On an improving trend; breakeven in 2H13E. We have noted float glass prices in China showing a gradual improvement trend YTD in 2013. We estimate that China Glass (CG) will have ~86% of its 2013E revenue stemming from float glass related products (clear / painted / coated glasses), suggesting an improvement in its operati ons, which to an extent is evidenced by solid performance of the float glass business of its peer, Xinyi Glass (00868.HK). Despite price recovery oc curring at a gradual pace, we estimate1H13E gross margins at ~10% (vs. 7.0% in 1H12 / 9.3% in 2H12), pointing to a return to double-digit margin. We expect CG to report a loss of ~Rmb42mn in 1H13E (1H12: Rmb82mn), but expect it to break-even or even register a slight profit in 2H13E amid seasonal strength in glass demand/prices.
Refinancing is a key concern. CG had ~Rmb1.38bn of short-term borrowings as at end-2012, accounting for ~85% of its total interest-bearing debts. CG has been working hard to re finance these short-term debts and increasing the proportion of long -term debts. Part of it wasreplaced/restructured in 1H13E via domestic bond issues and project financing, while the entire restructuring process would take time (with more avenues like foreign bond issuance under consideration) to complete. We also expect some increase in costs for the new debts due to tighter credit environment with rising market interest rates. As such, the overall refinancing issue appears under control, while we should continue to closely monitor it.
Maintain OVERWEIGHT. We raise our net profit forecasts for 2013/14/15E by 13.8%/5.1%/1.0% mainly on higher gr oss margin assumptions, but it is partly offset by higher finance costs. We also rolled forward our valuation basis to 2014E, and cut our TP to HK$1.20 (from HK$1.30) amid sector de-rating on credit concerns. We ba se the TP on 0.70x 2014E PB (20% discount to average forward PB during the previous up-cycle for float glass prices in 2Q09-4Q10, to factor-in gearing risk). Despite refinancing remaining a key concern, we believe that the current valuation of 0.52x 2014E PB has already factored in most risks. 1H13E result announcementwith operating improvement could be a positive catalyst, in our opinion.