Revenue continued to rise in the first half of the year, with declining photovoltaic glass prices and high costs dragging down profits. The company's 1H23 revenue was HK$12.14 billion, up 25.2% year on year. Of these, revenue from the photovoltaic glass/power plant business increased by +30.8%/-1.8% year-on-year to HK$105.8/1.49 billion, respectively. 1H23's gross margin recorded 22%, down 8.7/4.3 pct from the previous year/month-on-month period, mainly due to 1) the price of photovoltaic glass still falling slightly; 2) the high price of soda ash in January-May; 3) the overall cost of natural gas remains high. Coupled with the impact of the devaluation of the RMB exchange rate, net profit of 1H23 decreased 26.9% year on year to HK$1.39 billion. The net profit margin of the return mother was 11.5%, down 8.2/6.2 pct from year to month, respectively.

The pattern of the photovoltaic glass industry may be marginally optimized, and installation demand is expected to improve in the second half of the year. 1) On the supply side, since 2Q23, all provinces have issued opinions on handling risk warning information for photovoltaic glass production lines in accordance with the “Notice on Further Improving the Risk Warning of PV Rolled Glass Production Capacity” of the Ministry of Industry and Information Technology and the National Development and Reform Commission. We believe that policies such as hearings are clearly binding on PV glass production capacity investment, and that the PV glass supply and demand pattern in 2024-2025 may be marginally optimized. As a leading enterprise, Xinyi Solar has a significant cost advantage in expanding production, and its market share is expected to increase further. 2) On the demand side, the price of silicon materials has dropped sharply since June. The average weekly price of dense materials as of August 2 was 69,000 yuan/ton, down 41.5% from 118,000 yuan/ton at the end of May. We believe that with prices in the main industry chain returning to reasonable prices in the second half of the year, the installed capacity of photovoltaics is expected to be released rapidly, thereby improving the demand for photovoltaic glass.

The cost of soda ash and natural gas is expected to drop sharply month-on-month in the second half of the year, and the company's gross profit can be expected to improve. 1) In terms of raw materials, the spot price of heavy soda ash has dropped rapidly since May. According to business agency data, the price of heavy soda ash was 2,267 yuan/ton on August 6, down 15.5% from the end of May. We expect the decline in soda ash prices to reduce the company's 2H23 photovoltaic glass production costs, thereby improving profitability. 2) On the fuel side, due to the long term of the gas contract signed earlier, the decline in natural gas prices did not contribute much to the company's profit performance in the first half of the year, but the company's fuel costs are expected to improve significantly in the second half of the year. We believe that the current gross profit level of the company has basically bottomed out, and we are optimistic that profit will improve in the second half of the year.

The target for the expansion of photovoltaic glass production remains unchanged, and the guidelines for power plant installation have been improved. 1) In terms of photovoltaic glass, as of 1H23, the company has put into operation two new production lines with a daily melting capacity of 1000 tons this year. It plans to add 5 new production lines with a daily melting capacity of 1000 tons in the second half of the year, adding 7,000 tons/day production capacity for the whole year. The production capacity at the end of the year can increase from the current 21,800 tons/day to 26,800 tons/day. The company's annual effective production capacity is expected to increase by 45.6%. In addition, the company plans to add 2 new production lines with a melting capacity of 1,200 tons per day in Malaysia and 3 new domestic production lines with a melting capacity of 1,000 tons per day. 1H24 plans to add 5,400 tons/day in total production capacity, laying the foundation for next year's production and sales growth. 2) In terms of photovoltaic power plants, prices in the main photovoltaic industry chain were high in the first half of the year, and the company's power plant construction slowed down. Given the decline in module prices, the company plans to speed up power plant construction in the second half of the year to exceed the 500-800MW construction target set at the beginning of the year.

Investment recommendations: We forecast that the company's revenue for 2023-2025 will be HK$278/400/HK$46.9 billion, respectively, with a year-on-year growth rate of 35.1%/44.0%/17.2%; net profit from the return mother will be HK$46.1/64.4/HK$7.64 billion respectively, up 20.7%/39.6%/18.7% year-on-year. Considering valuation factors such as expected profit improvements, the company's position in the industry, and competitive advantage, we believe that the company's reasonable market value is HK$89 billion (HK$9.32 per share), which corresponds to 18 times the 2023 P/E, and maintains the “buy” rating.

Risk warning: The excessive expansion of production capacity in the industry has caused the price of photovoltaic glass to fall beyond the expected risk; the improvement in raw material and fuel costs falls short of expectations; the risk that the PV installed capacity does not meet expectations; the risk that the PV power plant business approval scale does not meet expectations; and the commissioning progress of polysilicon projects falls short of expectations.