Flat Glass reported FY21 results, with revenue of Rmb8,713.2mn (+39.18% YoY) and net profit of Rmb2,119.9mn (+30.15% YoY), in line with our expectation.
　　Operating results. Solar glass segment generated revenue of Rmb7.1bn (+36.3% YoY), accounting for 81.7% of total revenue, mainly due to the new capacity put into production. Gross margin of the company reported 35.5% (vs 46.5% in 2020), and GPM of solar glass reported 35.7% (vs 45% in 2020).Besides the declining ASP of solar glass and increasing production costs, the accounting changes that shipping costs should be included in COGS instead of SG&A also affected 4% of GPM. Net profit margin recorded 24.33%. Gearing ratio remained stable at 41.19% and the company had cash of Rmb2.8bn at hand by end of 2021. Capex was Rmb3769mn in 2021 and would reach Rmb5000 to 6000mn since the company is accelerating expansion, according to management.
　　Expansion plans. Since ASP of solar glass has fallen dramatically in 2021, the industry players would expand their capacity more rationally while some expansion plans may be postponed, downsized or even cancelled. The company continues to expand its capacity in 2022 and 2023. Its current capacity is 14,600tons/day and will reach capacity of 20,600tons/day (+69% YoY) and 27,800tons/day (+35% YoY) by end of 2022 and 2023. It would reach capacity of 32,600tons/day after all the planned lines put into production. Together with another industry leader, Xinyi Solar (00968.HK - buy), the two leaders would gain market share over 80% in three years considering their expansion. Such industry landscape would phase out other tier 2 and tie 3 companies since the leaders keep their GPM advantages of 10-15% over the industry thanks to the economies of scale and effective cost control.As for 2022, we expect ASP of 3.2mm coated glass would remain Rmb24-25/sqm considering the sufficient supply and strong downstream demand. Based on our sensitivity analysis, as ASP of 3.2mm coasted glass decreased by Rmb1/sqm, GPM of the company in 2022 would decline by 2%. And its GPM would remain at a reasonable 30% when ASP declines to Rmb23.5/sqm, under current high production costs.
　　Improving profit margin. Due to the increasing price of soda ash, natural gas and low-iron silicon sand, 2021 was quite tough for the company. The company recently completed its acquisition of Dahua Mining and Sanli Mining, securing its future supply of low-iron silicon sand and also reducing its production costs. The company would become 70-80% self-sufficient and cost of low-iron silicon sand would decline from Rmb180/ton to Rmb100-120/ton, contributing 2% of its GPM in 2022. Besides, the increasing penetration rate of bifacial (around 60% in 2022) and larger-size modules (over 50% in 2022) pushes the company to enhance its product portfolio to promote value-added products (thin glass and larger-format glass), which could mitigate its margin pressure caused by product price reductions and rising input costs.
　　Maintain Buy rating. We raise our diluted EPS forecasts in 22E and 23E: from Rmb1.22 to Rmb1.40 in 22E (+42.2% YoY), and from Rmb1.69 to Rmb2.11 in 23E (+50.5% YoY), and forecast EPS of Rmb3.07 in 24E (+45.4% YoY). We maintain our target price of HK$48, representing 19x 23E PE and 4.4x 23E PB. With 40.4% upside, we maintain our buy rating.
　　Risks: downstream demand below expectation. Capacity expansion below expectation.