Last Friday, the National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration jointly issued the "Notice on Matters Related to Photovoltaic Power Generation in 2018" (hereinafter referred to as the "Notice"):
On the one hand, the construction scale of ordinary photovoltaic power stations will not be arranged for 2018. This year, only 10 million kilowatts (10 gigawatts) will be allocated for distributed photovoltaic projects. The benchmark on-grid electricity prices for newly put into operation photovoltaic power stations will be uniformly reduced by 0.05 yuan per kilowatt hour from the date of publication, and the benchmark on-grid electricity prices for Class I, Class II, and Class III resource areas will be adjusted to 0.5 yuan, 0.6 yuan, and 0.7 yuan per kilowatt hour respectively (tax included).
On the other hand, starting from May 31, for distributed projects that are newly put into operation and adopt the "spontaneous self-use and surplus electricity grid" model, the full-scale electricity subsidy standard has been reduced by 0.05 yuan to 0.32 yuan per kilowatt hour (tax included).
The government has a firm attitude and moves quickly. The date of the issuance is the day when the new policy is implemented. The intensity and speed of the policy far exceed market expectations, which means that the photovoltaic industry will officially bid farewell to the era of subsidy profits, and companies that lack core competitiveness in the industry will be eliminated.
In an instant, the photovoltaic industry as a whole has turned to "winter". The photovoltaic sector in the Chinese and Hong Kong markets has suffered a critical blow, and many investors may turn off the lights and eat.
Image source: Internet
Among them, Flat Glass (6865.HK) was the most seriously injured, with a cumulative plunge of nearly 30% in two days. One has to ask, will the company be destroyed?
1. The past and present life of Flat Glass
Want to understand why the market response is so great? We first need to figure out the company's product structure.
In November 2015, Flat Glass was listed on the main board of the Hong Kong Stock Exchange. Its business includes photovoltaic glass (accounting for about 70% of the overall revenue), float glass , the R&D, production and sales of engineering glass and furniture glass, as well as the mining and sales of quartz sand for glass, and the construction of EPC photovoltaic power station projects, forming an "upstream mine - A vertically integrated business operation model of midstream photovoltaic glass and other glass product manufacturing - downstream photovoltaic power station operation. In terms of the equity structure of
, 75% are domestic shares and 25% are H shares. As of the end of 2017, the company's single shareholder and actual controller is Ruan Hongliang and its persons acting in concert, with a total shareholding ratio of 62.15%, all of which are domestic shares.
At present, the company's total production capacity is approximately 4,490 tons/day, of which photovoltaic glass is 3,290 tons/day and float glass is 1,200 tons/day. In terms of photovoltaic glass production capacity, Flat Glass ranks second in the world, second only to Xinyi Solar (0968.HK) with 6,800 tons/day. The two companies together account for nearly 50% of China's photovoltaic glass production capacity.
Due to the high entry barriers in the photovoltaic glass industry in terms of capital requirements, technology and cost control. To be precise, the industry is capital-intensive and technology-intensive in nature. As a result, companies in the first echelon of the industry have accumulated over time, and the siphon effect has become more and more obvious. This can be seen from the gross profit margin of the company and Xinyi Solar.
Although the two companies can enjoy higher gross profit margins than their peers in the industry, , in fact, if you look at the midstream position of the photovoltaic glass industry in the overall industry chain, this role does not have any advantages. Since the suppliers in the upstream chemical industry and downstream photovoltaic component manufacturers and other customers are quite strong, when the price of either party changes, photovoltaic glass simply cannot convert the siphon effect of the industry into bargaining power for upstream and downstream manufacturers.
Image source: Shenwan Hongyuan, company business structure
For example, in 2017, due to the decline in the average selling price of photovoltaic glass products and the substantial increase in several major raw materials during the period, the gross profit margin of the two major players in the industry declined significantly.
However, Xinyi Solar, the industry leader, added a total of three ultra-white photovoltaic raw glass production lines at the end of 2016 and the first quarter of 2017, with an additional daily production capacity of 2,900 tons. The sales volume increased by 53% year-on-year, offsetting the average Due to the impact of the 10% drop in selling prices and the relatively dispersed revenue structure, EPC service revenue surged 239% year-on-year during the period, effectively offsetting the sharp decline in photovoltaic glass profits, and the overall profit for the year was still able to record a year-on-year growth rate of 17.4%.
On the contrary, Flat Glass was not so lucky. Due to the large proportion of glass business revenue and the fact that its photovoltaic glass production base in Anhui was only ignited in December 2017, the newly added 1,000 tons of production capacity did not bring sales in time in 2017, resulting in a 29% drop in annual net profit, perfectly missing the bull market in Hong Kong stocks.
The new production capacity also laid the foundation for the sharp drop in stock prices after the introduction of the new policy, which will be discussed later.
Data source: Company
2. What was the surge like at the beginning of the year?
Entering 2018, Flat Glass has changed from last year's decline and soared crazily. From the beginning of the year to mid-March, it increased by as much as 100%, completely leaving the Hang Seng Index behind.
In my opinion, the logic of the market is mainly based on the following two reasons:
1. Industry supply-side reform
With the acceleration of the supply-side reform process, this whirlwind swept the glass sector at the end of 2017. The city of glass - in Shahe City, Hebei Province was hit hard, and many local production lines were in trouble.
In November 2017, 9 float glass production lines in the Shahe area were shut down due to incomplete pollution discharge permit procedures, with a total melting capacity of approximately 5,800 tons/day;
In December 2017, due to substandard environmental impact assessments, 3 float glass production lines and 10 G-glass production lines were shut down, with a total melting capacity of approximately 2,050 tons/day, plus 9 that were stopped in November. A total of 7,850 tons/day of production lines have been suspended in Shahe area, accounting for 27.4% of local production capacity and approximately 5.2% of the country's total production capacity.
This round of production suspension caused the price of photovoltaic glass to start to rise sharply at the end of 2017. However, this was only the beginning of the supply-side reform of the glass industry.
According to a CICC research report, as of mid-January, about 40% of glass companies across the country have not yet obtained their pollution discharge permits, including Rainbow New Energy and Hebei Jinxin. If they still fail to obtain their pollution discharge rights, there is a risk of forced closure.
Moreover, the photovoltaic glass industry has high barriers. Production requires long-term experience accumulation and one-stop production process, and requires a large initial investment. A 900-ton/day capacity photovoltaic glass kiln requires an initial investment of 900 million yuan, and a 550-ton furnace investment requires approximately 300-400 million yuan. Large-scale kilns have lower manufacturing costs than ordinary kilns (energy consumption is 20% lower).
According to data, a complete set of photovoltaic glass production lines takes 1-1.5 years from investment to output, and once the kiln is ignited and put into operation, it must run continuously. If the fire is suspended, it will take about 6 months to resume normal production.
As for downstream customers, photovoltaic component companies have high requirements for the quality stability, timely supply, and after-sales service of photovoltaic glass. To enter their supplier list, they must face numerous reviews and tests, which can take anywhere from six months to a year.
In addition, photovoltaic glass equipped with photovoltaic cell modules also needs to obtain certification from the exporting country's authoritative agency. The process is also time-consuming and expensive. These factors have created customer stickiness, which is beneficial to photovoltaic glass manufacturers that entered the market first and have stable cooperation.
2. A-share IPO expectations
Before Flat Glass was listed in Hong Kong, it tried to enter the A-share market in 2012, but it coincided with the overall PV industry falling into a trough, causing the company's financial data to be extremely ugly. The annual profit was only 60 million yuan, and it was eventually rejected by the great China Securities Regulatory Commission.
However, the company’s management is still unwilling to give up and is determined to enter the A-share market. In July last year, it submitted its listing application to the China Securities Regulatory Commission again. It is now in the feedback stage. According to the prospectus,
plans to issue 200 million shares and raise funds of up to 1.82 billion yuan, which means that the issue price is expected to be as high as 9.1 yuan per share. At the same time, if the company can successfully log into the A-share market, due to the A+H share structure, it will automatically become the subject of Hong Kong Stock Connect and enjoy the liquidity premium brought by southbound funds.
3. Raw material prices soared, and stock prices continued to fall.
However, the good times did not last long, and the company's stock price began to fall sharply in mid-March. The main reason was the cost side that was full of uncertainty.
According to data from the prospectus of that year, Flat Glass Company’s product cost structure mainly depends on two factors: energy and raw materials.
Data source: Company prospectus
Energy aspect : Electricity prices are basically stable, mainly depending on fuel prices. Last year, the "coal-to-gas" transition swept the northern land, and the "gas shortage" caused LNG spot prices to soar. However, this was caused by the coincidence of multiple factors. Nowadays, the state forces the "Three Barrels of Oil" to increase the extraction and import of natural gas, and gas distributors must complete the corresponding target gas storage capacity. Therefore, LNG prices are expected to gradually fall from a long-term perspective.
Image source: Wind, LNG price
In terms of raw materials : The price of quartz sand is relatively stable and will not cause major fluctuations in the company's costs. This is mainly due to the rich quartz sand resources in Fengyang County, Anhui Province, where the company's production line is located. In addition, the company signed a mining rights acquisition agreement with the Anhui Chuzhou government department, and can exercise mining rights when necessary, which basically stabilizes the cost of quartz sand.
However, soda ash , which accounts for 14.26% of the total cost of photovoltaic glass, experienced a sharp rise after March.
In May, as the international geopolitical crisis continued to escalate and U.S. crude oil inventories unexpectedly decreased, international oil prices repeatedly broke through important levels. The surge in oil prices also caused the prices of downstream chemical industry products to continue to rise. Unfortunately, soda ash is among them.
On the other hand, soda ash manufacturers have entered a maintenance period in the short to medium term, and the industry's reduction in overcapacity has led to a contraction in supply. The coincidence of multiple factors has caused the price of soda ash to increase by more than 25% year-to-date, completely erasing the sharp drop caused by the demand side at the end of 2017.
Image source: Wind, soda ash price
Uncertainty on the cost side caused a correction in stock prices from high levels after March, with a correction of 30% in two months. But this is still not comparable to the 30% drop in the past two days.
fell 30% in four or two days, what’s the explanation?
According to the "China Clean Energy Industry Annual Development Report" released by China Economic Information Service , a subsidiary of Xinhua News Agency, on March 27, 2018, it is expected that the scale of new photovoltaic installed capacity in 2018 will be between 40GW and 50GW. Xinyi Solar's management also predicts that China's newly installed capacity will reach 50GW this year, the same as last year.
In the first quarter of 2018, China's newly installed photovoltaic capacity increased by 22% year-on-year to 9.65GW, and the country's cumulative installed capacity is estimated to reach 140GW. According to EnergyTrend’s calculations, China’s cumulative installed capacity by 2020 will reach 250GW.
However, the new photovoltaic policies have completely cooled these good expectations, and the market has to readjust expectations. According to CICC’s estimates, the expected demand for new photovoltaics throughout the year may drop to approximately 35GW-45GW.
This means that the demand for photovoltaic glass will drop by up to 30%.
As mentioned above, the cost of shutting down and restarting glass manufacturing is very high. Therefore, once the production line is put into operation, it must remain in operation 24 hours a day, which determines the inelastic nature of glass manufacturing supply. With the sharp drop in downstream demand, the industry will suddenly be oversupplied, and a price war will soon break out.
Therefore, Flat Glass's earnings will fall sharply, which is one of the reasons for the collapse of the stock price.
On the other hand, the New Deal is also very likely to interrupt the company's A-share financing and the Shenzhen-Hong Kong Stock Connect, causing the company to suddenly fall into the financial trap of expanding production too much. . According to the company's information,
is currently under construction with a daily production capacity of up to 4,000 tons, in Anhui and Vietnam.
Data source: Company
In order to cope with such a fierce expansion plan, the company borrowed heavily last year. The figure below shows that the company's borrowings in 2017 increased significantly by 219.4% year-on-year, and the asset-liability ratio rose to 83.23% by the end of 2017.
