 and 2022, respectively. By then, the company's total production capacity will reach 12200 tons/day, and its leading position will be more stabilized.

Investment Thesis

Taking into account the better-than-expected industry boom and the company's industry position, we raise the target price to 15, equivalent to 2020/2021/2022 E 23.4/16.4/12.5x P/E and 4.7/3.5/2.8x P/B, Accumulate rating. (Closing price as at 7 August 2020)

Financials

Click Here for PDF format...