The company released the mid-year report of 2023, achieving operating income of 8.389 billion yuan, an increase of 28.69%, a net profit of 889 million yuan, a decrease of 11.16%, and a deduction of 838 million yuan, a decrease of 5.56%. In the short term, the profits of float glass and photovoltaic glass are expected to continue to improve under the optimization of supply and demand, and are optimistic about profit elasticity in the second half of the year; in the medium and long term, the continuous release of photovoltaic glass, electronic glass, architectural glass and polysilicon capacity will provide growth and maintain a "buy" rating.

Matters: the company released the mid-year report of 2023, achieving operating income of 8.389 billion yuan, an increase of 28.69%, a net profit of 889 million yuan, a decrease of 11.16%, a net profit of 838 million yuan, a decrease of 5.56%, and a net cash flow of 518 million yuan from operating activities. The income in the second quarter of the discount order was 4.319 billion yuan, up 15.67%, and the attributable net profit was 493 million yuan, with a decrease of 20.15%. The non-vested net profit was 469 million yuan, with a decrease of 14.94%, and the net cash flow of operating activities was 803 million yuan.

Float glass profit decline, optimistic about the peak season profit elasticity. 1H23 glass plate (including float, photovoltaic, engineering glass) achieved a net profit of 480 million yuan, down 20%, we expect to be mainly affected by float glass business. In the first half of the year, the price of float glass fell compared with the same period last year, the cost of superimposed raw fuel increased compared with the same period last year, and the profit level narrowed.

However, in the second quarter alone, glass prices rose rapidly, superimposed soda ash, natural gas prices fell, and profits have improved significantly. In the short term, with the arrival of the peak demand season, the marginal demand for superimposed Baojiao buildings and the continuous introduction of real estate policies, we expect to lead to a continuous improvement in glass demand, while the effective capacity released by the supply side during the peak season is relatively limited, and the number of elderly production lines in the industry is still large, and there is room for subsequent capacity reduction. Supply and demand optimization superimposed cost pressure relief, we are optimistic about the peak season profit elasticity.

Photovoltaic glass will enter the performance release period. 1H23's glass sector achieved 6.335 billion yuan in revenue, an increase of 43%. We judge that the rapid growth in revenue is mainly due to the continued release of production capacity, and sales have increased significantly compared with the same period last year. As of June 2023, the company has 7 photovoltaic Calendering glass furnaces and supporting photovoltaic glass deep processing production lines in Dongguan, Wujiang, Fengyang and Xianning, with an annual output of about 2.72 million tons of photovoltaic calendered glass, ranking third in the industry. Follow-up, two 1200t/d furnaces in Beihai are under construction in an orderly manner as planned. In the short term, photovoltaic glass supply and demand to improve stack cost pressure relief, profitability is expected to continue to repair at the bottom. In the medium and long term, relying on the technology and yield advantages brought by the company's more than 10 years of photovoltaic glass production experience, the continuous release scale advantage of superimposed production capacity appears, and the photovoltaic glass business is expected to become the new champion business of Southern Glass.

Electronic glass revenue has declined and is expected to improve as demand recovers. The revenue of 1H23's electronic glass and display business reached 720 million yuan, down 11%, and the net profit was 15 million yuan, down 87% from the same period last year, mainly due to the shrinking global demand for consumer electronic products and the expansion of domestic electronic glass production capacity, resulting in a market oversupply.

However, the competitiveness of the company's electronic glass continues to enhance, and the market share and brand effect of medium and high aluminum electronic glass products remain steadily improved; 2023H1, the company's high aluminum second generation (KK6-P) products continue to achieve volume production among new customers, indicating that the company has firmly established a firm foothold in domestic high-end customers. The new ultra-thin electronic glass production line with daily melting capacity of 110 tons in Qingyuan Hebei window has entered the preparation stage before commercialization. At present, Southern Glass has completed the full coverage of high, middle and low-end application scenarios in the field of electronic glass products. With the gradual recovery of consumer electronics demand, the profit of electronic glass is expected to improve.

Polysilicon short-term or under pressure, subsequent capacity expansion is expected to enhance competitiveness. 1H23 solar energy and other sectors income 1.585 billion yuan, with an increase of 10.5%, to achieve a net profit of 356 million yuan, with an increase of 26%, we judge that the profit is mainly contributed by polysilicon. However, as the price of silicon continues to decline, the cost of production capacity in Yichang is higher, and the operating pressure is expected to increase in the second half of the year. In addition, the company plans to build a new 50,000-ton high-purity silicon project in Haixi Prefecture, Qinghai Province. compared with the old line, we expect that the cost of the project will be significantly lower than that of the old line. at present, the construction of the project is being accelerated, and the company's solar energy business will be further expanded after completion to enhance the company's overall competitiveness.

Risk factors: macroeconomic pressure; the company's new business expansion is not as expected; raw fuel costs have risen sharply.

Profit forecast, valuation and rating: the company is an established leader in the glass industry. In the short term, the profits of float glass and photovoltaic glass are expected to continue to improve under the optimization of supply and demand. We are optimistic about profit elasticity in the second half of the year. In the medium and long term, the continuous release of photovoltaic glass, electronic glass, architectural glass and polysilicon capacity will provide growth. Taking into account the rapid decline in polysilicon prices and weak economic recovery, we adjust the company's 2023-2024 net profit forecast to 1.95 billion yuan (the original forecast is 3.313 billion yuan), and increase the 2025 net profit forecast of 2.76 billion yuan, corresponding to the EPS forecast of 0.64 yuan 0.75 yuan 0.90 yuan, referring to the company's historical valuation center (the average valuation of the company in recent 5 years is about 12x). Combined with the growth of the company's photovoltaic / electronic glass business, the company is given 12xPE in 2023, corresponding to the target price of 7.7 yuan, maintaining a "buy" rating.