According to our recent track of the solar glass industry, given the strong industry demand, increasing COGS and the decreasing price of solar glass, we cut our EPS forecasts in 22-24E, from Rmb1.40 to Rmb1.14 in 22E (+15.6% YoY), from Rmb2.11 to Rmb1.88 in 23E (+64.2% YoY), and from Rmb3.07 to Rmb2.59 in 24E (+38.4% YoY).
　　Cost management efforts despite of increasing raw material and energy cost. We estimate GPM of the company’s solar glass sector would drop by 20-25pct compared to that of 50.29% in 1H21. The decrease was partly due to the price slump of solar glass in 1H22. Taking 3.2mm coated glass as an example, average price in 1H22 was Rmb26.8/sqm, representing a 18% YoY decrease. Due to the geopolitics factors and global inflation, price of natural gas has increased by 31% during 1H22, and price of soda ash has increased by 55% as compared to that of 1H21. Facing such a tough 2022, the company has made efforts to manage its cost. The company completed its acquisition of Dahua Mining and Sanli Mining in 1H22, securing its future supply of low-iron silicon sand and also reducing its production costs. The company would become 60-70% self-sufficient of low-iron silicon and the cost would decline from Rmb180/ton to Rmb100-120/ton, contributing 2% of its total GPM in 2022.Besides, the company will sign a direct natural gas supply agreement with CNPC in 2H22 and therefore enjoy some discounts. With such efforts, we believe the company could maintain its 10-15% GPM advantages over lower tier companies in the industry.
　　Uncertainty of new industry supplies due to the public hearings on solar glass. In 2020, MIIT (Ministry of Industry and Information Technology) required that new solar glass projects planned to put into production after January 3, 2020 need to complete the public hearing process by May 31, 2022. And the MIIT would decide whether or not to permit those new projects based on the discussion results of public hearings. As for early July in 2022, there have been over 200,000 tons of new projects going through the public hearing process and none have received the final permission from MIIT. Considering the high industry barriers of solar glass sector, companies may not fully implement their planned new capacity of solar glass due to lack of capital or technology team, even if they got the permission from MIIT. We therefore suggest not to equal the new supplies in the next two years to the 200,000 tons because of 1) uncertainties of MIIT decisions and 2) inabilities of lower- tier companies in the industry. As for 2022, we believe there would be sufficient solar glass supplies, while the downstream demand would play a more important role when it comes to price. According to our analysis of bidding projects and modules export, we expect domestic and global installations to be 95GW and 250GW in 2022, respectively. As for Flat Glass, it continues to expand its capacity in 2022 and 2023. The company 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 37,400tons/day after all the planned lines put into production and realize a market share of 30-35%.
　　Maintain Buy rating. We maintain our target price of HK$48, representing 21x 23E PE and 5x 23E PB.With 74.5% upside, we maintain our buy rating.
　　Risks: downstream demand below expectation. Capacity expansion below expectation.