Xinyi Glass Net Profit Soared by Nearly 50% in 2016, High Growth Rate Maintains
Xinyi Glass Holdings Limited announced positive profit alert. It is expected that the annual net profit of Xinyi Glass Holdings Limited will rocket by 40% to 55% YoY by the end of 2016, from HKD2.113 billion in 2015 to HKD2.958 billion to HKD3.275 billion, the second-highest in history.
Reduced Costs Contribute to Growth in Results
The Chinese government cut the price of natural gas for industrial use in April and November of 2015, and the low price has maintained in 2016. Being the major beneficiary, Xinyi Glass has consumed less energy but obtained higher efficiency, resulting in the huge increase in the gross profit margin of float glass. The falling in the gross profit margin of float glass has contributed to the rise in that of automotive glass and architectural glass. Meanwhile, Xinyi Solar (00968.HK), of which the company owns 28%, announced a positive profit forecast, increasing its profit contribution to the company.
According to the company's financial report in H1, gross profit margin increased by 8% YoY to 34.7% in H1 2016, a new high over the past five years. The gross profit margin of the three main sectors, float glass, automotive glass and architectural glass, soared to 22.3%, 39.0% and 48.7%, respectively, from 8.7%, 31.7% and 44.1% in H1 2015, with a growth rate of 13.6%, 7.3% and 4.6% YoY, respectively.
Major Business Continues to Expand, Overseas Bases Advances Orderly
The company is building a high-quality float glass production line and a low-radiation coated glass production line in Malaysia. With preferential import tariff treatment and shorter transport distance, the new plant will help the company provide competitive products at lower costs, and facilitate the company's expansion in the Southeast Asian market.
The domestic glass production capacity has increased by 5.9% year-to-date. Due to the shortage of supply and rising international crude oil prices, domestic sodium carbonate and natural gas prices rocketed at the end of 2016. We believe the cost bonus running through 2016 is drawing to a close, and the company's low-cost advantage will be weakened in 2017. However, since the Chinese government strictly controls the capacity expansion of the flat glass industry, industry supply and demand are expected to remain in a relatively reasonable range. As a glass giant, Xinyi Glass is looking for M&A deals in China and overseas expansion of float glass business in order to increase the scale effect.
In addition to continuous investment in R&D, introduction of many high value-added glass products, and expenditure cutdown by solar energy cogeneration, Xinyi Glass also plans to strengthen the vertical integration of the industry chain, promoting business models of Xinyi Automobile Glass Hong Kong (08328.HK), its Hong Kong-listed subsidiary, to the entire country, with a view to opening up the direct market of aftermarket automotive glass and laying the foundation for its long-term development..
Valuation and investment thesis
We expect that the Company will achieve EPS of HK$0.81/0.87 in 2016/2017, we upgrade the target price to HK$7.1, equivalent to 8.8/8.2x expected EPS in 2016/2017. Also, the "Accumulate" rating is maintained. (Closing price as at 22 Dec 2016)
Financials
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