Flat Glass reported 2023 revenue of Rmb21.52bn (+39.2% YoY) and net profit of Rmb2.76bn (+30% YoY), slightly above market expectation. The company declared final cash dividend of Rmb38 cents per share, resulting in a payout ratio of 52.57% in 2023 with 1H23 interim cash dividend of Rmb23.8 cents per share, which exceeds market expectation.
Gradual earnings recovery in solar glass sector. During 4Q23, the company realized revenue of Rmb5.64bn (+32.8% YoY, -9.1% QoQ), and net profit of Rmb791.1mn (+27.9% YoY, -10.5% QoQ). Overall gross margin recorded 23.4% (-1.1pct QoQ), and net profit margin recorded 14.0% (-0.2pct QoQ). GPM of solar glass sector reported 24.4% in 2H23, representing 4.4pct increase as compared to 20.0% in 1H23, mainly due to relieved cost pressure of soda ash.
Accelerated overseas capacity expansion. The company delayed its expansion in 2H23 because of the long-awaited hearing approval of domestic projects from the government. Total capacity only reached 20,600tons/day (+6% YoY) by end of 2023. In 2024, the company accelerated its capacity expansion. According to management, Anhui project with capacity of 4*1,200tons/day will start production in March and Nantong project with capacity of 4*1,200tons/day will be commissioned in August. By end of 2024, the company will reach capacity with 30,200tons/day (+47% YoY). In 2025, the company plans to construct 6 production lines with capacity of 8,800tons/day but has not got the government approval yet. Hence the expansion timeline of the its domestic projects is uncertain. Due to the restrict domestic policies, the company also seeks expansion in Indonesia and Vietnam with capacity of 2*1,600tons/day and 1*1,600 tons/day respectively, which will be commissioned in 1H26. Currently it has capacity of 2,000tons/day in Vietnam. Since overseas price of solar glass is Rmb1- 2/sqm higher than domestic price and raw material costs are lower, we believe the overseas expansion will strengthen the company's global supply capacity and improve its profitability.
Downstream demand is booming. Domestic solar installation reached 36.72GW (+80% YoY) in the first two months of 2024. Moreover, module manufacturers plan 60GW+ production in April. We believe downstream demand is solid in 2024. As for supply, currently the solar glass industry supplies could satisfy roughly 50GW per month thanks to the slowed down industry expansion regulated by the government. The industry inventories of solar glass have continued to decline for 3 consecutive weeks since March and are currently at a level of 21.59 days. According to Infolink Consulting, 3.2mm coated solar glass experienced a small price hike of Rmb0.25 this week. We believe ASP of solar glass will remain stable in 2024 due to a favorable supply-demand environment.
Maintain Buy rating. We slightly lift ASP assumption of solar glass and revise down the effective capacity forecast of the company in 24-26 according to its updated expansion plan in our model. Given the uncertainty of the government approval, the company's 2025 planned domestic projects are excluded from our forecasts in a cautious manner. We therefore revise our EPS forecasts in 24-25E, from Rmb1.66 to Rmb1.71 in 24E (+38.7% YoY), from Rmb2.05 to Rmb2.32 in 25E (+35.1% YoY), and forecast EPS of 2.32 (+0.1% YoY) in 26E. We slightly cut our target price from HK$29.5 to HK$27.8 to reflect a small decrease in 24E net profit (24E EPS was revised up because of decreased shares number), representing 15x 24E PE. With solid demand and cost reduction, we believe the company will see an improved margin in 2024. We therefore maintain our buy rating.
Risks: downstream demand below expectation. Capacity expansion below expectation. Industry oversupply above expectation.