Summary. We had post-results NDR with XYS mgmt. Investors were interested in XYS??capacity expansion, margin improvement and PV glass pricing outlook in 4Q19 and 2020. Mgmt. released bullish outlook for global PV demand, and explained details about XYS' expansion strategy as well as means to further solidify its costs leadership.
- Aggressive capacity expansion reflects bullish demand outlook. XYS released 2020 effective PV glass output target to increase 42.1% YoY during 1H19 results briefing. Mgmt. expects solid PV demand growth in 4Q19 to be driven by China, and overseas installation will also expand rapidly to support capacity release in 1H20. Moreover, XYS' intention of expanding market shares also explained why target capacity growth is substantially higher than consensus market demand growth of 15-20% in 2020. We believe XYS' plan reflects a bullish demand outlook at the high end.
- Satisfied with current PV glass pricing. Pricing at RMB26-27/sqm, XYS makes ~30% GPM from PV glass sales. Mgmt. explained GPM led ahead peers except Flat Glass (6865 HK) by 10ppt from 1) energy efficiency, 2) economies of scale, and 3) all-round costs control. Mgmt. expected cost advantages will be further solidified through in-house silica supply from Guangxi. The industry has been facing costs pressures from silica sand, as the material accounts for ~15% of production costs. Investing in in-house silica supply will help XYS reduce silica costs by ~30%. As XYS is about to release large scale capacity in 2020 with superior profitability, mgmt. is satisfied with current PV glass product pricing, while peers may urge for a price hike.
- Intending to add 1GW solar farm in 2019-20. XYS had obtained 470MW and 70MW grid-parity and tariff-bidding projects. Most of grid-parity projects are ground-mounted, and subsidy intensity for tariff bidding projects is only RMB2-3cent/KWh. At current RMB4/watt project development costs, mgmt. saw no difference from returns level for those two project types with levered equity IRR of ~10%. Mgmt. also expected another 10% solar farm development costs cut in 2020/21, making grid-parity projects more profitable.
- Maintain HOLD. We maintain forecasts and rating unchanged, and we see improving market sentiment on 1) optimistic 4Q19 PV glass pricing, and 2) 2020 shipment growth and costs reduction.
