Flat Glass’s annual results came in slightly above our estimates, helped by VAT deduction of RMB91m in 4Q23. The management announced the much-awaited expansion plan for 2024 during post- results briefing, targeting to commission 8 new furnaces this year.
　　Compared to only one furnace added in 2023, FGG is set to regain lost ground and possibly deter peer expansion as well. That said, ASP decline for thin glass products YTD could drag its upcoming 1Q24 results. The anticipated price hike in April may also be short lived as supply picks up while demand visibility remains blurry. We maintain HOLD rating on FGG and cut TP to HK$17.20 as we see recent rally has priced in demand recovery in March & April and renewed oversupply risks from aggressive expansion of the duopoly.
　　Key Factors for Rating
　　Results review. FGG’s 4Q results were lifted by the VAT deduction of 91m, which was partially offset by increase in receivable, inventory and fixed asset impairments. OCF saw a great improvement in 4Q23, putting full-year figure to RMB1,967m from 9M23’s negative RMB21m. The board recommends a final dividend of RMB0.38/share, making full-year payout ratio to 53%.
　　Aggressive expansion plan. The management plans to ignite 4x1,200tpd furnaces in Anhui province this year starting from this weekend, and another 4x1,200tpd in Jiangsu province from this August to December. If executed on schedule, FGG’s end-2024 capacity will grow by 44% YoY, almost on par with Xinyi Solar (968 HK, BUY) again (which intends to add 6,400tpd capacity in 2024). FGG is also planning to add 4,800tpd capacity in Indonesia and Vietnam, while awaiting MIIT approval before constructing new furnaces in China.
　　We concur that it is strategically wise for the duopoly to seek market share gain during industry downturn, which would help to consolidate their leadership in the industry over the long run. However, their ambition could add uncertainties to industry S/D in 2H24, in our view. China has net added 4,580tpd solar glass capacity since end-Dec 2023, which would soon fully ramp up and contribute to incremental supply. If demand cannot hold ground in May, we expect solar glass price to quickly relinquish the possible gain in April.
　　Key Risks for Rating
　　Better/worse-than-expected solar PV demand.
　　Valuation
　　Maintain HOLD rating on FGG and cut DCF-based TP to HK$17.20. After recent rally of 50% from early-Feb trough, FGG is trading at 13x 2024 P/E on our estimates, which appears unattractive amid demand uncertainties and unexciting 1Q24 results, in our view.