China Solar Glass_Finding support; upgrade XYS to Buy

Summary of Key Points from the Conference Call Company and Industry Overview - Company: Xinyi Solar (XYS) - Industry: Solar Glass and Renewable Energy Core Insights and Arguments 1. ASP Recovery: The average selling price (ASP) for solar glass at 2.0mm has increased by 13%-17% in March 2025, driven by strong demand and disciplined supply management. This pricing recovery is expected to lead to profitability for XYS and Flat Glass Group (FGG) in Q2 2025 after two quarters of losses since late 2024 [2][4][8]. 2. Long-term Demand Outlook: Despite concerns regarding the sustainability of China's renewable energy demand due to upcoming competitive power trading policies, it is believed that demand will continue to outpace GDP growth, supported by electrification and decarbonization trends [3][4]. 3. XYS's Positioning: XYS is well-positioned to benefit from the pricing rebound in solar glass. The visibility of returns from its solar farms is improving due to stable tariff policies, disciplined capital expenditures, and reduced borrowing costs. Core earnings are projected to grow by 33% in 2025 and 82% in 2026 [4][8]. 4. Valuation and Market Position: XYS is currently trading at a forward PE of 8x for 2026, which is significantly below its historical average of 15-40x. This presents a re-rating opportunity as earnings fundamentals improve. The target price has been raised to HKD 4.40 from HKD 3.10, indicating a potential upside of 27.5% [4][27]. 5. Production Adjustments: XYS has revised its solar glass shipment volume assumptions downward by 3%-11% for 2025-2027 due to the permanent shutdown of smaller furnaces. This adjustment reflects a more cautious approach to capacity management [13][17]. 6. Cost Efficiency Improvements: The company expects to lower its cost of goods sold (COGS) by 1% for 2026-2027 due to improved scale efficiency and reduced finance costs, as a significant portion of its borrowings is now in RMB, benefiting from lower onshore interest rates [17][24]. Additional Important Insights 1. Market Dynamics: Second-tier producers are likely to struggle with profitability due to less competitive cost structures, which may limit supply growth in the near term [2]. 2. Risks: Potential risks include lower-than-expected ASPs for solar glass, slower solar farm installations, and increased competition in the market. The entry into polysilicon remains a concern but is already reflected in the current valuation [27]. 3. Financial Projections: Revenue for XYS is projected to grow from CNY 22,542 million in 2025 to CNY 31,823 million by 2027, with net profit expected to increase significantly [15][29]. 4. Valuation Comparisons: XYS's market cap is currently valued at HKD 31,321 million, with significant deductions for its holdings in Xinyi Energy and solar farms, leading to an implied market value for its solar glass business of HKD 25,721 million [19]. This summary encapsulates the key points discussed in the conference call, highlighting the positive outlook for Xinyi Solar and the solar glass industry, while also addressing potential risks and market dynamics.