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24 Jun, 2019 (Monday)

Fuyao Glass announced on January 15 to acquire the German Company SAM for EUR58.85 million. The Company started to set about consolidation from March 1 and set foot in the automotive aluminum trim strip industry. After the integration, it is expected to achieve integrated supply of aluminum trim strips and automotive glass, improve the added value of products and expand the customer base. Looking ahead, as the North American business steps on the right track, the Russian business has bottomed out and recovered, and the domestic market share continues to increase, we are optimistic that the Company`s overall performance will maintain a stable growth in the future.
Buy-in Price: $22.85, Target Price: $27.00, Cut Loss Price: $19.90

FLAT GLASS(6865.HK) - Expanding Capacity, and sufficient Orders Ensure Future Development

Company Profile

Flat Glass is the world's second largest PV glass manufacturer. At present, the company has a PV glass production line with daily melting capacity of 4,000 tons and a float glass production line of 1,200 tons per day. The production bases of the company are located in Jiaxing City, Zhejiang Province, and Bengbu City, Anhui Province. In addition, the PV glass production base in Haiphong, Vietnam is also under construction. About 60% of the products are sold in the domestic market, and 40% are exported to countries such as Japan/South Korea/Malaysia/Vietnam/India.

Financial Review: Gross Profit Margin Is under Pressure in Industry Adjustment Period

Affected by the decline of price of PV glass due to fluctuation of PV industry subsidy policy, in 2018, the revenue of Flat Glass recorded RMB3,064 million, an increase of 2.42% yoy, and the net profit attributable to the parent company was RMB407 million, a slight decline of 4.50% yoy. The net profit attributable to the parent company excluding non-recurring items was RMB371 million, down by 9.13% yoy.

After the issuance of the new 531 PV subsidy policy in 2018, the price of PV glass fell by approximately 30%. The average annual price decreased by approximately 15%. In addition, affected by the increase in energy cost and the price of some raw materials, in 2018, the Company's gross profit margin was 27.12%, narrowed by 1.75 ppts yoy, and the net profit margin was 13.3%, down by 1 ppts. On a closer look at the products, the revenue of the Company's PV glass, float glass, engineering glass and home glass reported RMB2.1 billion, RMB156 million, RMB333 million and RMB396 million, respectively, which was +3.4%, -47%, +33% and +3.6% yoy, respectively. Fractional gross profit margin recorded 26.7%, 14.4%, 24% and 26.4%, respectively, which was -3.04%, -8.44%, +0.69% and +1.5% yoy, respectively.

In Q1 of 2019, the Company recorded a revenue of RMB932 million, an increase of 37% yoy, and a net profit of RMB110 million, an increase of 11% yoy. The gross profit margin was 28.3%, down by 1.7 ppts yoy, mainly due to the high base in the same period of last year (PV glass price dropped by 20% yoy and increased by 20% qoq).

Industry Analysis: The PV Industry Ushers in a Deterministic Recovery Cycle

China is the leader of the global PV industry, with the production capacity of silicon wafers, cells and PV modules accounting for 80-90% of the world. Affected by the 531 policy, the downstream demand of China's PV industry dropped sharply, and the price of the PV manufacturing processes fell drastically under the imbalance of supply and demand. According to statistics of the National Energy Administration, in 2018, China's installed PV capacity increased by approximately 43 GW, down by 18% yoy. However, benefiting from the decline in China's PV market price, overseas PV markets are developing rapidly and the demand continues to be strong, gradually offsetting the domestic demand gap. Benefiting from the continuous decline in the price of PV modules and the continuous improvement of technologies, the cost of PV power generation had an accelerated decline and the degree of marketization has deepened.

From the end of 2018 to H1 of 2019, China's PV industry price has gradually stabilized and rebounded. It is expected that the global installed PV capacity will increase by 120 GWH in 2019, supporting the price of PV glass. We believe that the competitiveness of leading companies with economies of scale and technical capital is being strengthened.

Outlook: Industry Leaders Expand Capacity, and New Big Orders Ensure Future Development

In February 2019, the Company issued 150 million A shares to raise funds of RMB254 million; in March, the Company's Hong Kong stocks were included in the list of Southbound Hong Kong Trading Link; recently, the Company announced that it is intended to issue convertible bonds in China to raise no less than RMB1.45 billion, which is used for adding two furnace production lines for sheet glass and supporting processing with a daily melting capacity of 1,200 tons/day. The project of PV module cover glass with an annual production capacity of 750,000 tons is expected to put into production in 2021. In H1 and Q4 of this year, the Company will put into production the two production lines, respectively, with a production capacity of 1,000 ton/day (Anhui 1000 + Vietnam 1000). By the end of the year, the production capacity will reach 5,500-6,000 tons/day.

Investment Thesis

Recently, the US government announced the exemption of Section 201 tariffs on double-sided PV modules. It is expected that the double-sided ratio will continue to increase rapidly, which will benefit the strong price and demand of PV glass. Based on our financial forecast, we lift target price to HK$4.85 for the Company, equivalent to 2019/2020E 13/8.8x P/E, Buy rating.


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Recommendation on 24-6-2019
Price on Recommendation Date$ 3.950
Suggested purchase priceN/A
Target Price$ 4.850
Writer Info
Zhang Jing
(Research Analyst)
Tel: (+86 21 51699400-103)

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