COMPANY NEWS Xinyi Glass [868.HK; HK$4.18; Not Rated] Key Takeaways from Luncheon

January 15, 2016 COMPANY NEWS Xinyi Glass [868.HK; HK$4.18; Not Rated] Key takeaways from luncheon. Market Cap: US$2,107m; Free Float: 46.5%; 3-months Average Daily Turnover: US$4.6m Analyst: Mark Po The Company. Xinyi Glass (XYG) is one of the largest and most diversified [Xinyi Glass] glass producers in China. (HK$) (HK$ million) Key takeaways from luncheon. Management believes the industry 6 300 consolidation is an ongoing process and the nationwide production of float 5 250 glass will continue to go down in 2016 after a 7% decline from peak in 2015. 2015 marked the first time China glass manufacturing industry reported YoY 4 200 decline in five years. About 750m DWC of float glass was produced in 2015, 3 150 down from 792m DWC in 2014. The new capacity addition will drop to a very low level since Chinese government stopped granting new licenses since 2 100 2012. XYG does not have quota for building new float glass line after 1 50 completing expansion in 2016. Therefore, management believes that the new supply will be at low level starting 2H 2016. National wide production capacity 0 0 is expected to decline in 2016 and 2017 given potential capacity phases out. Jan15 Mar15 May15 Jul15 Sep15 Nov15 Turnover (RHS) Price (LHS) XYG’s management shared the view that the government policy of supply side Key Financials 2013 2014 2015E 2016E management will be implemented more easier in float glass industry vs other (in HK$m) commodities such as steel and cement. The float glass industry is dominated by non-SOE related companies and does not suffer from the structural Revenue 9,936.1 10,861.1 11,573.7 12,794.8 problems of SOE involvement. The collapse of Farun Group, the third largest Gross Profit 3,137.0 2,733.4 3,100.6 3,536.3 Gross Margin % 31.6 25.2 26.8 27.6 player in China, is clear evidence of better supply discipline. XYG is one of Net Profit 3,521.9 1,363.7 2,013.7 2,120.2 the beneficiaries of supply side management proposed by the Chinese Net Margin % 35.4 12.6 17.4 16.6 Government. Concerns on lower energy prices will delay consolidation EPS (Basic) 0.92 0.35 0.51 0.54 process as smaller players can survive given less capital tied up. However, management re-iterated the view that increasing environmental protection ROE (%) 31.8 11.1 15.7 15.2 control by China government will continue to put pressure on smaller players Dividend Yield (%) 6.46 3.59 5.95 6.26 which are required to make investment for emission reduction. PER (x) 4.55 12.02 8.17 7.76 PBR (x) 1.34 1.33 1.22 1.13 According to management, downstream demand for float glass in Q4 2015 was somewhat better than expected. Inventory level of XYG’s float glass Capex (2,873.8) (1,714.6) (1,600.0) (1,400.0) division is less than a month and management says there is limited pricing Free cash flow (136.5) (155.0) 609.5 808.6 pressure for cleaning up inventory in Jan-Feb in traditional low season. Net cash/(net debt) (4,097.6) (5,261.1) (5,171.0) (4,708.3) Management also highlights that pricing is relatively stable in Jan 2016 vs the Source: Bloomberg, Company Data, CGIS Research level in Nov-Dec 2015. About 2/3 of XYG’s gas usage follows pricing set by NDRC. The company enjoyed the benefit of natural gas price cut announced Medium term outlook to improve further. On medium term outlook in Nov 2015. Management believes the decline in production costs will have for the float glass division, we maintain the view that the current market positive impact of profitability of the float glass division. The market expects environment put heavier pressure on small glass manufacturers, which that Chinese government will cut natural gas price again later this year which are facing challenging environment. XYG’s management maintained is positive to XYG. A 5% cut in natural gas price will result in 3% increase in that the industry was under consolidation and a substantial portion of XYG’s net profit. capacity would be phased out. As XYG’s CAPEX peaked in 2013 and 2014, the company will report positive cash flow starting 2015 and XYG is an indirect beneficiary of RMB deprecation. About 70% of XYG’s revenue is denominated in RMB and the rest is mainly denominated in US$. beyond given slowdown in expansion. Financial position of XYG will RMB depreciation may drag down XYG’s overall top line growth as HK$ is the continue to improve and the risk of dilution by new equity issue is low. reporting currency. However, about 95% of XYG’s production costs is Our view. Despite concerns on outlook for Xinyi Glass’ float glass denominated in RMB and therefore, XYG is a beneficiary of RMB depreciation. division, we maintain the view that the negatives for Xinyi Glass have Production facility in Malaysia will start operation progressively 2H 2016, with been priced-in. Defensive auto glass aftermarket business and Low-E full contribution in 2017. Total CAPEX could be lower than original budget due construction glass business will continue to perform well going forward. to depreciating Ringgit. Production facility in Malaysia will serve ASEAN XYG is one of the beneficiaries of lower natural gas prices. XYG will markets. benefit from lower production costs and industry consolidation. The first phase of wind farm with 60MW capacity will start operation in later Catalysts. More positive news flow on China property sector and 2016 and another 60MW capacity will commence production in 2017 Average potential cut in natural gas prices in 2H 2016. cost power generation will be below RMB0.2/kWh given lower unit CAPEX of < RMB7/W and lower financial cost with average interest rate of about 2.5%. Tariff is about RMB0.61/kWh. Figure 1: Peer Comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F Lcy US$m x x x x x x x x % % % % % % 868 HK Xinyi Glass Holdings Ltd 4.18 2106.8 9.2 7.7 6.4 9.0 7.9 7.0 1.3 1.2 11.1 13.9 7.2 8.5 3.7 4.9 968 HK Xinyi Solar Holdings Ltd 3.1 2671.4 15.9 11.4 9.2 12.6 8.2 6.2 4.2 3.6 17.6 27.6 14.9 15.2 2.1 2.5 3300 HK China Glass Holdings Ltd 0.8 193.1 n.a. n.a. n.a. n.a. n.a. n.a. 0.6 n.a. 0.1 n.a. -2.8 n.a. n.a. n.a. 1108 HK Luoyang Glass Company Ltd-H 4.1 1042.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 38.7 n.a. -10.6 n.a. 0.0 n.a. 3606 HK Fuyao Glass Industry Group-H 16.8 5417.2 13.5 11.7 10.4 8.9 7.3 6.5 3.2 2.1 26.6 19.9 14.1 13.2 0.0 4.3 600660 CH Fuyao Group Glass Industr-A 14.2 5417.1 13.7 12.0 10.7 8.8 7.3 6.5 2.3 2.3 26.6 21.3 12.4 14.0 n.a. 4.2 000012 CH Csg Holding Co Ltd- A 10.1 2650.4 34.7 28.7 19.6 14.2 11.5 9.3 2.7 2.4 10.7 6.8 3.5 3.4 n.a. 2.5 601636 CH Zhuzhou Kibing Group Co Lt-A 4.3 1632.1 32.8 15.8 17.0 15.5 10.3 8.1 2.2 1.0 6.2 4.2 2.6 n.a. 0.0 n.a. Average 22.1 15.9 13.4 12.0 8.9 7.3 2.5 2.3 18.1 16.0 4.8 11.5 0.5 3.4 1802 TT Taiwan Glass Ind Corp 11.55 863.1 n.a. n.a. n.a. n.a. n.a. n.a. 0.6 n.a. 0.3 n.a. -2.6 n.a. n.a. n.a. SISE TI Turk Sise Ve Cam Fabrikalari 2.93 1835.4 9.3 8.9 7.6 6.1 5.5 5.1 0.9 0.8 7.4 8.8 4.5 4.9 n.a. 1.9 TRKCM TI Trakya Cam Sanayii As 1.71 504.6 8.8 7.8 6.1 5.6 4.8 4.3 0.6 0.5 12.6 6.9 4.9 3.9 n.a. 4.0 APOG US Apogee Enterprises Inc 38.49 1111.8 17.6 13.9 11.4 8.0 6.5 5.5 2.8 n.a. 8.2 n.a. 9.6 n.a. 1.1 1.2 5201 JP Asahi Glass Co Ltd 647.00 6517.8 17.0 18.4 17.1 5.8 5.6 5.5 0.7 0.7 1.4 4.0 2.5 2.6 n.a. 2.8 5214 JP Nippon Electric Glass Co Ltd 556.00 2348.7 33.3 19.7 18.6 4.3 4.1 3.9 0.6 0.5 2.5 1.6 0.5 1.7 n.a.

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