2023 earnings miss our expectations
Xinyi Glass announced its 2023 results: Revenue rose 4% YoY to HK$26.8bn, and attributable net profit grew 5% YoY to HK$5.4bn, with the investment income of HK$1bn from Xinyi Solar. In 2H23, revenue rose 12% HoH to HK$14.2bn, and attributable net profit grew 50% HoH to HK$3.2bn. The firm's results missed our expectations, as sodium carbonate prices remained elevated in 2H23 and the recovery of profit margin was slightly milder than expected.
Earnings of float and architectural glass businesses recover notably in 2H23; automobile glass business stabilizes despite external pressure.
Float glass: Revenue grew 5% YoY to HK$17.5bn in 2023 and 18% HoH to HK$9.4bn in 2H23. We note that sales volume and prices of glass rose in 2023 driven by policies to ensure the delivery of property projects. The tax-inclusive ASP rose 7% HoH to Rmb2,044/t in 2H23. We believe the firm's efforts to promote high-quality float glass products show its sales strength.
GM of float glass rose 9ppt HoH to 30.6% in 2H23, recovering despite elevated sodium carbonate prices, and we think this underscores its effective cost control.
Architectural glass: Revenue rose 9% YoY to HK$3.4bn in 2023. In 2H23, revenue rose 8% HoH to HK$1.7bn and GM improved 4.4ppt HoH to 36%, as the firm attached great importance to upgrading the structure of its doors and windows and stocked up on energy-saving coating products in advance.
Automobile glass: Revenue fell 2% YoY to HK$6bn in 2023 and remained flat HoH at HK$3bn in 2H23, with GM stable at 48%. More than 80% of the firm's revenue from this segment comes from overseas markets. We note that demand from overseas markets has been disrupted by high inflation and high interest costs. However, the automobile glass business has remained stable thanks to the firm’s flexible sales strategy.
Maintains ample cash flow; dividend yield remains attractive. The firm disclosed capex of about HK$3.5bn in 2023, mainly for plant and equipment purchases for domestic and overseas capacity expansion. We estimate that its free cash flow remained ample at HK$1.5bn. We estimate its dividend yield at about 8%, remaining attractive.
Trends to watch
Pressure on demand from completed property projects to gradually ease; extensive investment and integration experience to enhance advantages.
We see support for glass demand in 1H24 and pressure in 2H24. However, we expect the firm to maintain excess earnings from float glass products thanks to its abundant imported soda ash and silica sand resources as well as efforts to upgrade its product mix. Moreover, the firm continues to acquire and invest in float glass production lines in Chongqing and Indonesia, which should strengthen its alpha, in our view.
Expanding presence in multiple deep-processing segments; ample pipeline ahead.
Automobile glass: The firm focuses on the export and the aftermarket business, and has developed a number of products to enhance its export competitiveness.
We think the firm will likely continue to benefit from the demand for low-E glass with the target of carbon neutrality in China as one of the leading energy-saving glass companies. The firm is well-positioned with technologies and sales channels, and its new businesses are likely to offer a safety margin for its earnings, in our view.
Financials and valuation
Given faster-than-expected production resumption in the sector and possible decline in demand from completed property projects, we lower our 2024 EPS forecasts 38% to HK$1.27. We introduce our 2025 EPS of HK$1.07, implying 6x 2024e and 7x 2025e P/E. We maintain OUTPERFORM but cut our target price 36% to HK$10.3, implying 8x 2024e and 10x 2025e P/E with 35% upside.
Risks
Supply-side pressure caused by faster-than-expected production resumption; disappointing recovery of completions of housing projects.