Flat Glass’s 1H23 results were largely in line with our estimates, with net profit +8% YoY and solar glass GPM holding up at 20%. As inventory continues to decline in recent weeks, we stick to our HoH GPM recovery story for solar glass sector. With the newly raised RMB6bn from A-share placement, Flat Glass reduced its gearings and is poised to gain market share with possibly faster expansion. We cut FGG’s EPS forecasts by 13% for 2023-25 period to reflect dilution from A-share placement and delay in capacity addition in 2023. Maintain BUY rating with a lower TP of HK$29.00.
　　Key Factors for Rating
　　1H23 results review. FGG’s 1H23 solar glass margin reached 20.02%, higher than peer Xinyi Solar’s (968 HK/HK$6.51, BUY) 17% and in line with our estimates. The sequential recovery in margins helped to push up 2Q23 results despite limited sales volume growth and lackluster performance from non-solar glass segments (float glass segment booked an RMB45m loss with -26% margin).
　　Margin and market share outlook. Solar glass inventory declined steadily in August to 21.1 days as of last Thursday, according to sci99.com data. We expect the destocking trend to trigger another bump in ASP in September, further helping margin recovery. Although natural gas price may face another hike in the winter, we expect improved S/D dynamics to help solar glass producers pass on the cost pressure to customers. Limited addition in new solar glass capacity in recent months.
　　A-share placement to restore balance sheet. FGG’s finance expense more than doubled in 1H23 to RMB157m, mainly due to its previous acquisition of silica sand mines leveraged up its balance sheet. Fortunately, FGG completed its RMB6bn A-share placement in July just before the CSRC tightens IPO and refinancing activities. The proceeds should help FGG reduce gearing and finance expense in 2H23 onwards, and potentially accelerate expansion domestically and overseas as lower-tier peers struggle to breakeven.
　　FGG also announced its first interim dividend of RMB0.238/share, which may partially help to offset the concerns of its negative OCF in 1H23 (mainly due to inventory building) and sweetens the dilution from A-share placement to some extent.
　　Key Risks for Rating
　　Further delay in capacity expansion; weaker-than-expected solar PV demand.
　　Valuation
　　Maintain BUY rating. We cut FGG’s 2023-25 EPS forecasts by 13% to factor in the dilution and delay in capacity commissioning into 4Q23. Our new DCF-based TP of HK$29.00 implies 16x 2024E P/E.