Thursday, April 12, 2007
2nd Look at the Glass Companies
I took another look at the glass makers as there's been quite some activities going on with these counters, which unfortunately mean higher prices too. More people are buying into the recovery story after 2 years of oversupply and price war, and demand should pick up strongly from growth in both the auto and the construction sector. Speaking of construction materials, the glass counters are also a lagger after others like steel, aluminum, copper, cement, which all have had their run.
Those who are reading about the glass companies for the 1st time should also look at my work done back in January on Xinyi and ZJ Glass.
Xinyi (868)
The 2006 results were a surprise as it showed very strong growth in construction glass in the 2nd half, which helped counter the slower growth in auto glass. And it finally put its upstream float glass plant in operation after some delay. Bottom line showed excellent 50% growth but EPS growth was more moderate at 40% because of dilution from new shares issued last June. One can't really pick on these results in any way but my only concern about its strange cash management practice remains. I thought cashflow was tight when Xinyi had to raise $180m from a placement to build a solar glass operation. But then Xinyi declared roughly the same amount as dividends. Maybe the management really has a distaste for debt or maybe the outlook was really blurry at the time of placement when they didn't expect things to turnaround that quickly. But the market isn't troubled by this and Xinyi is now trading at 19x p/e. This one looks like is becoming a growth share.
ZJ Glass (739)
Nothing new came out since my last look but price has climbed by 40% in 2 months' time, which was respectable but no longer spectacular these days. 2006 results will be published on the 27th but all eyes are apparently already on 2007 and beyond, since there's nothing to cheer about the past year. Capitalization is now $1.8b so if ZJ Class can really recover to its previous peak earning of about 200m a year in 2007 (note: it made a loss in $76m 2006 interim), the p/e will be 9x, not bad if this kind of growth can maintain. I'd say for now the price has got ahead of earnings a bit, but those early birds might really know something which I don't.
China Glass (3300)
This one is complicated and so far I've not been able to make much sense out of its reports. It started out as a small glass makers and was listed in 2005. Since beginning of last year it have had a series of M&A taking up 6 or 7 other glass makers. Now it claims itself to be the biggest glass maker in China!
It attracted me because of its relatively small capitalization of about $1.3b, comparing to Xinyi's $7.5b and ZJ Glass's $1.8b. And it had good backing too with Nippon Glass as a strategic partner holding 29.9% and IFC holding like 3% plus Casanove (a good name in this business) helped place some shares recently at $2.75 (too bad now the price is $3.6 already). So it seemed a good bet on the recovery story. But after going through the numbers I found myself lost completely, even as simple as to the size and earnings power of the enlarged China Glass group. Of course it didn't help much when Everbright Capital was the IFA advising the minority shareholders in these acquisitions (for their opinion provided no useful insight).
To me it seems China Glass has been swapping shares with others to enlarge itself as opposed to straight acquisition, and it doesn't have majority control over most of these newly acquired businesses. The plus side is little cash is required and the company appears larger than it is. But the minus side is that it's hard to manage so many operations and to get consensus with so many heads on top. China Glass Group should properly be called China Glass and the group of companies. If you look at the balance sheet you'll find minority interest to be just as big, if not bigger, as the owners' equity!
So there you have it, my view on the three glass counters. All have merits not without doubt. I have a slight preference for China Glass for now but that can go away easily with a swing in price. This is a sector which I think is promising and worth taking some risk.
DISCLOSURE: I don't hold 868, 739, 3300 at time of writing.
Those who are reading about the glass companies for the 1st time should also look at my work done back in January on Xinyi and ZJ Glass.
Xinyi (868)
The 2006 results were a surprise as it showed very strong growth in construction glass in the 2nd half, which helped counter the slower growth in auto glass. And it finally put its upstream float glass plant in operation after some delay. Bottom line showed excellent 50% growth but EPS growth was more moderate at 40% because of dilution from new shares issued last June. One can't really pick on these results in any way but my only concern about its strange cash management practice remains. I thought cashflow was tight when Xinyi had to raise $180m from a placement to build a solar glass operation. But then Xinyi declared roughly the same amount as dividends. Maybe the management really has a distaste for debt or maybe the outlook was really blurry at the time of placement when they didn't expect things to turnaround that quickly. But the market isn't troubled by this and Xinyi is now trading at 19x p/e. This one looks like is becoming a growth share.
ZJ Glass (739)
Nothing new came out since my last look but price has climbed by 40% in 2 months' time, which was respectable but no longer spectacular these days. 2006 results will be published on the 27th but all eyes are apparently already on 2007 and beyond, since there's nothing to cheer about the past year. Capitalization is now $1.8b so if ZJ Class can really recover to its previous peak earning of about 200m a year in 2007 (note: it made a loss in $76m 2006 interim), the p/e will be 9x, not bad if this kind of growth can maintain. I'd say for now the price has got ahead of earnings a bit, but those early birds might really know something which I don't.
China Glass (3300)
This one is complicated and so far I've not been able to make much sense out of its reports. It started out as a small glass makers and was listed in 2005. Since beginning of last year it have had a series of M&A taking up 6 or 7 other glass makers. Now it claims itself to be the biggest glass maker in China!
It attracted me because of its relatively small capitalization of about $1.3b, comparing to Xinyi's $7.5b and ZJ Glass's $1.8b. And it had good backing too with Nippon Glass as a strategic partner holding 29.9% and IFC holding like 3% plus Casanove (a good name in this business) helped place some shares recently at $2.75 (too bad now the price is $3.6 already). So it seemed a good bet on the recovery story. But after going through the numbers I found myself lost completely, even as simple as to the size and earnings power of the enlarged China Glass group. Of course it didn't help much when Everbright Capital was the IFA advising the minority shareholders in these acquisitions (for their opinion provided no useful insight).
To me it seems China Glass has been swapping shares with others to enlarge itself as opposed to straight acquisition, and it doesn't have majority control over most of these newly acquired businesses. The plus side is little cash is required and the company appears larger than it is. But the minus side is that it's hard to manage so many operations and to get consensus with so many heads on top. China Glass Group should properly be called China Glass and the group of companies. If you look at the balance sheet you'll find minority interest to be just as big, if not bigger, as the owners' equity!
So there you have it, my view on the three glass counters. All have merits not without doubt. I have a slight preference for China Glass for now but that can go away easily with a swing in price. This is a sector which I think is promising and worth taking some risk.
DISCLOSURE: I don't hold 868, 739, 3300 at time of writing.
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