Yum Cha 飲茶. March 3, 2015 RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 24, HSCEI 12, Shanghai COMP 3, Shenzhen COMP 1, Gold 1,206.7 (0.0) BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) 59.5 (4.9) HIBOR, 3-M 0.4 (0.4) SHIBOR, 3-M RMB/USD DATA RELEASES DUE THIS WEEK Mar 03 HSBC China Composite PMI TALKING POINT ZERO TRANSACTION FOR A-SHARE SHORT-SELLING DEBUT March 3, 2015 Top 20 "shortable" Shanghai-listed A-shares (maximum short-selling quantity allowed/total issued shares) CH Equity SHANGHAI INTERNATIONAL AIRPORT % CH Equity SAIC MOTOR % CH Equity ZHENGZHOU YUTONG BUS % CH Equity HENAN PINGGAO ELECTRIC % CH Equity QINGDAO HAIER % CH Equity JIANGSU CHANGJIANG ELECTRONICS % CH Equity INNER MONGOLIA YILI INDUSTRIAL % CH Equity JIANGSU HENGRUI MEDICINE % CH Equity CHINA INTERNATIONAL TRAVEL SERVICE % CH Equity NORTH NAVIGATION CONTROL TECHNOLOGY % CH Equity FUYAO GLASS INDUSTRY % CH Equity TASLY PHARMACEUTICAL % CH Equity DAQIN RAILWAY % CH Equity HUAYU AUTOMOTIVE SYSTEMS % CH Equity KWEICHOW MOUTAI % CH Equity ANHUI HELI % CH Equity SHANGHAI JAHWA UNITED % CH Equity PING AN INSURANCE % CH Equity HEBEI HENGSHUI LAOBAIGAN LIQUOR % CH Equity XIAMEN FARATRONIC % Source: CGIHK Research Yesterday marked the first day in Shanghai-Hong Kong Stock Connect that Hong Kong and overseas investors were allowed to execute covered short-selling of Shanghai-listed A-shares. However, market response is quite disappointing with zero transaction making another record! We believe tight restrictions (e.g. daily short-selling quantity of a stock is capped at 1% of the shares held by northbound investors and a cumulative limit of 5% for a rolling period of 10 trading days) are the main reason for the poor response. The maximum short-selling quantity allowed for each stock is less than 0.1% of the issued shares (see table above). Such a small limit is not meaningful for most institutional investors who are interested in executing long-short trade. We expect the situation to improve in the medium term, as the quota for northbound trading is likely to expand in the future. The maximum short-selling quality will increase based on the formula. Mar 03 HSBC China Services PMI Trade Balance Exports YoY Imports YoY Trade Balance CNY RESEARCH NOTES Wong Chi-man, CFA XINYI SOLAR [0968.HK; BUY] - Xinyi Solar (XYS) s net profit came in at HK$493m, up 62% year-on-year (YoY), in line with the preannounced profit alert released in last December (+50% to 70%). Positive management guidance during the analyst meeting reaffirms our bullish stance on XYS s growth story, on the back of a potential recovery of solar glass pricing, cost reduction on the decline in natural gas price as well as aggressive target on solar farm construction. Reiterate BUY with TP of HK$3.38 (based on 19x 2015E PER). Exports YoY CNY Imports YoY CNY Source: Bloomberg Xinyi Glass [0868.HK; HK$4.55 NOT-RATED] - Xinyi Glass (XYG) s 2014 reported net profit was down 61% YoY to HK$1,363.7m. Excluding the impact of the disposal gains from Xinyi Solar [968.HK] spinoff, XYG s net profit was down 38.2% YoY. XYG s 2014 results was in line with previous guidance released earlier. XYG s management reiterated the view that the worst was over for group s float glass division and industry dynamic would be more favorable to Xinyi Glass in 2015 given: a) lower production costs (especially after NDRC announced unification of wellhead gas prices form 1 Apr 2015), b) potential pick up in demand and c) lower than expected increase in supply.. 1

2 March 3, 2015 Xinyi Solar [0968.HK] 2014 earnings largely in line; Positive management guidance; Reiterate BUY XInyi Solar (XYS) s net profit came in at HK$493m, up 62% YoY, in line with the preannounced profit alert released in last December (+50% to 70%). Positive management guidance during the analyst meeting reaffirms our bullish stance on XYS s growth story, on the back of a potential recovery of solar glass pricing, cost reduction on the decline in natural gas price as well as aggressive target on solar farm construction. Reiterate BUY with TP of HK$3.38 (based on 19x 2015E PER). Solar Power Sector BUY Close: HK$2.37 (Mar 2, 2015) Target Price: HK$3.38 (+43%) We expect margin to recover starting 2015E. The PV processed glass s gross margin dropped to 31.2% in 2H14 (versus 36.9% in 2H13 and 35.9% in 1H14), due to pricing pressure on solar glass as well as high energy cost. However, management is confident on solar glass pricing recovery this year due to (1) continuous growth of global demand for solar glass; (2) limited new capacity addition in the market (other than the commencement of XYS s two production lines [900t x 2]). On the cost side, NDRC s latest round of natural gas tariff revision will help XYS to significantly reduce cost, given that most of XYS s production capacities are using the gas based on incremental gas price which will be reduced by RMB0.44m 3 starting April 1, On the other hand, XYS s new production line in Malaysia (900t) is expected to be completed in mid-2016, which will help further lower the energy cost. Solar power generation to reach 500GWh this year. XYS completed 250MW and 38.1MW of ground mounted solar farm and distributive solar power plants (self-use) respectively in While the revenue from solar power generation was only at a lower than expected HK$31m in 2014, management explained that it was due to the management of revenue recognition in order to enjoy a full year preferential tax treatment starting this year. Management expects the solar power generation to reach 500Gwh this year, with gross margin of ~65% (Depreciation will be included in cost of sales). Potential solar farms disposal may offer additional upside on our estimates. XYS targets to add another 1GW of project this year, above our expectation. Most new solar farms will be located near XYS s solar glass production base. Average solar project capex will be RMB6-7/watt (below industry average), with utilization hours of This, coupled with low borrowing costs in Hong Kong, will help XYS achieve an equity IRR of 20% (high end of industry range based on our estimates). XYS will sell some solar farm projects to reduce funding pressure and enhance return. Total capex of HK$4bn this year. Of which more than HK$3.6bn is budgeted for solar farm installation while the balance will be for solar glass business. Risks: (1) Cyclical nature of solar glass segment; (2) policy risk; (3) unexpected energy cost hike; (4) rising gearing ratio. Share Price Performance Market Cap Wayne Fung, CFA Analyst (852) waynefung@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk US$1,858m Shares Outstanding 6,080m Auditor PWC Free Float 33% 52W range 3M average daily T/O Major Shareholding HK$ US$3.2m Management (35.66%) Xinyi Glass (31.21%) 2

3 Figure 1: Earnings projection (HK$ m) E 2016E (HK$ m) E 2015E 2016E Income statement Cash flow statement Revenue 1,533 1,968 2,410 4,688 5,536 Operating activities Solar glass 1,533 1,968 2,379 3,235 3,398 Pretax profit ,251 1,500 Solar power generation D&A Solar EPC ,292 Finance costs Cost of sales (1,269) (1,375) (1,649) (3,021) (3,519) Interest income (1) (2) (2) (6) (9) Solar glass (1,269) (1,375) (1,644) (2,063) (2,141) Change in working capital (110) (44) Solar farm 0 0 (4) (186) (296) Income tax paid (61) (44) (79) (173) (210) Solar EPC (773) (1,082) Others 4 5 (208) 0 0 Gross profit ,667 2,018 Operating cash flow ,471 1,854 Solar glass ,172 1,258 Solar farm Investing activities Solar EPC Capex on PP&E (348) (240) (2,409) (4,000) (2,000) Other income Purchase of land use right Other gain/(loss), net 2 0 (13) 0 0 Interest received S&D expenses (72) (124) (98) (173) (188) Others Administrative expenses (93) (162) (160) (258) (288) Investing cash flow (309) (125) (2,407) (3,994) (1,991) EBIT ,321 1,627 D&A Financing activities EBITDA ,643 2,108 Proceed from equity Net finance income/(expenses) 1 2 (5) (70) (126) Proceed from/(repayment of) borrowings 0 0 1,300 2,700 1,000 Pretax profit ,251 1,500 Dividends paid 0 0 (103) (146) (270) Income tax (24) (67) (79) (173) (210) Finance costs 0 0 (7) (76) (135) Net profit ,078 1,290 Advance from related parties 242 (292) Recurring net profit ,078 1,290 Others 2 (13) EPS (HK$) Financing cash flow 244 (305) 1,969 2, Recurring EPS Net change in cash (45) 459 (HK$ m) E 2016E E 2016E Balance sheet Valuation Non-current assets PER (recurring earnings) (x) PP&E 1,655 1,368 3,685 7,367 8,889 Dividend yield - 1.0% 1.1% 1.9% 2.2% Land use right PBR (x) Investment in associate/jv EV/EBITDA (x) Others Growth rate Total non-current assets 1,865 1,612 4,162 7,840 9,358 Revenue 24% 28% 22% 95% 18% EBIT -63% 158% 56% 129% 23% Current assets EBITDA -42% 85% 43% 145% 28% Inventories Recurring net profit -63% 153% 62% 119% 20% Trade and other receivables ,323 1,104 Recurring EPS -63% 114% 15% 111% 20% Cash Operating ratios Others Gross margin 17% 30% 32% 36% 36% Total current assets 931 1,075 1,602 2,294 2,549 EBIT margin 9% 19% 24% 28% 29% EBITDA margin 16% 24% 28% 35% 38% Total assets 2,796 2,687 5,764 10,134 11,908 Recurring net margin 8% 15% 20% 23% 23% Asset turnover Current liabilities Adjusted ROE 12% 18% 18% 29% 27% Trade and other payables ,121 1,859 1,612 Adjusted ROA 4% 11% 12% 14% 12% Short term bank borrowings ,143 1,643 Interest coverage n/a n/a Others 1, Net debt/equity 137% Net cash 23% 83% 77% Total current liabilities 1, ,291 3,029 3,282 Current ratio Quick ratio Non Current Liabilities Days inventories Deferred tax liabilities Days receivables Long term bank borrowings 0 0 1,157 2,857 3,357 Days payables Others Total non-current Liabilities ,167 2,867 3,367 Equity Share capital 921 1,908 2,460 2,460 2,460 Retained earnings ,778 2,799 1,065 2,310 3,306 4,238 5,259 MI Total equity 1,065 2,310 3,306 4,238 5,259 Total equity and liabilities 2,796 2,687 5,764 10,134 11,908 BVPS (HK$) Sources: Company, CGIHK Research estimates 3

4 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Figure 2: XYS PER band HKD x 23x 19x 15x 11x Sources: Bloomberg, CGIHK Research estimates 4

5 COMPANY NEWS Xinyi Glass [868.HK; HK$4.55 Not Rated] Key takeaways from 2014 results. Market Cap: US$2,301m; Free Float: 48.0%; 3-months Average Daily Turnover: US$5.8m Analyst: Mark Po March 3, 2015 The Company. Xinyi Glass (XYG) is one of the largest and most diversified glass producers in China. XYG s 2014 reported net profit was down 61% YoY to HK$1,363.7m. Excluding the impact of the disposal gains from Xinyi Solar [968.HK] spinoff, XYG s net profit was down 38.2% YoY. XYG s 2014 results was in line with previous guidance released earlier. XYG s turnover was up 9% YoY to HK$10,861.1m in 2014, up from HK$9,936.1m (excluding turnover from Xinyi Solar) in XYG declared a final dividend of HK$0.06. Gross margin came out at 25.2%, slightly lower than market expectations due to lower than expected gross margin of automobile glass division (related to a factory relocation). Outlook remains positive. During the result presentation, management highlighted that outlook for XYG remains positive due to: a) margin recovery of the automobile glass segment, b) increasing usage of energy saving construction materials and c) recovery of the float glass division. XYG s management reiterated the view that the worst was over for group s float glass division and industry dynamic would be more favorable to Xinyi Glass in 2015 given: a) lower production costs (especially after NDRC announced unification of wellhead gas prices form 1 Apr 2015), b) potential pick up in demand and c) lower than expected increase in supply. According to management, production facilities in Southern China which accounted for 1/3 of total natural gas usage already saw 15% decline in natural gas costs given the decline in global oil prices. The remaining 2/3 of gas usage also saw a decline in costs after unification of city-gate gas price 1 Apr Management did not release a target for the impact of unification of city-gate gas prices, which are subject to negotiation with natural gas suppliers. Regarding average selling price (ASP) of floating glass division, management reckoned the overall ASP of the group would pick up in 2Q As we discussed before, ASPs of floating glass in Southern China already reported a sequential increase since the beginning of Management also reiterated the view that the increase in capacity would likely to be less than market expected given the increasing environmental protection control and tight market liquidity. Management believed that capacity of float glass industry would see a 3-5% YoY decline in Gross margin of the float glass division already saw substantial improvement in Jan & Feb 2015 vs average gross margin of 7% in Automobile glass segment will report shipments volume growth and margin improvement in 2015 given lack of one-off items and steady downstream demand growth. XYG formed alliance with auto insurance companies in China that endorsed XYG brand automobile glass for their insurance claims. XYG s automobile glass segment is expected to report steady performance going forward as the group continues to gain market share in the aftermarket segment. According to China Construction Glass & Industry Association, penetration of Low-E glass remains low at 11% in China vs 80% or above in other developed markets such as US and Germany. Penetration of Low-E glass is expected to increase to 21% in 2017, up from 11% from current level. Medium term outlook to improve further. Regarding medium term outlook for the floating glass division, we maintain the view that the current market environment put heavier pressure on small glass manufacturers, which are [Xinyi Glass] (HK$) Mar14 May14 Jul14 Sep14 Nov14 Jan15 Turnover (RHS) Price (LHS) Key Financials (in HK$m) Source: Bloomberg, Company Data. (HK$ million) E 2016E Rev enue 9, , , ,125.6 Gross Prof it 3, , , ,403.5 Gross Margin % Net Prof it 3, , , ,589.6 Net Margin % EPS (Basic) ROE (%) Div idend Yield (%) PER (x) PBR (x) Capex (2,873.8) (1,729.0) (1,500.0) (1,500.0) Free cash f low (136.5) (183.3) Net cash/(net debt) (4,097.6) (5,181.5) (5,854.0) (6,140.0) facing challenging environment. XYG s management maintained that the industry was under consolidation and a substantial portion of capacity would be phased out. Leading players like XYG will be the major beneficiary of massive industry consolidation. XYG granted in total 28,000,000 share options to employees yesterday with an exercises price of HK$4.55. Our view. Despite concerns on outlook for Xinyi Glass float glass division, we maintain the view that the negatives for Xinyi Glass has been priced-in. Defensive auto glass aftermarket business and Low-E construction glass business will continue to perform well in XYG is one of the beneficiaries of lower natural gas prices. Key drivers for the growth of XYG for 2015 is the margin recovery for the float glass business. Long term outlook for XYG remains positive given the government s increasing environmental protection control and progrowth policy. We share the concern on the China property sector that may creates volatility to XYG shares. However, XYG will benefit from lower production costs and industry consolidation. Catalysts. Continuous increase in glass prices driven by demand recovery in 1H15, more positive news flow on China property sector and potential cut in natural gas prices in 2H

6 Figure 1: Peer Comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 2014F 2015F 2016F 2014F 2015F 2016F F F F F Lcy US$m x x x x x x x x % % % % % % 868 HK* Xinyi Glass Holdings Ltd n.a n.a HK* Xinyi Solar Holdings Ltd n.a n.a HK* China Glass Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 0.6 n.a. 3.9 n.a. 1.9 n.a. 1.0 n.a HK Luoyang Glass Company Ltd-H n.a. n.a. n.a. n.a. n.a. n.a n.a n.a n.a. 0.0 n.a CH Fuyao Group Glass Industr-A n.a CH Csg Holding Co Ltd- A n.a CH Zhuzhou Kibing Group Co Lt-A n.a. 2.0 n.a. Average TT Taiwan Glass Ind Corp n.a. n.a. n.a. n.a. n.a. n.a. 1.2 n.a n.a. 0.7 n.a. n.a. n.a. SISE TI Turk Sise Ve Cam Fabrikalari n.a. 1.3 TRKCM TI Trakya Cam Sanayii As n.a. 1.6 APOG US Apogee Enterprises Inc n.a. 5.8 n.a. 7.9 n.a JP Asahi Glass Co Ltd n.a JP Nippon Electric Glass Co Ltd n.a. 2.5 SGO FP Compagnie De Saint Gobain n.a. 3.2 Average Source: Company Data, Bloomberg, CGIH and *: 2015 and 2016 forecasts 6

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: