Xinyi Glass Lifting target price to HK$9.0 - Profit doubles on strong performance from all businesses XYG is one of the largest and most diversified glass producers in China with exposure to automotive aftermarket glass, construction, solar and float glass. The Company announced its annual results on 28 Feb. We have made earnings revisions arising from higher glass prices and higher sales volume. We also lift the price target from HK$8.8 to HK$9.0 to reflect these earning revisions. The key driver for growth is capacity addition. XYG is adding capacity more quickly in 2011 than in any other year since its IPO. We expect overall average prices in 2011 to be higher than 2010 and margins to remain firm. Higher supply of float glass by XYG and other producers is unlikely to put pressure on 2011 GPM but could impact 2012 GPM if demand is not as strong as expected. We need to see the new policies on promoting solar energy and low-e glass installations in government buildings before we can determine if demand could absorb the rising level of supply. We are lifting our 2011E and 2012E sales by 4.3% and 8.0%, respectively, to reflect higher sales price for float glass (revised up 2% to HK$2,250 for 2011 and HK$2,138 for 2012) and slightly higher volumes for construction and PV glass. We are lifting our 2011E and 2012E net profit by 0.4% and 3.5%, respectively, to reflect higher sales and EBIT offset by higher tax expenses. Overweight 0868.HK, 868 HK Price: HK$6.35 Price Target: HK$9.00 Previous: HK$8.80 China Auto Parts Leon Chik, CFA AC Andrew Hsu (852) 2800-8572 andrew.tj.hsu@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Price Performance 6 HK$ 4 2 Mar-10 Jun-10 Sep-10 Dec-10 0868.HK share price (HK$ HSI (rebased) YTD 1m 3m 12m Abs -1.6% -1.9% 8.0% 107.2% Rel -1.2% -0.7% 6.0% 96.4% XYG trades at an 8.8x FY11E P/E. Our new DCF-based price target (Dec-11) of HK$9.0 (previously HK$8.8) implies a forward FY12E P/E of 10.9x, about 4% higher than the average FY11E P/E of 10.4x for SMID-Caps Industrial companies in HK/China. The key risks to our PT are falling demand for construction and auto glass that may result from cooling measures implemented by the Chinese government. Xinyi Glass (Reuters: 0868.HK, Bloomberg: 868 HK) HK$ in mn, year-end Dec FY08A FY09A FY10A FY11E FY12E Revenue 3,894 3,956 6,364 10,594 12,763 Net Profit 709.2 773.1 1,570.8 2,530.5 2,867.3 EPS (HK$) 0.21 0.23 0.45 0.72 0.82 DPS (HK$) 0.10 0.11 0.22 0.36 0.41 Revenue growth (%) 40.4% 1.6% 60.9% 66.5% 20.5% EPS growth (%) 1.4% 9.0% 97.1% 61.1% 13.3% ROCE 15.0% 16.3% 17.2% 30.2% 31.1% ROE 16.9% 15.8% 26.3% 35.3% 33.7% P/E (x) 30.6 28.0 14.2 8.8 7.8 P/BV (x) 5.1 4.1 3.4 2.9 2.4 EV/EBITDA (x) 21.7 17.3 15.2 6.2 5.2 Dividend Yield 1.6% 1.7% 3.5% 5.7% 6.4% Source: Company data, Bloomberg, J.P. Morgan estimates. Shares O/S (mn) 3,518 Market cap (HK$ mn) 22,337 Market cap ($ mn) 2,866 Price (HK$) 6.35 Date Of Price 28 Feb 11 Free float (%) 42.6% 3-mth trading volume (mn) 11 3-mth trading value (HK$ mn) 72 3-mth trading value ($ mn) 9 HSI 23,338 Exchange Rate 7.79 Fiscal Year End Dec See page 12 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Company description P&L sensitivity metrics EBIT EPS FY10E impact (%) impact (%) Xinyi Glass was founded in 1988 and was listed in 2005, and is one of the largest Float glass price Impact of each 5 percentage points increase 5.2% 4.9% glass conglomerates in China with the Oil cost largest export volume in China for glass. Impact of each 5 percentage points increase -1.1% -1.1% Xinyi is a major supplier of replacement Wages autoglass (about 30% of the US market Impact of each 5 percentage points increase -2.2% -2.2% share for non-original manufacturer GM: 1% Increase autoglass) and also makes construction Impact of each 100bps increase 3.6% 3.6% glass and float glass. Source: J.P. Morgan estimates. Revenue mix (2010E) Float glass 29% Solar Glass 16% Price target and valuation analysis Our Dec-11 price target is based on the DCF methodology. The nature of the industry leads us to apply a terminal growth of 3% (the low-end of the 3-6% growth rate used for SMID caps). Construct 16% Auto 39% Source: J.P. Morgan estimates. EPS: J.P. Morgan vs. consensus HK$ J. P. Morgan Consensus FY11E 0.72 0.57 FY12E 0.82 0.68 Risk-free rate: 4.20% Market risk premium: 6.00% Beta: 1.20 WACC 11.4% Terminal g : 3.00% Our PT (Dec-11, DCF-derived) of HK$9.0 implies a fwd P/BV (FY12E) of 3.4x and a fwd P/E of 10.9x (FY12E). The key risks to our PT are falling demand for construction and auto glass that may result from cooling measures implemented by the Chinese government. Source: Bloomberg, J.P. Morgan estimates. Table 1: Peer valuation comparison Companies Ticker Price (PT), HK$ MCAP US$MM Vol US$ MM 3M chg 2010E P/E (x) 2011E P/E(x) 10E EV / EBITDA ROE (%) P/B (x) 10E yld (%) XINYI GLASS HOLD (OW)* 868 HK 6.35 (9) 2,864 8.7 6.9 14.2 8.8 10.4 26.3 3.4 3.5 AMVIG HOLDINGS (NR) 2300 HK 6.13 726 1.0 0.2 9.8 9.1 6.6 12.2 1.6 4.2 KBC (OW)* 148 HK 41.4 (65) 4,503 6.7 2.6 8.7 7.8 5.3 17.5 1.4 2.9 KB LAMINATES (OW)* 1888 HK 6.93 (12) 2,665 1.6 (8.5) 7.8 7.4 5.5 29.7 2.4 6.9 LM PAPER (OW)* 2314 HK 5.07 (8.5) 3,052 4.8 (17.4) 13.6 11.1 10.7 19.7 2.3 2.7 ND PAPER (OW)* 2689 HK 8.65 (14) 5,177 18.7 (26.4) 13.3 10.2 10.2 13.1 1.8 0.7 CHENMING (OW)* 1812 HK 6.39 (9.5) 2,194 0.9 3.2 9.9 6.1 5.7 9.6 1.1 7.7 TECHTRONIC INDS (OW)* 669 HK 9.63 (11) 1,984 4.8 14.1 16.3 10.9 8.6 11.4 1.3 2.5 STELLA INTERNATI (NR) 1836 HK 15.94 1,626 0.3 1.4 14.0 11.8 7.1 15.4 2.1 5.8 TECHTRONIC INDS (NR) 669 HK 9.63 1,986 4.8 14.1 18.1 11.9 7.2 9.8 1.9 2.0 Average (0.7) 13.7 10.4 4.5 16.4 2.1 3.4 Source: Company data, Bloomberg, J.P. Morgan estimates (*). Bloomberg estimates for NR companies. Share prices are as of Close of 28 Feb 2011. 2
Key takeaways from analyst presentation Strong growth in all divisions The company reported strong growth in sales (up 61% Y/Y) and also earnings growth (up 103% Y/Y) and this was ahead of our estimates. The company also achieved GPM of over 40%, a historical high since IPO. The HK$0.44 EPS was about 12% higher than consensus (in line with our expectations) and we expect the strong results to result in upward revisions for 2011 EPS. Our current estimate of HK$0.72 is 26% higher than the consensus estimate of HK$0.57. The growth in earnings in 2011 would be driven by capacity growth (20-30% estimated for construction and auto-glass, 70-80% increase for float glass and about 2.5x for PV glass). We expect GPM to fall slightly to 39.5% in 2011 (40.1% in 2010) in order to be conservative given the record high margins in 2010. GPM in 2011 may be subject to some price deterioration in 2H11 but the higher proportion of sales from higher margin PV glass should help alleviate some GPM compression. Spin-off of PV glass business and new electronic glass operations The company announced that it is looking to spin-off its solar related photovoltaic (PV) glass business. XYG is also looking to enter the electronic glass market (used for LCD monitors and TVs) by constructing a new line in Wuhu, Anhui that would be operational in 2012. The new plant could cost up to HK$1.0bn and would be one of the few domestic producers of this high end glass product. The company has been developing this new product in its R&D facilities for over 3 years. Little information has been released on this new production line and we are not aware of any technological partners in this venture. Table 2: Full year results review Year to Dec (HKDmn) FY 09 A FY 10 A YoY FY10E Variance Turnover 3,958 6,364 60.8% 5,977 6.5% Gross profit 1,462 2,555 74.8% 2,374 7.6% Gross margins 36.9% 40.1% 39.7% EBIT 832 1,896 127.9% 1,671 13.5% EBIT margins 21.0% 29.8% 28.0% Net profit 774 1,571 103.1% 1,546 1.6% Net margins 19.5% 24.7% 25.9% EPS 0.446 0.440-1.3% 0.440 0.0% Source: Company data; J.P. Morgan estimates. Xinyi Glass reported its results (at 1pm on 28 Feb) with NP of HK$1,571mn (up 103% Y/Y and 1.6% higher than our estimates). Our NP estimate was 12.4% higher than the Bloomberg consensus. Meanwhile, sales revenue came in at HK$6,364mn, 6.5% higher than our estimate. GPM reached a record high of 40.1% and the GPMs for autoglass and construction glass remained strong at 39% and 38% respectively. Notable improvements came from float glass and PV glass where their GPM rose from 26% in 2009 to 36% in 2010 and from 30.6% in 2009 to 51.9%in 2010 respectively. EBIT came in 13.5% higher than our estimates on the back of stronger than expected sales (which is 6.5% higher than our estimate) especially in the float glass and PV glass businesses. Offsetting the higher-than-expected EBIT was the rise in tax expense which was 7x that of 2009. This came in as a surprise because the tax rate in 1H10 was 11.5% but the FY10 tax rate was 17.0%. Significant portion of the additional tax in 2H10 came from withholding tax on dividends which amounted to about HK$70-80mn. This is a provisional tax that can be refunded to the company in 2011 after all corporate income taxes are paid. The company has taken a conservative approach and recorded 3
the entire expense in 2010 (such a provision was not required at the end of 2009). Excluding the impact of this additional provision, the tax rate would be between 12-13%. It appears that the company would need to make this provision each year so we have notched up our tax rate in 2011 to 16% to factor this in. Net profits revised up by 3.5% for FY11E Table 2: Estimate changes ------------- New ------------ ------------ Old -------------- ------------Change --------- Year to Dec (HKDmn) FY11E FY12E FY11E FY12E FY10E FY11E Turnover 10,594 12,763 10,161 11,814 4.3% 8.0% Gross profit 4,182 4,849 3,939 4,341 6.2% 11.7% EBIT 3,033 3,516 2,768 3,041 9.6% 15.6% Net profit 2,531 2,867 2,522 2,769 0.4% 3.5% EPS (Rmb) 0.72 0.82 0.72 0.79 0.4% 3.5% Assumptions Gross margin 39.5% 38.0% 38.8% 36.7% 0.7% 1.2% Source: J.P. Morgan estimates. We are lifting our 2011E and 2012E sales by 4.3% and 8.0%, respectively, to reflect higher sales price for float glass (revised up 2% to HK$2,250 for 2011 and HK$2,138 for 2012) and slightly higher volumes for construction and PV glass. We are lifting our 2011E and 2012E net profit by 0.4% and 3.5%, respectively, to reflect higher sales and EBIT offset by higher tax expenses. Our DCF-based Dec-11 PT is lifted to HK$9.0 (previously HK$8.8) due to the earnings revisions.. Valuation and share price analysis DCF valuation Our Dec-11 PT is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk free rate of 4.2% (yield on 10 year government notes in China). We have assumed a beta of 1.2. Accordingly, WACC is assumed at 11.4%. We have estimated free cash flow for XYG until 2015 and assume a terminal growth rate of 3.0%. The terminal growth is based on the annual growth rate expected in 2015 (the final year of the estimate period) subject to a minimum of 3% and a maximum of 6% depending on the nature of the industry and the level of maturity in China. We also analyzed the DCF price sensitivity to WACC, and the terminal multiple. 4
Table 1: XYG Base-case DCF analysis HK$ in millions, year-end Dec FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E Cash flow estimates Sales 2,775 3,894 3,956 6,364 10,594 12,763 14,202 15,812 17,409 EBIT 726 768 917 1,859 3,033 3,516 3,614 3,982 4,346 NOPAT 698 735 866 1,753 2,519 2,956 2,966 3,228 3,479 Capex, net (1,661) (857) (1,364) (2,089) (1,607) (920) (1,155) (902) (944) Depreciation 141 148 255 341 397 467 525 584 636 Change in working capital (367) 134 707 (420) (730) (276) (453) (534) (661) Free operating CF (FoCF) (1,189) 160 463 (415) 579 2,226 1,883 2,376 2,510 DCF Parameters Assumptions Liabilities as a % of EV 10% Terminal growth 3.0% WACC 10.8% Risk-free rate 4.2% Market risk 6.0% Enterprise NPV (10E-16E) 33,711 Beta 1.20 + Net cash (debt), current (2,535) Cost of debt 6.2% - Minorities (Market value) (34) +/- Other items 0 Implied exit P/E multiple (x) 9.7x = Equity value 31,141 / Number of shares 3,518 = Equity value per share (HK$) 9.0 Source: Company data, J.P. Morgan estimates. Table 2: XYG Sensitivity analysis based on WACC and perpetual terminal growth rate WACC Source: J.P. Morgan estimates. Terminal growth rate 8.8 1.5% 2% 2.5% 3.0% 3.5% 4.0% 4.5% 9.3% 9.3 9.8 10.4 11.2 12 13 14.2 9.8% 8.7 9.1 9.7 10.3 11 11.8 12.8 10.3% 8.1 8.5 9 9.5 10.1 10.8 11.6 10.8% 7.6 8 8.4 8.9 9.4 10 10.6 11.3% 7.2 7.5 7.9 8.3 8.7 9.2 9.8 11.8% 6.8 7.1 7.4 7.8 8.1 8.6 9.1 12.3% 6.5 6.7 7 7.3 7.6 8 8.5 5
Table 3: XYG Key assumptions Year to December FY07 FY08 FY09 FY10 FY11E FY12E Auto glass capacity (m) 8.9 10.4 11.2 12.7 14.4 15.9 Cons. glass capacity (m sq. m) 13.7 14.1 18.0 24.0 30.0 32.6 Float glass capacity (MM tonnes) 0.38 0.67 0.95 1.17 2.43 2.86 Auto glass utilization 70% 71% 65% 73% 74% 76% Construction glass utilization 44% 40% 35% 40% 40% 40% Inventory Days 67 57 63 47 47 47 Receivable Days 89 62 78 88 88 88 Source: Company data, J.P. Morgan estimates. Table 4: XYG Revenue mix HK$ MM, year-dec FY07 FY08 FY09 FY10 FY11E FY12E Automobile glass 1,717 1,964 1,946 2,378 2,977 3,498 YoY 39.7% 14.4% -0.9% 22.2% 25.2% 17.5% % of total 61.9% 50.4% 49.2% 37.4% 28.1% 27.4% Construction glass 472 651 721 926 1,261 1,388 YoY -5.3% 38.0% 10.8% 28.4% 36.2% 10.0% % of total 17.0% 16.7% 18.2% 14.6% 11.9% 10.9% Float glass 586 1,279 1,289 3,060 6,356 7,877 YoY 184.8% 118.2% 0.8% 137.4% 107.7% 23.9% % of total 21.1% 32.8% 32.6% 48.1% 60.0% 61.7% - Auto and const 492 1,006 950 1,982 4,093 4,279 YoY 139.0% 104.6% -5.6% 108.6% 106.5% 4.5% - PV & TCO 94 273 339 1,078 2,263 3,598 YoY 189.3% 24.3% 217.9% 110.0% 59.0% Total revenue 2,775 3,894 3,956 6,364 10,594 12,763 Source: Company data, J.P. Morgan estimates. 6
Table 5: XYG P&L statement Year to Dec (HK$MM) FY06 FY07 FY08 FY09 FY10 FY11E FY12E Total Revenues 1,933 2,775 3,894 3,956 6,364 10,594 12,763 YoY change (%) 40.0% 43.5% 40.4% 1.6% 60.9% 66.5% 20.5% Cost of Goods Sold (1,233) (1,702) (2,683) (2,494) (3,809) (6,413) (7,914) YoY change (%) 36.7% 38.1% 57.6% -7.1% 52.7% 68.3% 23.4% Gross Profit 700 1,072 1,211 1,462 2,554 4,182 4,849 YoY change (%) 46.2% 53.1% 12.9% 20.7% 74.7% 63.7% 16.0% Gross Margin 36.2% 38.6% 31.1% 37.0% 40.1% 39.5% 38.0% SGA (322) (421) (527) (591) (771) (1,216) (1,392) YoY change (%) 46.6% 31.0% 25.2% 12.2% 30.4% 57.7% 14.4% Other Income/(Expenses) 32 75 84 47 76 68 59 Operating profit 411 726 768 917 1,859 3,033 3,516 EBITDA 508 867 916 1,172 2,200 3,430 3,983 EBITDA margin 26.3% 31.3% 23.5% 29.6% 34.6% 32.4% 31.2% Depreciation & Amortization (97) (141) (148) (255) (341) (397) (467) YoY change (%) 82.5% 45.0% 5.5% 71.4% 34.1% 16.4% 17.7% EBIT 411 726 768 917 1,859 3,033 3,516 EBIT margin 21.2% 26.2% 19.7% 23.2% 29.2% 28.6% 27.5% Net Interest Expense (12) (24) (24) (9) (4) (21) (20) Exceptional item 0 0 0 (85) 37 0 0 Associates (1) 2 0 0 1 0 0 Gains/losses 0 0 0 0 0 0 0 Net Income Before Taxes 399 703 753 823 1,893 3,012 3,496 YoY change (%) 44.0% 76.5% 7.0% 9.4% 129.8% 59.1% 16.1% Tax (16) (30) (42) (47) (321) (480) (627) Effective Tax rate 4.0% 4.3% 5.6% 5.8% 16.9% 15.9% 17.9% Minority Interests 2 (2) (2) (3) (1) (1) (1) Net Income 385 671 709 773 1,571 2,531 2,867 YoY change (%) 49.5% 74.3% 5.7% 9.0% 103.2% 61.1% 13.3% Net margin 19.9% 24.2% 18.2% 19.5% 24.7% 23.9% 22.5% Source: Company data, J.P. Morgan estimates. 7
Table 6: Interim estimates Year to Dec (HK$ MM) 1H09 2H09 1H10 2H10 1H11E 2H11E Total Revenues 1,628 2,328 2,679 3,685 4,572 6,022 Gross Profit 462 1,000 1,032 1,522 1,797 2,384 EBIT 265 652 729 1,129 1,359 1,674 Net Income Before Taxes 259 565 727 1,166 1,349 1,663 Net Income 225 548 643 928 1,134 1,397 Diluted EPS (HK$) 0.066 0.161 0.183 0.264 0.322 0.397 Ratios Revenue split 41.2% 58.8% 42.1% 57.9% 43.2% 56.8% GPM 28.4% 43.0% 38.5% 41.3% 39.3% 39.6% EBIT margin 16.3% 28.0% 27.2% 30.6% 29.7% 27.8% NPM 13.8% 23.5% 24.0% 25.2% 24.8% 23.2% YoY Revenue -13.5% 15.8% 64.5% 58.3% 70.7% 63.4% GP -29.1% 78.7% 123.3% 52.3% 74.2% 56.6% EBIT -42.0% 109.8% 175.3% 73.1% 86.3% 48.3% NP -44.0% 78.4% 185.5% 69.4% 76.4% 50.5% Source: Company data, J.P. Morgan estimates. 8
Table 7: XYG Balance sheet Year to Dec (HK$MM) FY06 FY07 FY08 FY09 FY10 FY11E FY12E Cash and Cash Equivalents 173 316 436 532 640 489 689 Inventories 371 511 612 678 820 1,366 1,645 Accounts receivable 569 675 661 844 1,534 2,554 3,076 Other Current Assets 77 58 56 343 5 10 20 Total Current Assets 1,190 1,559 1,765 2,397 2,999 4,418 5,430 Intangible Assets 0 0 0 0 0 0 0 Property and Equipment, Net 1,790 3,269 3,972 4,738 6,486 7,696 8,149 Other Assets 265 543 761 875 1,531 1,761 2,025 Non-Current assets 2,055 3,811 4,733 5,613 8,017 9,457 10,174 Total Assets 3,245 5,371 6,498 8,010 11,016 13,875 15,604 Accounts Payable 342 185 470 681 1,508 2,510 3,024 Other Accrued Expenses 230 442 382 736 3 81 188 Taxes Payable 12 14 50 55 147 306 453 ST and current LT debts 335 424 722 580 471 522 436 Total Current Liabilities 919 1,065 1,624 2,052 2,128 3,420 4,101 Long-term Debt 80 260 484 522 2,254 2,502 2,089 Other Noncurrent Liability 0 0 1 5 79 131 158 Noncurrent liabilities 80 260 485 528 2,333 2,633 2,246 Total Liabilities 999 1,325 2,109 2,579 4,461 6,053 6,347 Share capital 1,011 2,246 1,998 2,512 2,369 2,369 2,369 Reserves and Surplus 1,237 1,799 2,371 2,899 4,168 5,433 6,867 Total Shareholders' Equity 2,248 4,045 4,369 5,411 6,536 7,802 9,235 Minority Interest (2) 0 20 20 20 21 22 Total Shareholders' Equity 2,246 4,045 4,389 5,431 6,556 7,822 9,257 Total Liabilities and Equity 3,245 5,371 6,498 8,010 11,016 13,875 15,604 Source: Company data, J.P. Morgan estimates. Table 8: XYG Cash flow statement Year to Dec (HK$ MM) FY06 FY07 FY08 FY09 FY10 FY11E FY12E EBIT 411 726 768 917 1,859 3,033 3,516 Depreciation and Amortization 97 141 148 255 341 397 467 Working Capital Changes (101) (367) 134 707 (420) (730) (276) Tax Paid (19) (24) (30) (42) (47) (321) (480) Cash Flow From Operations 388 476 1,020 1,836 1,733 2,380 3,227 Capital expenditures (456) (1,661) (857) (1,364) (2,089) (1,607) (920) Investments and others (14) 232 (219) (114) (655) (230) (264) Net Interest (12) (37) (24) (9) (4) (21) (20) Cash Flow from Investing (481) (1,467) (1,100) (1,487) (2,748) (1,858) (1,205) Free Cash Flow (94) (990) (79) 350 (1,016) 522 2,022 Dividends (141) (257) (325) (348) (572) (1,025) (1,349) Common issue 186 1,310 0 90 0 0 0 Debt 81 129 524 4 1,696 352 (473) Other Financing 0 (76) 0 0 0 0 0 Cash Flow from financing 125 1,106 199 (254) 1,124 (673) (1,823) Change in cash 32 116 120 96 108 (151) 200 Cash beginning 141 173 316 436 532 640 489 Foreign exchange changes 0 31 0 0 0 0 0 Cash at end 173 316 436 532 640 489 689 Source: Company data, J.P. Morgan estimates 9
JPM Q-Profile Xinyi Glass Holdings Ltd. (HONG KONG / Consumer Discretionary) As Of: 25-Feb-2011 Quant_Strategy@jpmorgan.com Local Share Price Current: 6.63 12 Mth Forward EPS Current: 0.59 7.00 0.70 6.00 0.60 5.00 0.50 4.00 0.40 3.00 2.00 1.00 0.00 0.30 0.20 0.10 0.00-0.10 Earnings Yield (& local bond Yield) Current: 9% Implied Value Of Growth* Current: -13.88% 35% 30% 25% 20% 15% 10% 5% 12Mth fwd EY Hong Kong BY Proxy 2.00 1.00 0.00-1.00-2.00-3.00 0% -4.00 PE (1Yr Forward) Current: 11.2x Price/Book Value Current: 4.0x 25.0x 8.0x PBV hist PBV Forward 20.0x 7.0x 6.0x 15.0x 5.0x 4.0x 10.0x 3.0x 5.0x 2.0x 1.0x 0.0x 0.0x ROE (Trailing) Current: 22.06 Dividend Yield (Trailing) Current: 2.40 50.00 12.0 45.00 40.00 10.0 35.00 8.0 30.00 25.00 6.0 20.00 4.0 15.00 10.00 2.0 5.00 0.00 0.0 Summary Xinyi Glass Holdings Ltd. 3018.14 As Of: 25-Feb-11 HONG KONG 9.879635 SEDOL B05NXN7 Local Price: 6.63 Consumer Discretionary Auto Components EPS: 0.59 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 11.23x 3.36 19.21 10.16 10.24 17.14 3.35-70% 71% -10% -9% P/BV (Trailing) 4.03x 0.77 6.91 2.27 2.60 5.10 0.10-81% 71% -44% -36% Dividend Yield (Trailing) 2.40 1.53 10.00 3.08 3.60 7.22-0.03-36% 317% 28% 50% ROE (Trailing) 22.06 11.50 46.81 22.06 26.66 48.25 5.08-48% 112% 0% 21% Implied Value of Growth -13.9% -3.55 0.45-0.23-0.41 1.18-2.00-2459% 421% -66% -192% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 10
Xinyi Glass: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E HK$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 3,956 6,364 10,594 12,763 14,202 EBIT 917 1,859 3,033 3,516 3,614 % change Y/Y 17.6% 17.8% 66.5% 20.5% 11.3% Depr. & amortization 323 387 397 467 525 Gross Profit 1,462 2,554 4,182 4,849 5,096 Change in working capital 707-420 -730-276 -453 % change Y/Y 20.7% 74.7% 63.7% 16.0% 5.1% Taxes -42-47 -321-480 -627 EBITDA 1,303 1,522 3,430 3,983 4,139 Cash flow from operations 1,836 1,733 2,380 3,227 3,059 % change Y/Y 25.0% 16.8% 55.9% 16.1% 3.9% EBIT 917 1,859 3,033 3,516 3,614 Capex -1,478-2,745-1,837-1,184-1,459 % change Y/Y 24.6% 15.8% 63.2% 15.9% 2.8% Net Interest -48-48 - - - EBIT Margin 22.9% 22.5% 28.6% 27.5% 25.4% Other - - - - - Net Interest -48-48 - - - Free cash flow 575 690 522 2,022 1,589 Earnings before tax 823 1,893 3,012 3,496 3,603 % change Y/Y 9.4% 129.8% 59.1% 16.1% 3.1% Tax -47-321 -480-627 -683 Equity raised/(repaid) 90 - - - - as % of EBT 5.0% 5.0% 15.9% 17.9% 18.9% Debt raised/(repaid) 4 1,696 352-473 18 Net income (reported) 773 1,571 2,531 2,867 2,919 Other - - - - - % change Y/Y 22.9% 15.1% 61.1% 13.3% 1.8% Dividends paid -348-572 -1,025-1,349-1,447 Shares outstanding 3,412 3,518 3,518 3,518 3,518 Beginning cash 436 532 640 489 689 EPS (reported) 0.23 0.45 0.72 0.82 0.83 Ending cash 532 640 489 689 849 % change Y/Y 22.9% 15.1% 9.2% 13.3% 1.8% DPS 0.10 0.22 0.36 0.41 0.41 Balance sheet Ratio Analysis HK$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E HK$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalents 532 640 489 689 849 Gross margin 36.8% 36.2% 39.5% 38.0% 35.9% Accounts receivable 844 1,534 2,554 3,076 3,594 EBITDA margin 32.9% 23.9% 32.4% 31.2% 29.1% Inventories 678 820 1,366 1,645 2,014 Operating margin 22.9% 22.5% 28.6% 27.5% 25.4% Others 343 5 10 20 136 Net margin 19.5% 24.7% 23.9% 22.5% 20.6% Current assets 2,397 2,999 4,418 5,430 6,593 Sales per share growth 17.6% 17.8% 66.5% 20.5% 11.3% LT investments 875 1,531 1,761 2,025 2,329 Sales growth 17.6% 17.8% 66.5% 20.5% 11.3% Net fixed assets 4,738 6,486 7,696 8,149 8,778 Net profit growth 22.9% 15.1% 61.1% 13.3% 1.8% Total Assets 8,010 11,016 13,875 15,604 17,700 EPS growth 22.9% 15.1% 9.2% 13.3% 1.8% Liabilities Interest coverage (x) 27.03 32.03 - - - Short-term loans 580 471 522 436 436 Payables 681 1,508 2,510 3,024 3,365 Net debt to equity 17.9% 15.3% 32.5% 19.9% 15.7% Others 791 150 387 641 917 Working Capital to Sales 21.3% 13.3% 13.3% 13.3% 15.8% Total current liabilities 2,052 2,128 3,420 4,101 4,718 Sales/assets 0.62 0.66 0.85 0.87 0.85 Long-term debt 522 2,254 2,502 2,089 2,089 Assets/equity 1.46 1.43 1.78 1.69 1.66 Other liabilities 5 79 131 158 175 ROE 20.4% 20.9% 35.3% 33.7% 29.3% Total Liabilities 2,579 4,461 6,053 6,347 6,982 ROCE 16.3% 17.2% 30.2% 31.1% 28.9% Shareholders' equity 5,411 6,536 7,802 9,235 10,695 BVPS 1.54 1.86 2.22 2.63 3.04 Source: Company reports and J.P. Morgan estimates. 11
Other Companies Recommended in This Report (all prices in this report as of market close on 28 February 2011) Xinyi Glass (0868.HK/HK$6.35/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Xinyi Glass (0868.HK) Price Chart Price(HK$) 12 11 10 9 8 7 6 5 4 3 2 1 0 Jun 07 Mar 08 OW HK$2.25 Dec 08 Sep 09 Jun 10 OW HK$8.8 OW HK$4 OW HK$2.5 OW HK$5.5 OW HK$6.8 N HK$5.7 OW HK$3.45OW HK$3.45 OW HK$4.12OW HK$5.7 Date Rating Share Price (HK$) 28-Sep-07 N 5.60 5.70 31-Mar-08 OW 2.64 3.45 08-May-08 OW 3.03 4.00 02-Sep-08 OW 2.08 3.45 18-Nov-08 OW 1.06 2.50 03-Feb-09 OW 1.00 2.25 04-Mar-10 OW 3.16 4.12 31-Mar-10 OW 3.54 5.50 02-Aug-10 OW 3.51 5.70 20-Sep-10 OW 4.76 6.80 09-Nov-10 OW 5.84 8.80 Price Target (HK$) Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Apr 08, 2009 - Mar 04, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] J.P. Morgan Cazenove s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analyst s team s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Leon Chik, CFA: China Liansu Group Holdings (2128.HK), China Shineway Pharmaceutical Group Limited (2877.HK), China State Construction (3311.HK), Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (1938.HK), Concord Medical Services Holdings Limited (CCM), Dah Chong Hong (1828.HK), Fufeng Group (0546.HK), Haitian International Holdings (1882.HK), Johnson Electric Holdings (0179.HK), Kingboard Chemical (0148.HK), Kingboard Laminates (1888.HK), Lee & Man Paper Manufacturing (2314.HK), Lijun International Pharmaceutical Holdings (2005.HK), Lonking Holdings Ltd (3339.HK), MicroPort Scientific Corp (0853.HK), Mindray Medical (MR), NVC Lighting Holdings Ltd (2222.HK), Nine Dragons Paper Holdings Ltd (2689.HK), Shandong Chenming Paper (1812.HK), Shandong Weigao Group Medical Polymer Co. Ltd. (1066.HK), Shougang Concord International (0697.HK), Sihuan Pharmaceutical Holdings (0460.HK), Sino Biopharmaceutical (1177.HK), Sinopharm (1099.HK), Skyworth Digital 12
Holdings (0751.HK), TCL Multimedia (1070.HK), Techtronic Industries (0669.HK), The United Laboratories (3933.HK), VTech Holdings (0303.HK), WSP Holdings (WH), Xinyi Glass (0868.HK) J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 46% 42% 12% IB clients* 53% 50% 38% JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. 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