Rating: BUY (Initiation) 

Target price: HKD4.31 

Share price (19 Jul): HKD3.03 

Market Cap (HKDm): 5,484.7 

Up/downside: 42.2% 

We initiate coverage of China Glass Holdings with a BUY call and a PT of HKD4.31. With the increasing penetration of multi-layered glass, we are confident about demand for float glass and expect the tight supply to continue. We see much room for the company to optimize cost and increase production capacity, and appreciate its profit growth potential. 

Production capacity upscale potential; profit margin flexibility could increase 

China Glass Holdings is a float glass veteran manufacturer with a history that traces back to Jiangsu Glass Factory in 1958. Its core business is the manufacture and sale of float glass and deep-process products, including colorless, colored, coated, energy-saving and new energy glass. As of end-2020, it has 13 float glass production lines with a daily melting capacity of 6,650t/d, 6 domestic production bases and 1 overseas float production line in Nigeria. China National Building Material Group and Legend Holdings are its largest and second largest shareholders, respectively. At end-2020, the company produced 35.44m weight case of various glass products and sold 36.6m weight case. Riding the boom in the float glass industry, its 2020 revenue increased 33% yoy to RMB3.2bn while its gross profit margin also improved significantly. A sustained float glass boom gives its float glass production capacity more room to rise and would allow it to tap industry uptrend benefits. This high potential is worth investor attention, especially in view of its current valuation levels.  

Cold repair production; external/internal growth; float glass capacity potential 

At end-2020, it has 10 float glass production lines (13 in total). Based on its float glass output, we estimate post-2020 cold repair would lift effective production capacity by about 30% (i.e. by about 1,500t/d; 1H21 involved two furnaces at a combined 1,000t/d). And China Glass has extensive experience in external acquisition of integrated float assets. It acquired a 70% stake in a Nigerian company (owning and operating a 600t/d float glass line) and plans to acquire a 55% stake in Fujian Longtai Industrial (in May 2021: a construction glass production furnace and to build an automotive glass production line). With gradual asset buildup, its floating capacity would increase. In addition, to manage competition, its potential participation in the float glass assets of its major shareholders could add profit margin elasticity. 

Kiln upgrades; shareholders’ advantages; cost optimization and profit potential 

The profitability of China Glass lags behind float glass leaders Xinyi Glass and Kibing Group. The main reasons are: 1) its single-line kilns are small in scale, kiln age is old, and it falls behind in total scale. It lacks large-scale procurement advantages, resulting in high unit production cost. 2) Cost management is weak, especially in the financial expense ratio. The average age of the company’s kilns is 6.5 years, significantly older than Xinyi Glass and Kibing Group. It indicates an urgent need for the company’s glass furnaces to be modified for cold repair production. Modification could increase the scale of its single-line furnaces and reduce energy consumption and optimize unit production cost. In addition, the controlling shareholder has abundant silica sand resources and full glass supply chain service capabilities. The company’s wholly owned subsidiary, China Glass Investment, signed a procurement framework agreement with Huaguang Group (a wholly owned subsidiary of Triumph Science & Technology Group) in 2019; it could make better use of group resources to benefit from scale advantages such as scale procurements, which is a significant factor in optimizing production costs. At the same time, we observe that its financial expense ratio is significantly higher than that of the float glass market leader. With a sustained float glass boom, China Glass profit restoration could optimize its balance sheet structure and improve financial expense management and control. 

We anticipate float glass boom would raise China Glass’s profit margin flexibility 

New float glass production capacity is restrained by policy and the probability of a marginal relaxation is small, while industry cold repair pressure is high. We expect effective float glass supply increases in 2021/22E to be muted. Demand has benefited from the momentum brought by construction completions and higher building energy conservation requirements. In the context of an increase in the penetration of multi-layered glass, we are confident about demand for float glass and expect the tight supply to continue. We see much room for the company to optimize cost and increase production capacity, and note its profit growth potential. We estimate 2021/22/23E revenue will arrive at RMB4.64bn/4.98bn/5.58bn, up 47/7/12% yoy, and net profit at RMB650m/690m/830m, up 6/21% yoy in 22E/23E. Relative to peers, we endorse for the company a 10x target PE in 2021E, which derives a price target of HKD4.31. We initiate coverage with a BUY rating. Risk include: lower-than-expected demand; weakening float glass supply management; sharp fluctuations in raw material prices; slower-than-expected pace in profitability restoration and production capacity improvements; and valuation uncertainty due to different market valuation systems. 

免责声明(DISCLAIMER): 

此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。 

This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.