What's new
　　Last week, Xinyi Glass invited investors to visit its Wuhu factory and to speak with management.
　　Comments
　　Demand improving steadily; GFA under construction and extended application to support demand. Xinyi Glass management mentioned that in March-April, recovering end-market demand and traders’ restocking led to a rapid decline in industry inventory from a high of 70mn boxes to 40mn boxes at end-April, and a sharp fall in factory inventories. This boosted industry prices by more than Rmb400/t. However, factory inventories slightly rebounded and prices fell in May. Entering June, traders have largely depleted their inventories and started to replenish, and Xinyi Glass’s sales-to-output ratio restored balance.
　　The firm is optimistic about the long-term market demand: It expects stable market demand buttressed by large-scale gross floor area (GFA) under construction, higher glass consumption per GFA unit driven by rising window-to-wall ratio, and higher double-glass and triple-glass product prices boosted by rising penetration rate of low-E glass. Data from sci99.com shows that domestic float glass ASP was Rmb2,060/t this week (vs. -Rmb58/t last week), and inventories at glass producers rose 0.31% WoW to 52.29mn boxes; social stocks rose 2,500 units MoM to 42,500 units; and deep-processing period at end-May was largely flat at about 16 days compared with mid-May.
　　Supply contraction started during the trough; idle capacity gradually eliminated. According to the firm, the industry experienced rapid dipping and heaving with daily melting volume down from a peak of 180,000t/day in 2021 to a trough of 160,000t/day at end-2021. Some companies still had plans to resume production in the near term. Xinyi Glass management said that about 10% of its facilities have yet to start operation, which it expects to be withdrawn from the market through capacity replacement or sales. Further, it said the industry will likely gradually tighten capacity quotas and shorten the suspension period of idle production capacity to rebalance supply, such as removing facilities unused for two years.
　　Differentiation gradually paying off; long-term competitiveness strong. Due to the pressure on demand for ordinary white glass products (standardized products) related to residential buildings, Xinyi Glass is accelerating the production of differentiated products (e.g., colored glass and thick glass) to adapt to the structural changes in demand. The proportion of differentiated products has risen from one-third in 2022 to 50%. The firm is also gradually increasing the proportion of self-supplied raw materials (over one-third self-sufficiency rate of quartz sand) and intends to self-produce soda ash in the future. We believe it will continue to strengthen its competitive advantages and lead the domestic architectural glass market by offering differentiated products to create premiums and expanding upstream to improve cost advantages.
　　Financials and valuation
　　We keep our 2023 and 2024 EPS forecasts unchanged. The stock is trading at 7.8x 2023e and 5.9x 2024e P/E. Given the funding pressure along the real estate value chain, we maintain an OUTPERFORM rating, but we cut our target price 18% to HK$16 (implying 10x 2023e and 7.7x 2024e P/E), with 30% upside.
　　Risks
　　Demand from completed property projects disappoints; number of glass production lines resuming production exceeds expectations.