August 31, 2017 COMPANY NEWS China Glass Holdings Limited [3300.HK; HK$0.70; Not Rated] Key takeaways from 1H 2017 results presentation and detailed discussion with management Market Cap: US$162m; Free Float: 41.1%; 3-months Average Daily Turnover: US$0.13m Analyst: Mark Po [China Glass Holding Limited] The Company. China Glass Holdings Limited (CGH) produces float glass in (HK$) (HK$ million) 1.5 10 China, and markets its glass under the SUBO brand name in China and internationally. 8 CGH held its 1H 2017 results presentation yesterday. Management discussed 1 the Company’s 1H 2017 results, the outlook for industry and the Company, and 6 its near-term expansion plan. We also had a detailed discussion with CGIH’s 4 new management regarding the Company’s relationship with CNBM Group, its 0.5 roadmap and strategy, and its overseas business development. We believe that 2 CGH is likely to be the platform for CNBM Group to develop glass operations in both China and overseas markets. 0 0 1H 2017 results highlights. CGH’s 1H 2017 net profit was RMB22.9m, which is Aug16 Oct16 Dec16 Feb17 Apr17 Jun17 Turnover (RHS) Price (LHS) a turnaround from a net loss of RMB93.9m in 1H 2016. Turnover increased by Key Financials 2013 2014 2015 2016 about 20% YoY, from RMB918m in 1H 2016 to RMB1,101m in 1H 2017. The (in RMB m) increase in turnover was attributable mainly to a 13% YoY increase in the average selling price (ASP), from RMB60.5/DWC in 1H 2016 to RMB68.6/DWC Revenue 2,760.4 2,489.4 1,968.9 2,139.7 Gross Profit 537.2 372.2 78.3 327.3 in 1H 2017. CGH’s sales volume increased 6% YoY in 1H 2017. Its gross profit Gross Margin % 19.5 15.0 4.0 15.3 margin increased from 10.5% in 1H 2016 to 12.8% in 1H 2017, which was Net Profit 81.6 1.8 (426.4) 21.1 Net Margin % 3.0 0.1 (21.7) 1.0 mainly due to the higher ASP. Accounts receivable turnover decreased from 20 EPS (Basic) 0.05 0.00 (0.24) 0.01 days in 2016 to 19 days in 1H 2017, and inventory turnover increased from 79 days in 2016 to 97 days in 1H 2017. The Company’s net gearing increased from ROE (%) 3.9 0.1 (20.0) 1.1 Dividend Yield (%) 1.32 - - - 44% in 2016 to 49% in 1H 2017. CGH didn’t declare an interim dividend in 2017. PER (x) 11.49 n.a. n.a. 50.09 As at 30 Jun 2017, CGH had 10 float glass production lines in operation; the PBR (x) 0.44 0.47 0.57 0.53 production lines not in operation were suspended due to cold repair, debugging, Capex (m) (344.0) (309.8) (265.0) (477.1) technological renovation, or other reasons. In addition, CGH has an offline low- Free cash flow (m) 306.2 (73.9) (209.3) (322.2) emission coated (Low-E) glass production line and one amorphous silicon thin- Net cash/(net debt) (mn) (1,320.7) (1,378.0) (997.2) (1,200.2) film battery production line. Source: Bloomberg, Company Data, CGIS Research New management from CNBM Group released the roadmap. CNBM Group CGH management mentioned that the industry ASP is likely to go up (through Triumph Technology Group Company) has a 23.01% stake in CGH, further in 2H 2017 vs. 1H 2017. Management said there is unlikely to be making it the largest shareholder. Recall that CGH appointed Mr. Peng Shou a major increase in glass capacity, as the Chinese government is tightly (from CNBM Group) the Chairman of the Board and Mr Tang Liwei (from CNBM controlling new capacity expansion. Regarding supply side reforms, CGH Group) a Non-Executive Director of CGH in Mar 2017. This was the first time Mr. management mentioned that the Chinese government has been actively Peng Shou and Mr Tang Liwei hosted a CGH’s results presentation since they shutting down outdated capacity since the beginning of 2017. The joined CGH’s board. According to new management, CNBM Group intends to production line in Nigeria will have daily capacity of 500 tonnes and is support CGH going forward as part of its business development plan and SOE expected to start trial production in 2H 2017. The production line in Egypt reforms. CGH management also shares the view that CNBM Group, through will have daily capacity of 600 tonnes, but CGH is doing a feasibility Triumph Technology, will provide further support to CGH in terms of technology, study on the production line. CGH is also looking for projects in other financing and management resources to improve operating performance. countries, especially those covered by the OBOR Initiative. The overseas According to CGH management, Triumph Technology Group Company is the production lines will have a positive impact on CGH’s bottom line leader in glass manufacturing technology and construction services for glass according to management. manufactures. Triumph Technology Group Company is one of the major global Our view. We share the view that CGH is a weak player in the industry players in glass manufacturing plant construction. CGH is now upgrading its compared with leading players such as Xinyi Glass [0868.HK] and Fuyao product portfolio to give it higher exposure in the high-end glass market Glass [3606.HK], but CGH is also a beneficiary of higher float glass segment. CGH is now expanding its range of ultraviolet-proof high transmittance prices and supply side reforms. Shares of CGH have been under (ultra clear) glass products in industrial glass areas, such as light heating, home pressure since our latest update in Apr, in our view, due to lack decoration, furniture, lighting and interior decoration. CGH’s electronic glass Company-specific news flow. We believe that CNBM Group will utilize production line, with daily output of 400 tonnes, has been put into operation and CGH as a platform to consolidate glass operations under CNBM Group. product quality is continually improving. Management expects the electronic Given its volatile earnings record and low trading liquidity, it will take time glass production line to reach optimal production within three months. CGH has for the market to build confidence in CGH, but we believe that the put more effort into the development of production techniques for online Low-E business development initiated by CGH’s new senior management will and online Sun-E Reflective glass and has achieved a substantial increase in translate into more sustainable growth going forward, which will attract production capacity and market share. CGH joined the procurement system of market interest. Triumph Technology Group Company earlier this year. CGH will see lower production costs starting in 2H 2017, as Triumph Technology Group has strong Catalysts: News flow on supply-side reforms, co-operation with CNBM pricing power. CGH management is positive on the outlook for the industry and Group, and M&A activity. the Company, given supply side reform policies and steady demand growth. Figure 1: Peer comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Share Price Performance Price Market Cap 2017F 2018F 2019F 2017F 2018F 2019F 2016 2017F 2016 2017F 2016 2017F 2016 2017F 1M 3M 6M 12M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % 868 HK Xinyi Glass Holdings Ltd 7.52 3846.8 8.1 7.3 6.9 8.0 7.3 6.8 2.0 1.9 24.8 25.1 13.8 14.2 5.7 6.0 -3.2 3.6 13.2 19.6 25.6 968 HK Xinyi Solar Holdings Ltd 2.7 2513.7 8.2 7.5 6.8 7.3 6.3 5.7 2.2 2.2 33.2 29.5 11.1 12.1 5.3 5.5 15.2 12.9 0.3 -15.5 8.7 8328 HK Xinyi Automobile Glass Hong 1.5 105.6 n.a. n.a. n.a. n.a. n.a. n.a. 8.1 n.a. 0.1 n.a. 0.1 n.a. 0.0 n.a. -1.9 5.5 3.4 -5.6 2.0 3300 HK China Glass Holdings Ltd 0.7 161.9 n.a. n.a. n.a. n.a. n.a. n.a. 0.5 n.a. 1.1 n.a. 0.4 n.a. 0.0 n.a. -2.8 -10.3 -22.2 -33.3 -14.6 1108 HK Luoyang Glass Company Ltd-H 4.7 1287.6 n.a. n.a. n.a. n.a. n.a. n.a. 4.0 n.a. 2.9 n.a. 0.9 n.a. 0.0 n.a. 10.3 13.3 -17.7 -0.2 -7.8 3606 HK Fuyao Glass Industry Group-H 24.5 8538.5 16.0 13.8 12.4 10.6 9.2 8.2 3.0 2.6 18.2 17.0 10.5 10.8 3.6 3.8 -8.6 -18.5 1.0 15.1 1.7 6865 HK Flat Glass Group Co Ltd-H 1.3 303.6 3.6 2.9 2.5 2.2 1.7 n.a. 0.7 0.5 21.9 18.3 13.2 15.6 6.5 6.9 -7.0 -16.5 -21.9 -38.9 -23.3 Average 9.3 8.1 7.2 6.7 5.7 6.9 3.1 1.8 12.9 21.6 6.0 12.8 2.6 5.4 0.9 -2.3 -9.5 -13.1 -5.6 600660 CH Fuyao Glass Industry Group-A 22.9 8538.6 17.4 15.0 13.5 10.5 9.1 8.2 3.3 2.9 18.2 17.2 10.5 11.1 n.a.