Earnings estimated to fall 35-45% YoY in 1H23
　　Xinyi Glass announced a profit warning for 1H23, estimating that its net profit attributable to shareholders fell 35-45% YoY to HK$1.82-2.15bn in 1H23 due to two major factors. First, the average selling prices of the firm’s float glass products remained at low levels due to dampened float glass demand. Second, the average costs of energy and raw materials continued to increase in 1H23. The firm’s profit warning is roughly in line with our expectation. In addition, data from the firm shows that it plans to transform the existing float glass production facilities at Chongqing Yuhu Glass and build a new low-e coating glass production line.
　　Trends to watch
　　Float glass price rising from a low level but still declining YoY; easing of cost pressure not fully reflected in 1H23 earnings. Data from the National Bureau of Statistics shows that the tax-inclusive ASP of float glass fell 8% YoY to Rmb1,916/t in 1H23 YTD. Meanwhile, Xinyi’s glass price index fell 6% YoY. We think float glass price is rising from a low level amid a mild demand recovery but has not risen to the level from a year ago. However, the tax-inclusive ASP rose 20% QoQ to Rmb2,089/t in 2Q23 YTD, a marked QoQ improvement.
　　On the cost side, we think the spot price of sodium carbonate has declined at a faster pace since late May and fell to Rmb2,120/t in early June, but the falling prices of raw materials and fuels have not been fully reflected in Xinyi’s earnings. We expect the falling prices of raw materials and fuels to make a more visible positive contribution to the firm’s earnings in 2H23.
　　Float glass price likely to rebound in peak demand season after slack season ends. In the peak demand season, we expect float glass trading companies to replenish inventories after orders from downstream industries improve and inventories fall to a low level. We expect float glass price to rebound and the firm’s earnings to improve HoH in 2H23.
　　On the supply side, the current daily float glass melting volume is about 167,000t/day, down 5% YoY. We think that about 10% of industry-wide production capacity has been not in operation and we expect this portion of production capacity to be replaced or sold, and gradually eliminated from the market. Therefore, if demand improves strongly in peak demand season this year, we think float glass supply is unlikely to grow faster than expected.
　　Xinyi announces plans to invest in Chongqing Yuhu Glass; further expansion thanks to experience in business consolidation. The firm recently disclosed that it plans to transform the existing float glass production facilities at Chongqing Yuhu Glass and build a new low-e coating glass production line to strengthen its presence in high-quality float glass products in southwestern China. We believe the firm’s successful acquisition of Huaerrun and a Hainan-based special glass company demonstrates its experience in business consolidation. We expect the firm to strengthen its advantage.
　　Efforts to produce differentiated products to gradually pay off; long-term competitiveness strong. The firm disclosed that it is accelerating the shift to the production of differentiated products (e.g., colored glass and thick glass products) to adapt to structural changes in demand due to the pressure on demand for housing-related ordinary white glass products. The proportion of differentiated products at the firm has increased from one-third in 2022 to 50%.
　　We believe the firm will continue to expand its competitive advantages and lead the domestic architectural glass market by offering differentiated products to create price premiums for its products and expanding its presence in upstream segments of the industry chain (e.g., expanding its presence in quartz sand and sodium carbonate) to improve its cost advantages.
　　Financials and valuation
　　We keep our 2023 and 2024 EPS forecasts unchanged. The stock is trading at 7.3x 2023e and 5.5x 2024e P/E. We maintain our OUTPERFORM rating and target price of HK$16 (10x 2023e and 7.7x 2024e P/E), offering 38% upside.
　　Risks
　　Demand from completed property projects disappoints; number of glass production lines resuming production beats expectations.