Green shoots emerging
■ We hosted an investor call with Xinyi Glass yesterday.
■ During the call, management shared its view on the reasons for the recent decline in float glass industry inventory, raw materials prices, and the impact of dual energy consumption controls.
■ We lowered our forecasts for Xinyi Glass, mainly after factoring in slower turnover growth and a lower gross profit margin.
■ Xinyi Glass may see share price volatility, as investors may take a wait-and-see stance. Sentiment on the downstream sector has been stabilizing, which is expected to boost sentiment on building materials names, including Xinyi Glass.
■ We maintain our ADD rating, with a lower target price of HK$28.87, based on 11x 2021 P/E (lower than historical mean of 14x). The downward revision is due to a cut in our net profit forecasts and a lower target P/E multiple (from 16x to 11x).
Demand gradually picking up since Nov 21
Owing to credit events in property sector and power rationing, float glass customers mainly took a wait-and-see stance on installations. As a result, industry sales volume was down in Sep and Oct compared to pre-Sep 21 levels. Float glass prices performed strongly since beginning of 2021 and surged to a record high in early Sep 21. However, because of softer-than- expected demand in Sep and Oct (the traditional peak season), float glass prices corrected sharply, falling about 30% from the peak in early Sep 21. In late Nov 21, downstream customers started to purchase float glass for year-end rush orders as the market stabilized, since the impact of recent events has eased somewhat. As a result, float glass prices started to stabilize in late-Nov with even a slight rebound recently. Xinyi Glass management mentioned that float glass prices are unlikely to see a major rebound in the short term as this is the traditional low season. Recent news reports suggest that policy fine-tuning (for the property sector) may be right around the corner, which may stabilize sentiment on the outlook for float glass demand and prices. Softer property sales and figures on new starts since Sep 21 have triggered concerns about medium- and long-term
demand for float glass. Xinyi Glass management reiterated the view that GFA completion (which returned to positive growth since 2H20) will support demand for float glass in 2022. Under-construction GFA continued to grow before 2021, and projects will eventually need to be completed and delivered. Xinyi Glass management mentioned that the Company didn’t expect a sharp fall in demand despite the credit events in the property sector. We may see a further pick-up in demand for float glass in the coming month as credit loosening continues (the Chinese government has become more pro-growth, indicated by the latest RRR cut). We might still see some seasonal corrections in float glass prices in 1Q22 (the low season during CNY), and some glass producers may cut prices to reduce inventory. According to Xinyi Glass management, the Company doesn’t have any plans to cut prices to reduce inventory in the short term. On the supply side, new supply of float glass capacity will be limited, given the Chinese government’s carbon neutrality policy. Cold-repairing may also constrain any increase in float glass capacity.
Improving cost environment
Strong soda ash prices in Sep and Oct put pressure on the profitability of float glass manufacturers, which is one of the reasons for Xinyi Glass’s share price correction. Given the easing of power rationing and softer demand for glass manufacturing, the soda ash price has dropped over 10% from its peak. The cost environment is turning more favourable for float glass manufacturers. The domestic natural gas price in China has been regulated and is not as volatile as the international price. The price of imported liquefied natural gas (LNG) is based on the international oil price, so users of LNG may see higher costs pressure vs. domestic natural gas.