The Glass Battle Under the Environmental Sword of Damocles
Release time:
2018-06-11 15:58
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The Glass War Under the Environmental Sword: The Protagonist Isn’t Cao Dewang—It’s Another Tycoon Worth Tens of Billions. By Yang Jin. Lead: China’s glass industry has two dominant players—Fuyao Glass and Xinyi Glass—whose combined market capitalization currently totals roughly HK$118 billion. Fuyao leads with a market cap of HK$74.8 billion, while Xinyi ranks second at HK$43.7 billion. Fuyao’s market cap is 1.7 times that of Xinyi’s. The glass industry is undergoing a dramatic transformation, and a key factor driving this change is environmental regulation. For many years, the glass industry has been characterized by strong cyclicality—but this round seems different. Just as the stock prices of industry giants reached historic highs and then began to pull back slightly, large-scale...
The Glass Battle Under the Environmental Sword: The Protagonist Isn't Cao Dewang—It’s Another Billion-Dollar Tycoon.
Author: Yang Jin
Introduction: China’s glass industry is dominated by two giants—Fuyao Glass and Xinyi Glass—whose combined market capitalization currently totals approximately HK$118 billion. Fuyao leads with a market cap of HK$74.8 billion, while Xinyi ranks second at HK$43.7 billion. Fuyao’s market cap is 1.7 times that of Xinyi’s.
The glass industry is undergoing a dramatic transformation, and a key factor driving this change is environmental protection.
For many years, the glass industry has been characterized by fairly strong cyclicality—but this round seems to be different. After the stock prices of industry giants reached all-time highs and then slightly declined, large-scale buybacks began flooding into the secondary market—buybacks at high prices. In a sense, this suggests that these companies believe the industry cycle won’t decline as rapidly from its peak prosperity as it did in previous cycles—unless, of course, they’re deliberately using buybacks to send out positive signals and artificially prop up their stock prices.
While recently compiling Hong Kong stock data, Bread Finance discovered a company in the glass industry—Xinyi Glass (0868.HK)—that is simultaneously conducting share buybacks and increasing its holdings.
When it comes to the glass industry, mainland investors first think of Fuyao Glass (600660.SH, 3606.HK). Thanks to the immense social influence of its founder, Cao Dewang, Fuyao’s brand recognition has long since transcended both the industry and capital markets, reaching far into the public sphere.
However, before Fuyao Glass issued H-shares, Xinyi Glass was the industry leader in the Hong Kong stock market. As China’s largest producer of float glass, Xinyi wields even greater influence within its niche sectors—beyond just the automotive glass segment.
Also in the glass industry, Fuyao is a customer of Xinyi. The two companies maintain a cooperative relationship for the most part, with only limited competition in certain local markets.
Let me first briefly introduce the glass manufacturing process: raw materials (such as soda ash and silica sand) → flat glass (including float glass) → deep-processed glass (including automotive glass and architectural glass, among others).
Fuyao Glass primarily focuses on high-value-added automotive glass, with its customers mainly being vehicle manufacturers. In contrast, Xinyi Glass sells both float glass and deeply processed glass; among these, automotive glass is mainly used in the aftermarket repair market.
Fuyao Glass also has a float glass production line, primarily for its own use. When there’s a supply gap, it relies on external procurement, and Xinyi is among its suppliers.
In recent years, the glass industry has been one of the key sectors targeted by efforts to reduce overcapacity and strengthen environmental regulations. As a result, many glass manufacturers have been significantly affected by measures such as upgrading environmental protection equipment and shutting down production lines. This has profoundly reshaped the industry’s overall landscape and future trends. Industry giants have emerged as the primary beneficiaries, gaining larger market shares.
The question is whether the future will continue to reap benefits, whether the dividends that environmental protection brings to industry giants can offset cyclical risks, or even—on some level—extend or smooth out these cycles.
Let’s start by getting a rough overview of the glass industry through a comparison of industry leaders.
Fuyao vs. Xinyi: Two Giants in the Glass Industry with Market Caps Exceeding 100 Billion Yuan
China’s glass industry is dominated by two giants: Fuyao Glass and Xinyi Glass. Their combined market capitalization currently totals approximately HK$118 billion. Fuyao is the leader, with a market cap of HK$74.8 billion, while Xinyi ranks second at HK$43.7 billion. Fuyao’s market cap is 1.7 times that of Xinyi’s.
From the perspective of revenue and profit, the gap between the two industry giants isn't that significant. In 2017, Fuyao reported revenues of 18.716 billion yuan and a net profit attributable to shareholders of 3.148 billion yuan; Xinyi’s revenues, converted into RMB, amounted to approximately 12.311 billion yuan, with a net profit of about 3.355 billion yuan.
Xinyi’s revenue was lower than Fuyao’s, but their profits were roughly comparable. The comparison of strengths is shown below:
The gap in market capitalization between the two companies is mainly due to differences in valuation levels. As of June 8, 2018, Fuyao’s A-share price-to-earnings ratio was 20.3 times, while its H-share ratio was 19.3 times; Xinyi Glass, by contrast, had a ratio of only 10.9 times.
Over the past decade and more, Xinyi Glass’s revenue and profit growth rates have actually outpaced those of Fuyao: From 2005 to 2017, Fuyao’s revenue grew by a factor of 5.43, while Xinyi’s revenue grew by a factor of 9.67. During the same period, Fuyao’s net profit increased by a factor of 7.04, whereas Xinyi’s net profit surged by a factor of 14.43.
In addition to brand recognition, the valuation difference is likely related to the business compositions of the two companies.
For a long time, more than 90% of Fuyao Glass’s revenue has come from automotive glass, which offers higher value-added products. Although the company also produces float glass, it mostly uses this glass for its own internal needs. In contrast, Xinyi Glass covers the production and sales of float glass, automotive glass, and architectural glass simultaneously, with the following revenue breakdown:
In 2017, Xinyi Glass generated revenues of HK$8.017 billion, HK$3.91 billion, and HK$2.801 billion from float glass, automotive glass, and architectural glass, respectively. Among these, float glass accounted for the largest share at 54.43%, an increase of 11 percentage points from 43.39% in 2014.
Currently, Xinyi Glass is the largest float glass manufacturer in China and throughout Asia. In the automotive glass sector, Xinyi has established a differentiated competitive positioning relative to Fuyao. While Fuyao focuses primarily on the OEM market, supplying parts to automakers, Xinyi targets the aftermarket replacement market—your neighbor’s auto repair shop might well be selling Xinyi glass.
Float Glass Giant: Gross Profit Margin Continuously Improving; Automotive Glass Competes in a Different Niche Than Fuyao
Let’s first take a look at Xinyi Glass’s performance.
After experiencing a slowdown in revenue growth in 2014 and 2015, Xinyi Glass’s revenue growth rate has returned to double-digit levels over the past two years, and its gross profit margin has also been steadily improving. The following chart shows the detailed figures for revenue and gross profit margin:
In 2017, Xinyi Glass reported revenue of HK$14.727 billion, up 14.6% year-on-year; net profit attributable to shareholders reached HK$4.014 billion, an increase of 24.91% over the previous year; and its gross profit margin stood at 36.97%, an improvement of nearly 11 percentage points from 25.17% in 2014—a rise for three consecutive years.
The increase in gross profit margin is mainly attributable to the rising gross profit margins of both float glass and automotive glass in recent years. Let’s start with float glass.
Revenue from float glass increased from HK$4.712 billion in 2014 to HK$8.017 billion in 2017, with a compound annual growth rate of 19.38%. During the same period, its share of total revenue rose from 43.39% to 54.43%, while the gross profit margin climbed from 6.99% to 31.72%.
Meanwhile, revenue from automotive glass rose from HK$3.593 billion in 2014 to HK$3.91 billion in 2017, with a compound annual growth rate of only 2.86%. Its share of total revenue has also been steadily declining—from 33.08% in 2014 to 26.55% in 2017.
Although the revenue growth of automotive glass has lagged far behind that of float glass, its gross profit margin has continued to rise in recent years, increasing from 41.8% in 2014 to 46.95% in 2017. Meanwhile, Fuyao’s automotive glass gross profit margin has remained consistently around 37%. Xinyi’s automotive glass gross profit margin is higher than Fuyao’s—partly because all of its float glass is supplied internally, thereby reducing costs, and partly possibly due to differences in the markets it primarily targets.
Fuyao Glass primarily supplies整车 manufacturers, while Xinyi Glass mainly serves the aftermarket. According to available data, nearly 75% of Xinyi’s automotive glass is exported to overseas aftermarket markets, 12% is sold in the domestic aftermarket, and the remaining 13% is sold to the OEM market.
It appears that, at present, Xinyi’s automotive glass business has established a differentiated competitive landscape with Fuyao. In the future, these two industry giants are likely to further increase their market shares—driven by environmental policies.
Environmental Sword: A Major Transformation in the Glass Industry
Capacity reduction and stringent environmental policies have been major variables facing the glass industry in recent years.
According to the emission limit requirements for flat glass plants in the “2+26” cities set by the Ministry of Environmental Protection, effective June 1, 2018, the emission standards are as follows: particulate matter 20 mg/Nm³, sulfur dioxide 100 mg/Nm³, and nitrogen oxides 400 mg/Nm³. These represent reductions of 60%, 75%, and 43% respectively compared to the previous emission limits—quite substantial reductions indeed.
According to statistics, the primary fuels currently used in China’s float glass manufacturing are natural gas, coal, and petroleum coke, accounting for 39%, 22%, and 22% respectively. Under intense environmental pressure, the shift from coal and petroleum coke to natural gas in the fuel mix for float glass production has become an inevitable trend.
According to Xinyi Glass’s annual report, all of its current production lines now use natural gas as fuel, so the environmental rectification efforts have only a limited impact on it. Meanwhile, according to Fuyao Glass’s disclosure, most of its newly constructed production lines currently under development also utilize natural gas as fuel.
Large glass manufacturers either have already been ahead of the curve in terms of policy or have ample financial resources to support their upgrades, so environmental regulations won't affect them as much. However, it's a different story for smaller and medium-sized glass manufacturers with weaker financial strength.
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