1H24 results largely in line with our expectation
　　Xinyi Glass announced its 1H24 results: Revenue fell 6% YoY to HK$11.8bn and net profit attributable to shareholders rose 27% YoY to HK$2.7bn. The firm received investment income of about HK$455mn from its 23% stake in Xinyi Solar. Its results were largely in line with our expectations.
　　Float glass revenue under pressure; cost control better than
　　expected. In 1H24, the firm’s revenue from float glass fell 13% YoY to HK$7bn, mainly due to falling sales volume and prices amid weakened demand from completed property projects. However, the firm’s cost control beat our expectations. We estimate that the gross margin of float glass rose 6ppt YoY to 28% in 1H24, possibly due to falling ASP of soda ash (a raw material) and lower purchase price of natural gas.
　　Development of high value-added automotive glass and architectural glass to boost earnings.
Automotive glass: In 1H24, the firm’s revenue from automotive glass rose 9% YoY to HK$3.3bn, and its gross margin rose 2ppt YoY to 50%. The increase in revenue was mainly due to growing orders from new clients in China and overseas, and the gross margin of this business remained stable at a high level.Architectural glass: In 1H24, the firm’s revenue from architectural glass fell 3% YoY to HK$1.56bn, with the overall decline manageable and sharper than that of some peers. We attribute this to increased sales volume of various coated glass products and robust client base, which includes governments and property developers that have solid financials.
　　Cash flow under pressure YoY possibly due to increased capex at home and abroad, but payout ratio remained stable and dividend
　　yield was impressive. The firm’ net cash flow from investing activities was -HK$1.8bn in 1H24, under pressure YoY. Capex totaled HK$2.7bn, mainly for the purchase of plant and machinery to build new production capacity for architectural glass, automotive glass and float glass in China, Malaysia and Indonesia. The firm paid an interim dividend of HK$0.31 per share, and we estimate its interim dividend payout ratio at 48% and interim dividend yield at 7%.
　　Trends to watch GFA completed to remain under pressure in 2H24, but we think automotive and architectural glass businesses may improve the
　　firm’s earnings. We believe demand from completed property projects is trending downwards. The industry-wide average float glass price (tax included) reached Rmb1,492/t at end-July, and the industry suffered a small loss. We believe it may take time for the industry-wide cold repair of float glass production lines to relieve pressure on supply. As a result, we think sales volume and earnings of the float glass business may face challenges in 2H24. However, as the firm performs well in cost control, we expect it will maintain a relative advantage in earnings.
　　The firm has proved its strength in automotive glass and architectural glass. Its automotive glass focuses on the aftermarket and is more resilient against economic fluctuations, with gross margin largely stable at 45-50%. In recent years, the firm has continued to develop high-value- added products (e.g., ADAS and HUD) to enhance its competitiveness. Its architectural glass products meet the needs of energy conservation, carbon reduction and window upgrading, and we expect its financially solid clients to ensure sales volume and payment collection. Compared with peers, we believe the firm’s automotive and architectural glass business segments will prop up earnings.
　　Financials and valuation
　　Given potential pressure on float glass in the future, we cut our 2024 and 2025 EPS forecasts 12% and 12% to HK$1.12 and HK$0.94. The stock is trading at 7x and 9x 2024e and 2025e P/E. We maintain OUTPERFORM and cut our target price 7% to HK$9.6, implying 9x and 10x 2024e and 2025e P/E, implying 16% upside.
　　Risks
　　Falling demand from property completions; slow cold repair of float glass production lines; disappointing earnings of auto glass.