Flat Glass reported 1H23 revenue of Rmb9,678.4mn (+32.5% YoY) and net profit of Rmb1,084.9mn (+8.2% YoY), in line with market expectation. Overall gross margin recorded 19.1% (-3.5pct YoY), and net profit margin recorded 11.2% (-2.5pct YoY). The company declared a Rmb23.8 cents per share interim cash dividend.
Gradual earnings recovery in solar glass sector. During 2Q23, the company realized revenue of Rmb4,313.5mn (+13.6% YoY, -19.6% QoQ), and net profit of Rmb573.4mn (+1.3% YoY, +12.1% QoQ).
Overall gross margin recorded 19.9% (+1.4pct QoQ), and net profit margin recorded 13.3% (+3.8pct QoQ). Solar glass sector contributed most of revenue and earnings. In 1H23, solar glass sector reported revenue of Rmb8,786.9mn (+35.8% YoY) and gross margin of 20.0% (-3pct YoY). Thanks to the decreases in major raw materials and fuel prices, overall profits improved slightly in 2Q23. Due to the increase in overseas demand, revenue from overseas markets recorded Rmb1,408mn, representing a YoY growth of 53.4%.
Relieved cost pressure. The costs of raw material and energy to produce solar glass have been increasing since 3Q21, resulting in deteriorating GPMs of solar glass sector. For the COGS of solar glass, natural gas as energy makes up 25%-30% and soda ash makes up 15-17%. Thankfully, price of soda ash began to drop since late April due to predictable oversupply. Price of soda ash in August decreased by 27% compared that in April. Furthermore, the shortage of natural gas across 2022 also mitigated this year and the price fell since 2Q23. We believe such positive changes would relieve cost pressure for solar glass manufacturers and expect GPM of the company’s solar glass sector to gradually improve throughout 2H23.
Limited new industry supplies due to the hearing approval on solar glass. In May 2023, NDRC and MIIT issued a further notice on risk management about solar glass capacity expansion. Later, the provincial departments of industry and information technology sorted out the solar glass expansion projects under construction and under plan in their jurisdiction, and publicized the authoritative instructions. Some projects have been required to submit capacity replacement plans, and some projects have been required to follow the risk management procedure. As a result, most manufacturers delayed their expansion since then. Currently only 21,000tons/day of expansion capacity has passed the hearing approval and we believe the hearing process did impose strong restrictions on the industry expansion. In the near term, module manufacturers plan 51GW production in September while solar glass supplies could satisfy roughly 45GW, which implies a possible price hike in solar glass in September. As for Flat Glass, it will reach capacity of 25,400tons/day (+23% YoY) and 30,200tons/day (+19% YoY) by end of 2023 and 2024. According to management, if the domestic expansion policies become tight, the company will seek expansion in Southeast Asia. The company already has capacity of 2,000tons/day in Vietnam. Since overseas price of solar glass is Rmb1-1.5/sqm higher than domestic price, we believe the overseas expansion will strengthen the company's global supply capacity and improve its profitability.
Maintain Buy rating. Given the delayed expansion and potential GPM improvement, we cut our EPS forecast in 23-24E, from Rmb1.88 to Rmb1.20 in 23E (+21.8% YoY), and from Rmb2.59 to Rmb1.66 in 24E (+37.9% YoY), and forecast EPS of Rmb2.05 (+23.6% YoY) in 25E. We cut our target price from HK$48 to HK$29.5, representing 16.5x 24E PE and 2.5x 24E PB. With cost reduction and price increases, we believe the company will see its earnings recovery in 2H23. We therefore maintain our buy rating.
Risks: downstream demand below expectation. Capacity expansion below expectation. Industry oversupply above expectation.