Key takeaways from post-results investors call
- We hosted a post-results investors call with Xinyi Glass [0868.HK].
- During the call, management discussed the outlook for the float glass industry, autoglass, and the Company’s growth strategy.
- We reiterate the view that the post-results share price weakness is due to concerns about the performance of the Company’s float glass segment.
- The weak float glass price will cap near-term share price performance, but we believe that the reduction in industry capacity, softer input costs, and a potential policy shift indicate an inflection in late 3Q22.
- We reiterate our ADD rating with a target price of HK$18.74, based on 11x 2022 P/E.
Good working capital management
? During its call with investors, Xinyi Glass management mentioned that the Company has put a lot of effort into working capital management, especially accounts receivable (A/R), which is one of the reasons for no major receivables risk despite the credit events in the China property sector. Xinyi Glass has been careful in terms of client selection to reducing A/R risks.
Cold repair may constrain supply
? According to management, given the weak float glass prices (weak profitability), some industry players have speeded up the cold repair process. Seven production lines with capacity of 5,000t/line (about 2% of total capacity) were closed for cold repair in Jul 22. In Mar 22, we noted that some float glass makers had delayed the cold repair process for some production lines (due to good profitability at the time), but the change in the market environment may trigger more float glass makers to kick-off the cold repair process. As discussed earlier, the delays may trigger concerns about a) less stable output quality and higher input costs, and b) potential furnace leakage. We maintain the view that closing production lines for cold repair will eventually constrain supply.
Overseas expansion
? The Company will build a new float glass production complex in Indonesia, which is one of the steps in the Company’s globalization strategy. According to management, similar to Malaysia, Indonesia has supply of natural gas and other upstream materials for better management of input costs. The Company is expected to disclose more details regarding the Indonesia plant going forward. Xinyi Glass has sufficient financial resources, and its future investment is not expected to affect its dividend policy.
Our view
? The post-results correction, in our view, was due to concerns about softer-than-expected demand and high inventory. We share the view that the recent weak float glass price movement may put pressure on Xinyi Glass. But the reduction in industry capacity, softer input costs, and a potential policy shift indicate an inflection in late 3Q22. The Company’s valuation is still reasonable, with a decent yield. We reiterate our ADD rating with a target price of HK$18.74, based on 11x 2022 P/E (which remains unchanged and
lower than the historical mean).
