KIBING GROUP(601636)：PRODUCTION AND SALES VOLUME OUTPERFORM PEERS;WATCH PROFIT CONTRIBUTION FROM DEEP PROCESSING BUSINESS

　　1H22 results in line with preannouncement
Kibing Group announced its 1H22 results: Revenue dropped 5% YoY to Rmb6.49bn, and attributable net profit fell 51% YoY to Rmb1.08bn. In 2Q22, revenue dropped 12% YoY to Rmb3.43bn, and attributable net profit fell 58% YoY to Rmb557mn. Its 1H22 results were in line with the firm’s preannouncement.
　　1) Sales/production ratio leading the sector. The company's float glass output decreased by 750,000 boxes YoY to 59.53mn boxes in 1H22 due to the 800t/d production line being under cold repair in early March in Heyuan. Sales volume decreased by 5.89mn boxes to 55.07mn boxes. While the sales/production ratio dropped 9ppt YoY to 93%, it still outperformed its peers. According to our calculations, the average selling price (ASP) of the company's flat glass in 1H22 was close to Rmb100, maintaining a premium and showing its strength despite headwinds. In addition, its energy-saving glass orders grew steadily backed by China's decarbonization drive. In 1H22, contract revenue from the segment reached Rmb1.19bn. 2) Inventory of cheap soda ash and fuel bringing cost advantages over peers. In 2Q22, the ASP of soda ash rose 50% YoY or 10% QoQ to Rmb2,791/t. The ASP of petroleum coke increased 118% YoY or 38% QoQ to Rmb5,073/t. The firm stockpiled cheap soda ash and petroleum coke, which allowed it to manage rising costs. In 2Q22, the company's blended gross margin declined 27ppt YoY and 8ppt QoQ to 26.8%. 3) G&A expense ratio dropped 3 ppt YoY. In 1H22, the company's expense ratio decreased 3.7ppt YoY to 7.2%. Its G&A expense ratio fell 3ppt YoY to 6.4%, mainly due to the decrease in provision for bonuses and incentives as a result of declining performance, while the rest remained stable. 4) Cash flow under pressure; net profit to net OCF ratio down YoY. In 1H22, the company's net operating cash flow (OCF) decreased 75% YoY to Rmb586mn. Given the downtrend in the float glass industry and the 70% YoY rise in cash paid for the company's purchases of goods, the net profit to net operating cash flow ratio dropped 53ppt to 54%. In addition, the company's free cash flow in 1H22 was -Rmb605mn and was under short-term pressure.
　　Trends to watch
　　Demand to mildly recover QoQ; cold repair of loss-making production lines likely to drive rebound in prices. We believe demand for float glass may mildly improve in 2H22. The disappointing recovery of housing completion weighs on small firms, while loss-making production lines may put pressure on cash flow and these firms may commence cold repair. We thus see potential for rebounds in the prices of float glass. Kibing still has a small inventory of low-price fuel and raw materials, which may enable the firm to maintain its cost advantages.
　　Deep-processing business expanding; watch profit contribution from new business. 1) PV glass: The company's Chenzhou production line with 2,200t/d of capacity officially commenced operation in April. We expect the nominal capacity to reach 9,400t/d and 7,000t/d under optimistic and neutral scenarios by end-2023. The company has broad experience in sourcing low-priced soda ash and improving the self-supply rate of silica sand, etc. We believe this segment will see significant rise in earnings contribution and bring about a valuation rerating. 2) Electronic glass: In April 2020 and July 2022, Phase I and II production lines of electronic glass commenced operation. The total capacity reached 130t. In addition, Kibing intends to invest Rmb780mn in two new electronic glass production lines in Shaoxing.
　　Financials and valuation
　　As the recovery of housing completion is slow and demand for float glass has not turned around, we lower our 2022 and 2023 EPS forecasts 31% and 25% to Rmb0.82 and Rmb0.98. The stock is trading at 14x 2022e and 12x 2023e P/E. We maintain OUTPERFORM. Given the pressure on the float glass sector and the rerating of the PV glass business, we lower our target price 9% to Rmb14.5 (implying 18x 2022e and 15x 2023e P/E), with 28% upside.
　　Risks
　　Disappointing recovery of housing completion; sharper-than-expected rise in raw material prices; disappointing deep-processing business.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。