20160304-中国银河国际证券-信义玻璃-00868.HK-Improving_supply_demand_situation._Initiate_with_BUY_28页_1mb

Xinyi Glass [0868.HK] Summary

Core Content

Xinyi Glass (XYG) is a leading diversified glass manufacturer and the second-largest float glass producer in China. It holds a 20% share of the global automobile aftermarket replacement glass (ARG) market. The company is positioned to benefit from the improving supply/demand dynamics in the float glass industry due to the Chinese government's supply-side reform policies and the rationalization of industry capacity.

Main Points

1. Improving Supply/Demand Dynamics

• The float glass industry is facing capacity reduction due to supply-side reforms, which are expected to ease supply pressure and improve utilization rates.
• XYG is expected to see a 8.2% top-line CAGR and 18.4% bottom-line CAGR from 2015 to 2017.
• The company's share price may be under pressure due to weak market sentiment, but this offers a buying opportunity as the negatives have been priced in.

2. Stable Auto Glass Market

• Auto glass demand is correlated with the growth of the automobile industry and is expected to grow at a CAGR of >7% from 2016 to 2017.
• XYG has a strong position in the global auto glass replacement market, with about 80% of its auto glass business focused on the aftermarket.
• The company supplies auto glass to major Chinese automakers such as Chery, BYD, and Zhengzhou Yutong Bus.

3. Leadership in Low-E and PV Glass

• XYG is a domestic leader in Low-E and PV glass through its subsidiary, Xinyi Solar (XYS).
• The company is expected to see strong growth in PV glass volume, with a projected 32% increase from 2014 to 2017.
• The adoption of Low-E glass is driven by rising environmental awareness in China.

4. Industry Structure and Competitive Landscape

• The float glass industry is fragmented in China but consolidated globally.
• The top five float glass companies account for only 28% of the market share, indicating a highly competitive environment.
• The industry is more market-driven due to its private-sector nature, making capacity rationalization easier compared to SOE-dominated industries.

5. Valuation and Investment Outlook

• XYG is currently trading at 8.4x 2016 PER, which is undemanding compared to historical averages and its peers.
• The company is recommended with a Buy rating and a target price of HK$5.5, representing a 24.7% upside from the closing price of HK$4.39 on March 3, 2016.
• The company's financial performance shows resilience, with a stable net profit margin and increasing dividend yield.

Key Financials (in HKDm)

Key Risks

• Lower than expected property investment.
• Faster than expected capacity expansion.
• Substantial increase in production costs.

Strategic Developments

• XYG plans to spin off Xinyi Automobile Glass Hong Kong (XYAG) through a listing on the Hong Kong Stock Exchange's GEM board.
• The spin-off will not involve raising new capital and will distribute existing shares of XYAG to XYG shareholders through a special dividend.
• XYAG is the second-largest automobile replacement glass service provider in Hong Kong with a market share of 19.5%.

Market Trends

• The float glass industry is expected to see a 3.7% YoY decline in effective capacity in 2016 and a 6.1% decline in 2017.
• Supply-side reforms are expected to reduce the supply of float glass, leading to improved supply/demand dynamics.
• The global auto glass market is stable with a CAGR of 7.6% from 2009 to 2013, and is expected to continue growing due to increased vehicle usage and demand for value-added glass products.

Conclusion

XYG is well-positioned to benefit from the improving supply/demand dynamics in the float glass industry, supported by government policies and the company's strong market share in the auto glass segment. The spin-off of XYAG is expected to enhance future business development and provide additional value. With its undemanding valuation and strong fundamentals, XYG is recommended for a Buy rating.