We reckon Flat Glass’s valuation is much more reasonable now, and there could be short-term catalyst that drives the desire for bottom- fishing. Possible ASP hike in November (first time in 6 months) may be driven by cost inflation and temporary S/D improvement, but we are still concerned about a possibly weak 1Q23 demand that may dampen sentiment again. We recommend investors with long horizons to wait for a few more months before jumping in. Upgrade to HOLD on more reasonable valuations metrics with a new TP of HK$20.50.
　　Key Factors for Rating
　　Peaking out inventory and potential cost hike may prompt first ASP increase in months. Solar glass industry inventory has been declining for four consecutive weeks to 19.4 days, roughly 15% down from peak, according to sci99.com data. As natural gas price may see further double-digit hike next month, solar glass makers are eager to capture the opportunity to pass through cost inflation. While this may not materially improve their gross margins, market may take it as bottoming-out signal as visibility on the cost side is low.
　　Valuation reasonable compared to volume and earnings growth. Flat Glass’ H-share price has declined by 52% YTD, and is now trading at c.12x 2023 P/E on our estimates, similar to its long-term mean multiples but much lower than the average level since the grid-parity era. Against potential 32% YoY EPS growth in 2023, the current valuation is much more reasonable compared to when we downgraded it four months ago.
　　So why is it not a BUY? While we do agree that Flat has the potential to rebound in the near-term for the above mentioned reasons, we remain cautions about solar PV demand in 1Q23 after year-end rush installation. To recall, solar glass is the only segment along the value chain without utilisation flexibility. Any demand weakness may hit solar glass harder than any other segments, as rising inventory dampens ASP/margin and sentiment alike. We prefer to watch for a few more months before calling the shot more confidently.
　　Key Risks for Rating
　　Lower-than-expected fuel and material costs; better-than-expected demand.
　　Valuation
　　Flat’s 3Q22 earnings of RMB502m represent 40% of our 2H22 forecasts, which is in line with market estimates.
　　Upgrade to HOLD. We maintain our forecasts for now and cut DCF-based TP to HK$20.5 mainly on RMB exchange rate update and valuation rollover to 2023.
　　Our new TP implies 13x 2023E P/E.