The price of photovoltaic glass continues to fall, but the industry is expected to enter the storage cycle after a sharp reduction in production: due to reduced module production and increased glass supply, the price of photovoltaic glass has continued to fall since May. The price of 2.0/3.2 mm glass has dropped by as much as 35%/24%. Currently, all companies' photovoltaic glass businesses have fallen into net profit losses, and the gross profit of second- and third-tier companies is negative. Due to serious losses, large-scale cooling of the industry began in July, and no new production capacity was started in September. The mainland's nominal daily melting volume continued to drop from the highest 0.115 million tons in June to 0.098 million tons at present, a decrease of 14%. Furthermore, according to Zhuochuang information, some companies have also reduced production capacity by blocking kilns, so the actual reduction in production is even greater. Currently, photovoltaic glass has achieved a balance between supply and demand. We expect that as production continues to be cut and module production increases, glass is expected to enter the storage cycle, and the price rebound can be expected.

Production expansion and cold repair were carried out simultaneously to reduce costs: The company set up 1,200 tons of production capacity in Malaysia as scheduled in August, while cold repairing old production capacity to reduce costs, including 500 tons in Tianjin in September and 900 tons in Malaysia in October.

Since the unit cost would increase accordingly, the company did not cut production by blocking kilns. As a result, the company's current production capacity has dropped from 25,800 tons at the beginning of the year to 25,200 tons.

Supply-side reforms are expected to be introduced to accelerate the clean-up of the industry and benefit the leaders: Under loss pressure, the industry is calling for supply-side reforms recently. We expect the government to introduce policies such as raising energy consumption standards to speed up the clean-up of the supply and price recovery of photovoltaic glass, and benefit leading enterprises with lower energy consumption such as companies.

The company has built kilns of less than 900 tons with high energy consumption, accounting for only 7% of the production capacity, which is lower than 10% of the other leading company Follett and more than 20% of the industry average, and the share of production capacity that may be eliminated is low.

Compared with peers, the valuation advantage is obvious, and it was raised to purchase: due to the fall in the price of photovoltaic glass exceeding expectations and the company's production falling below expectations, we lowered our profit for 2024-26 by 25%/35%/29%. Compared to the lowest closing price on September 17, the company's stock price increased by only 18%, far lower than Follett (6865 HK)'s 47%. The company's 2025 price-earnings ratio/price-to-account ratio was only 10.8/0.84 times, far lower than Follett's 24.5/1.18 times. The company's photovoltaic power generation business is relatively stable in profit and continues to provide cash flow, and the debt ratio is significantly lower than that of the photovoltaic glass industry. Therefore, when the industry all fall into losses and is unable to expand production, the company can still make an overall profit and buck the trend and expand production, and is in an advantageous position in competition. Due to the current uncertain profit trend of the company, we moved to a market account rate valuation. Based on 1.03 times the 2025 market account ratio (compared to the 1.20 times discount we gave Follett of 14%, which is the average discount level since this year), the target price was lowered to HK$4.04 (originally HK$4.09) and raised to buy.