1H23 results at upper end of preannouncement
　　Xinyi Glass announced its 1H23 results: Revenue fell 7.5% YoY to HK$12.6bn, and net profit attributable to shareholders declined 35% YoY to HK$2.15bn, with the investment income of HK$310mn from Xinyi Solar.
　　The firm’s results reached the upper end of its preannouncement, and were in line with our expectations.
　　Trends to watch Float glass prices bottomed out in 1H23, but declined YoY. Revenue from automobile and architectural glass businesses grew steadily.
　　The firm's 1H23 revenue from float glass business fell 13% YoY to HK$8bn. In 1H23, the industry ASP of float glass （tax inclusive） fell 9% YoY to Rmb1,905/t. The firm disclosed that the proportion of its differentiated product output rose 8ppt to over 45% in 1H23 compared with full-year 2022. We believe this may bring stronger- than-industry resilience to its overall price.
　　In 1H23, the firm's revenue from automobile glass business rose 2% YoY to HK$3bn, and the firm developed high-value-added glass for new models to increase the unit value.
　　The firm's revenue from architectural glass business rose 9% YoY to HK$1.6bn in 1H23, possibly due to increased orders from governments, state-owned enterprises （SOEs）， and high-quality property developers.
　　Cost pressure from raw materials and fuels to ease in 3Q23, boding
　　well for earnings recovery. In 1H23, the firm's blended GM fell 9ppt YoY to 29%, with GM of float glass, automobile glass, and architectural glass businesses falling 12ppt, 2ppt, and 9ppt YoY to 22%, 48%, and 31%. We attribute this to product price pressure, as well as rising raw material and energy costs.
　　The decline in the spot price of sodium carbonate began to accelerate in late May, and the tax-inclusive ASP reached Rmb2,050/t at end-July. We think the firm’s cost pressure may ease in 3Q23. We believe a Rmb100/t decline in sodium carbonate per tonne may bring an earnings recovery of nearly Rmb1 per case of glass.
　　Capex pressure to ease; free cash flow to remain ample. The firm disclosed that capital commitment contracted for but yet to be executed by the firm as at end-June, 2023 decreased over 10% YoY. If the firm follows its full-year plan, we expect its capex pressure to ease marginally in 2H23 and free cash flow to remain ample.
　　Policy tailwinds to boost housing completions; extensive experience in investment and M&A integration to enhance leading position. We
　　believe recent policies have demonstrated local governments' determination to ensure the delivery of property projects. We foresee restocking of glass in the near term. We expect glass prices to rise, but we think the magnitude of the price increase depends on the pace of production resumption.
　　The firm acquired four float glass production lines in Hainan Chengmai in 2021, and another two in Chongqing in 2023. Moreover, it invested in two float glass production lines in Surabaya, Indonesia in 2022, and is still seeking overseas investment opportunities in the sector. We believe the firm’s successful acquisition of Huaerrun and AVIC Glass demonstrates its extensive experience in business consolidation. We expect the firm to strengthen its competitive advantage as an industry leader.
　　Financials and valuation
　　We maintain our 2023 and 2024 EPS forecasts. The stock is trading at 8x
　　2023e and 6x 2024e P/E. We maintain an OUTPERFORM rating and a target price of HK$16, implying 10x 2023e and 7.6x 2024e P/E with 31% upside.
　　Risks
　　Supply-side pressure caused by faster-than-expected production resumption; disappointing recovery of completions of housing projects.