1

Xinyi Solar [0968.HK]

We are incrementally positive on Xinyi Solar’s (XYS) growth outlook after attending a site visit last week: (1) the gross margin in 1H16E should see higher-than-expected expansion, given a higher ASP (up >10% versus 2H15) and lower gas cost, based on the management tone; (2) construction of new solar glass production lines (daily ca-pacity: 1,000t x2) is on track; (3) preparation work for new solar farm construction is going faster than we expected; and (4) there is no imminent need for equity fundrais-ing, according to management. We raised our 2016E/2017E earnings forecasts sub-stantially by 36%/45%, taking our estimates 10%/9% above consensus. Our bullish forecasts come from higher margin assumptions, higher solar glass shipment volume from new production lines and higher solar power generation. We raised our TP to HK$4.00 (14x 2016E PER, historical average) from 3.00. Reiterate BUY.

Site visit tour with key management team members. During the visit, we met with Ching Sai Tung (CEO, XYG), Wesley Lee (CEO, XYS), Jason Lau (CFO, XYG), Daniel Chu (FC, XYS) and Wythe Tung (GM, Xinyi Energy). We visited the solar glass production lines in Wuhu and two solar farm projects located in Shou County in Lu’an (phase one: 100MW) and Sanshan in Wuhu (100MW).

Impressive solar farm project combined with fish farming. The solar farm projects located in Shou County have a total designed capacity of 300MW. Phase one (100MW) was connected to the grid in December 2015. The solar farm is built over a couple of large fish ponds. Besides, below the solar panels, there is space for livestock raising, thereby maximizing the land use. Management be-lieves this type of pilot project can help XYS secure more similar projects from the government in the future. We noticed that the ground works for phase two (100MW) had been carried out. We believe XYS can ramp up the installation in a short period of time once the construction quota is assigned, which is expected to be in June, according to management.

Cost reduction to drive higher solar farm IRR. XYS currently has 1.05GW of grid-connected capacity, and management said the new installation target was 700MW. Management expects the equity IRR this year to be higher than that in 2015 despite the on-grid tariff reduction, because of lower module costs (our price check showed that the current module price is ~7% lower than that of a year ago). Management also revealed that it planned to increase the procure-ment of mono-crystalline modules because of their cost advantage. Management expects the unit capex of its solar farms to be ~RMB6/watt this year, while the levelized cost of electricity is only ~RMB0.40/kWh.

Construction of new solar glass production lines progressing well. The two new solar glass production lines are located near the existing solar glass produc-tion plant. We observed construction work being carried out with cranes working. According to XYS’s schedule, the first production line (1,000t) and the second line (1,000t) will commence operations in Q4 2016 and Q1 2017, respectively. The 900t production line in Malaysia is expected to start operation in early Q4 2016, according to management. We have fully incorporated the capacity growth in our new estimates.

Continued share purchases by Xinyi Glass (XYG). Since beginning of this year, XYG [0868 HK; BUY] has spent a total of HK$484m to purchase 159.2m shares of XYS at an average price of HK$3.042, raising its stake in XYS from 26.54% to 28.90%.

Risk factors: (1) cyclical nature of the solar glass segment; (2) policy risks; (3) unexpected energy cost hikes; (4) a rising gearing ratio; (5) delay in tariff pay-ments from the government.

Wayne Fung, CFA —Analyst

(852) 3698-6319

waynefung@chinastock.com.hk

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Solar Power Sector Earnings and TP raised after site visit; Expect positive surprise on

earnings this year

BUY (Unchanged)

Close: HK$2.98 (April 22, 2016)

Target Price: HK$4.00 (+34%)

Share Price Performance

Market Cap US$2,593m

Shares Outstanding 6,749m

Auditor PWC

Free Float 38%

52W range HK$2.01-3.97

3M average daily T/O US$6.1m

Major Shareholding Management

(32.43%)

Xinyi Glass (28.9%)

April 25, 2016

2

Figure 1: XYS solar farm project in Shou County, Lu’an, Anhui (100MW)

Sources: CGIS Research

3

Figure 2: XYS solar farm project in Sanshan district in Wuhu, Anhui (100MW)

Sources: CGIS Research

Figure 3: XYS new solar glass production lines under construction

Sources: CGIS Research

4

Figure 4: XYS self-owned dock by the Yangtze River (for the transportation of raw materials and end products)

Sources: CGIS Research

Figure 5: XYS floating solar farm

Sources: CGIS Research

5

Figure 6: China solar power installation additions Figure 7: China solar power cumulative installation

Sources: EPIA, NEA, CGIS Research estimates Sources: EPIA, NEA, CGIS Research estimates

Figure 8: XYS PER band Figure 9: No. of XYS shares purchased by XYG this year

Sources: Bloomberg, CGIS Research estimates Sources: HKEx, CGIS Research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

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

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Jan-16

Mar-16

Mar-16

HKD

19x

16x

13x

10x

7x

Date Share purchased (m) Price (HK$) Amount (HK$ m)

4-Jan-16 13.4 3.220 43.2

5-Jan-16 10.8 3.250 35.1

6-Jan-16 8.4 3.295 27.6

7-Jan-16 18.6 3.106 57.8

8-Jan-16 9.6 3.107 29.8

11-Jan-16 13.8 3.009 41.6

12-Jan-16 10.7 3.016 32.4

13-Jan-16 9.0 3.074 27.8

14-Jan-16 14.8 3.022 44.8

17-Mar-16 7.3 2.736 19.9

18-Mar-16 16.5 2.811 46.4

12-Apr-16 12.4 2.936 36.3

13-Apr-16 8.1 3.007 24.4

14-Apr-16 2.4 3.041 7.3

18-Apr-16 3.3 3.007 10.0

Total 159.2 3.042 484.4

160 500

2,500 3,198

10,951 10,600

15,124

20,000 20,000

0

5,000

10,000

15,000

20,000

25,000

China solar installation annual addition (MW)

300 800 3,300 6,498

17,449

28,049

43,173

63,173

83,173

103,173

123,173

143,173

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

China solar installation (cumulative) (MW)

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Earnings projection

Sources: Company, CGIS Research estimates

(HK$ m) 2013 2014 2015 2016E 2017E (HK$ m) 2013 2014 2015E 2016E 2017E

Income statement Cash flow statement

Revenue 1,968 2,410 4,750 6,697 9,139 Operating cashflow

Solar glass 1,968 2,379 3,911 5,243 7,161 Pretax profit 370 572 1,394 2,273 2,982

Solar power generation 0 31 313 1,041 1,825 D&A 100 94 226 644 894

Solar EPC 0 0 526 413 153 Share of associates/JCE/JV 0 0 0 (36) (37)

Cost of sales (1,375) (1,649) (3,040) (3,740) (5,186) Finance costs 0 7 21 163 234

Solar glass (1,375) (1,644) (2,546) (3,114) (4,527) Interest income (2) (2) (5) (17) (18)

Solar power generation 0 (4) (83) (302) (529) Change in working capital 224 117 282 (525) 290

Solar EPC 0 0 (411) (325) (130) Income tax paid (44) (79) (188) (284) (328)

Gross profit 592 761 1,710 2,957 3,953 Others 5 (1) (975) 0 0

Solar glass 592 735 1,365 2,129 2,634 Operating cash flow 654 709 755 2,218 4,016

Solar power generation 0 27 230 739 1,296

Solar EPC 0 0 116 89 24 Investing cash flow

Other income 63 87 143 103 85 Capex on PP&E (240) (2,322) (3,640) (5,000) (5,000)

Other gain/(loss), net 0 (13) 62 0 0 Purchase of land use right 0 0 0 0 0

S&D expenses (124) (98) (187) (248) (320) Investment in associates/JCE/JV 0 0 (175) 0 0

Administrative expenses (162) (160) (318) (429) (557) Dividend received from associates/JCE/JV 0 0 0 29 30

EBIT 369 577 1,410 2,383 3,161 Interest received 2 2 5 17 18

D&A 100 94 226 644 894 Others 113 (9) 0 0 0

EBITDA 468 671 1,636 3,027 4,055 Investing cash flow (125) (2,328) (3,811) (4,954) (4,952)

Share of associates/JCE/JV 0 0 0 36 37

Net finance income/(expenses) 2 (5) (16) (146) (216) Financing cashflow

Pretax profit 370 572 1,394 2,273 2,982 Proceed from equity 0 778 3,259 750 0

Income tax (67) (79) (188) (284) (328) Proceed from/(repayment of) borrowings 0 1,300 2,290 3,700 1,000

After tax profit 304 493 1,206 1,989 2,654 Dividends paid 0 (200) (146) (304) (917)

MI 0 0 0 (80) (159) Finance costs 0 (6) (21) (163) (234)

Net profit 304 493 1,206 1,910 2,495 Advance from related parties (292) 0 0 0 0

Core net profit 304 493 1,143 1,910 2,495 Others (13) 0 0 0 0

EPS (HK$) 0.07 0.08 0.19 0.28 0.37 Financing cash flow (305) 1,872 5,382 3,983 (150)

Core EPS (HK$) 0.07 0.08 0.18 0.28 0.37

Net change in cash 224 252 2,326 1,247 (1,087)

(HK$ m) 2013 2014 2015 2016E 2017E 2013 2014 2015 2016E 2017E

Balance sheet Valuation

Non-current assets PER (recurring earnings) (x) 40.6 35.4 17.0 10.5 8.1

PP&E 1,368 3,685 7,104 11,464 15,574 Dividend yield 0.8% 1.4% 3.0% 4.6% 6.0%

Land use right 189 180 180 177 173 PBR (x) 7.4 5.5 3.5 2.5 2.1

Investment in associate/JV 0 0 175 182 190 EV/EBITDA (x) 42.7 29.8 12.2 6.6 4.9

Others 55 296 382 382 382 Growth rate

Total non-current assets 1,612 4,162 7,842 12,205 16,319 Revenue 28% 22% 97% 41% 36%

EBIT 158% 56% 145% 69% 33%

Current assets EBITDA 85% 43% 144% 85% 34%

Inventories 91 299 199 416 494 Recurring net profit 153% 62% 132% 67% 31%

Trade and other receivables 499 733 1,586 1,680 2,827 Recurring EPS 114% 15% 109% 61% 31%

Cash 279 543 2,869 4,116 3,029 Operating ratios

Others 206 28 239 239 239 Gross margin 30% 32% 36% 44% 43%

Total current assets 1,075 1,602 4,893 6,451 6,590 EBIT margin 19% 24% 30% 36% 35%

EBITDA margin 24% 28% 34% 45% 44%

Total assets 2,687 5,764 12,735 18,656 22,908 Recurring net margin 15% 20% 24% 29% 27%

Asset turnover 0.72 0.57 0.51 0.43 0.44

Current liabilities Adjusted ROE 18% 18% 25% 28% 28%

Trade and other payables 350 1,121 2,156 1,942 3,457 Adjusted ROA 11% 12% 12% 12% 12%

Short term bank borrowings 0 143 474 1,174 1,674 Interest coverage n/a 132.1 99.2 20.8 18.8

Others 17 28 79 79 79 Net debt/equity Net cash 23% 11% 34% 48%

Total current liabilities 367 1,291 2,710 3,196 5,210 Current ratio 2.93 1.24 1.81 2.02 1.26

Quick ratio 2.17 0.82 0.75 0.73 0.68

Non Current Liabilities Days inventories 41 43 30 30 32

Deferred tax liabilities 10 10 17 17 17 Days receivables 95 93 89 89 90

Long term bank borrowings 0 1,157 3,116 6,116 6,616 Days payables 72 163 197 200 190

Others 0 0 0 0 0

Total non-current Liabilities 10 1,167 3,133 6,133 6,633

Equity

Share capital 1,908 2,460 3,808 3,808 3,808

Retained earnings 403 846 1,937 4,293 5,871

2,310 3,306 5,745 8,101 9,679

MI 0 0 1,146 1,226 1,385

Total equity 2,310 3,306 6,891 9,327 11,064

Total equity and liabilities 2,687 5,764 12,735 18,656 22,908

BVPS (HK$) 0.41 0.54 0.85 1.20 1.43

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :