Solid 2021 results; sentiment expected to improve
? Despite cooling demand from the property sector, Xinyi Glass reported solid 2021 results in the mid-range of previous guidance.
? The market is expected to have concerns about demand due to soft property-related activity. But improved liquidity and tight control on the supply side will help.
? We revised down our profit forecasts by 5.6% for 2022 and 5.9% for 2023, and introduced forecasts for 2024 after the 2021 results adjustment.
? The Company’s valuation is still reasonable, with a decent yield.
? We reiterate our ADD rating with a lower target price of HK$27.99, based on 11x 2022 P/E (which remains unchanged and lower than the historical mean of 14x). The downward revision is due to a cut in the net profit forecasts.
Solid 2021 results
Xinyi Glass reported a net profit of HK$11,555.9m in 2021, up 79.9% yoy from HK$6,422.2m in 2020, which is at the mid-range of its earlier profit alert of 70–85% yoy growth. Revenue surged 63.6% yoy, from HK$18,615.9m in 2020 to HK$30,459.1m in 2021. The Company’s gross profit margin rose 10.1ppts yoy to 51.8% in 2021 vs. 41.7% in 2020 and 53.0% in 1H21 (higher than our previous expectation of 51.4%). Its net profit margin reached 37.8% in 2021 (vs. 29.7% in 2020). All three business segments reported solid growth in 2021: autoglass revenue rose 18.4% yoy, float glass revenue was up 85.7%
yoy (Xinyi Glass reclassified the semi-finished Low-E glass business from the architectural glass segment to the float glass segment in 1H21), and architecture glass revenue rose 39.9% yoy. The major improvement in its gross profit margin was driven mainly by a jump in the gross profit margin of its float glass operations, which reported a gross profit margin of 53.8% in 2021 (55.3% in 1H21 and 52.5% in 2H21), up 28.9ppts yoy. The gross profit margin of its auto glass operations was 47.1% (49.3% in 1H21 and 45.2% in 2H21) and flat yoy, and the gross profit margin of its architecture glass operations was up 2.3ppt to 46.2% in 2021. The contribution from Xinyi Solar and Xinyi Energy continued to grow yoy. Xinyi Glass declared a final dividend of HK$0.76, implying a payout ratio of about 49.5% in 2021. Xinyi Glass has a strong financial position, as it had cash on hand of over HK$10,000m as at 31 Dec 2021.
Improved sentiment
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 in 2H20) will support demand for float glass in 2022. We believe that improved liquidity and tight control on the supply side will help. The float glass price has stabilized since late-Nov (which is line with our discussion in Dec 2021) and recovered somewhat after CNY in Feb 2022. We may see a further pick-up in demand for float glass in the coming month, as credit loosening takes
effect (the Chinese government has become more pro-growth, indicated by the latest RRR cut). The dual carbon policy is expected to trigger another around of consolidation, and leading players may gain market share. 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. We also remain constructive on Xinyi Glass’s investment in Xinyi Silicon, which is expected to create medium- and long-term growth potential for the Company.
Lower forecasts and target price
We cut our 2022F–2023F net profit forecasts by 5.6% and 5.9%, respectively, given the Company’s lower turnover and margin assumptions, but higher contribution from Xinyi Solar.