We upgrade XYS from Hold to BUY rating, based on 1) substantially higher-than-expected solar price outlook; 2) we see limited solar glass supply growth in 1H20, while demand will likely be thrilling; 3) potential policy control on solar glass capacity expansion will likely benefit XYS for its leading capacity scale and overseas development experience. It seems a non-consensus call at a timing that XYS’ major shareholders placing 350mn old shares at discount, but we believe market impact of the share offloading will create a good entry point.
- Share placement impact seems limited. Nine major shareholders of XYS planned to sell 350mn shares through placement at HK$5.125 with 8.5% discount to previous close price. The share placement may remind the market of those nine shareholders and XYG (868 HK)’s share offloading in May and Jun 2019, and then create pressure on XYS for potential concerns and uncertainties. Given continuous solar glass price hike since Sep 2019, we think XYS’ fundamental would be strong enough to absorb the impacts, and we believe it will create a good entry point if share price has significant decline.
- Strong pricing driven by thrilling demand. XYS’ share price has soared from Dec, since the Company announced price hike from RMB27.9/sqm to RMB28.9/sqm on 29 Nov. Strong pricing was driven by tightened solar glass supply, as domestic PV installation order started to flow in, and overseas demand maintained decent growth on the back of continuous declining solar module price. In 2020, we expect global PV installation to increase 30.4% YoY, while we estimate effective PV glass output growth will be less than 19.7%, implying tightened supply situation will likely last for the whole year. We expect XYS to benefit from tightened supply while releasing capacity growth in 2Q/3Q20.
- Outstanding profitability with GPM reaching 39.5%. At RMB29/sqm, we estimate the Company is making 42% GPM from PV glass sales. Based on declining price outlook as XYS releasing new capacity throughout the year, we expect ASP to remain strong at RMB28.0/sqm in 2020, leaving outstanding GPM of 39.5% for the PV glass segment. In 2021, we also raise our ASP outlook by 5.8% from RMB26/sqm to RMB27.5/sqm.
- Upgrade to BUY with TP lifted to HK$6.62. Based on revised ASP and costs outlook, we raise our EPS forecast by 12.8%/34.9%/28.4% from HK$0.28/0.31/0.42 to HK$0.31/0.42/0.57. Our DCF TP is lifted by 62.2% from HK$4.08 to HK$6.62. Upgrade XYS from Hold to BUY.
