Equity Research: Flat Glass Group (601865.SH)

Profitability Repair on the Horizon Amidst Industry-Wide Supply Discipline

Date: September 8, 2025
Sector: Power Equipment / Photovoltaic (PV) Materials
Rating: OVERWEIGHT (Maintained)
Current Price: CNY 18.28
Target Price: Implied via Valuation Multiples (See Section 5)
Analysts: Jiaxiong Wu (S1300523070001), Zhen Gu (S1300525040003)

Executive Summary

Flat Glass Group Co., Ltd. ("Flat Glass" or the "Company"), a global leader in photovoltaic (PV) glass manufacturing, has released its interim financial results for the first half of 2025 (1H25). The report reveals a challenging operating environment characterized by significant year-over-year (YoY) declines in revenue and profitability due to intense industry competition and pricing pressures. However, a critical inflection point is emerging. In response to the Chinese government’s directive to curb "involutionary" (destructive) competition, the PV glass sector is undergoing a coordinated supply-side contraction.

Our analysis indicates that Flat Glass is actively participating in this structural adjustment, reducing its operational capacity by 15% since the beginning of 2025. This supply discipline, coupled with a recent rebound in glass prices from cost-deficit levels, positions the Company for a meaningful profitability recovery in the second half of 2025 (2H25). While 1H25 earnings were depressed, the sequential quarter-over-quarter (QoQ) improvement in 2Q25 net profit (+46%) signals the beginning of this turnaround.

Consequently, we have adjusted our earnings forecasts for 2025-2027 to reflect the delayed recovery trajectory but maintain our OVERWEIGHT rating. We believe the market has not fully priced in the sustainability of the current price hikes and the long-term benefits of industry consolidation. The Company remains a core beneficiary of the "anti-involution" policy framework, with its scale advantages and cost leadership providing a resilient foundation for margin expansion as supply-demand dynamics normalize.

Key Takeaways

1. 1H25 Financial Performance: Bottoming Out Amidst Sectoral Headwinds

The Company’s 1H25 financial results reflect the severe impact of the prolonged downturn in the PV supply chain. Revenue and profits contracted significantly YoY, driven by lower average selling prices (ASPs) and compressed margins. However, sequential data suggests the worst may be behind us.

• Revenue Contraction: Total revenue for 1H25 stood at CNY 7.74 billion, representing a 27.66% YoY decline from CNY 10.70 billion in 1H24. This top-line contraction is primarily attributable to the substantial drop in PV glass prices throughout late 2024 and early 2025, which outweighed volume contributions.
• Profitability Pressure: Net profit attributable to shareholders amounted to CNY 261 million, a stark 82.58% YoY decrease from CNY 1.50 billion in 1H24. Deducting non-recurring items, the net profit was CNY 227 million, down 84.64% YoY.
• Margin Erosion: The comprehensive gross margin declined by 9.73 percentage points (ppts) YoY to 14.05% in 1H25. Similarly, the net profit margin fell by 10.59 ppts YoY to 3.44%. This compression underscores the intensity of price wars prior to the recent industry-wide production cuts.
• Sequential Improvement (The Turnaround Signal): A crucial highlight is the performance in 2Q25. The Company reported a net profit of CNY 155 million in 2Q25. While this represents a 79.02% YoY decline (due to the high base effect from 2Q24), it marks a 46.02% QoQ increase from 1Q25. This sequential growth is the earliest concrete evidence that the strategic shift towards supply reduction and price stabilization is beginning to translate into financial results.

Table 1: 1H25 vs. 1H24 Financial Highlights

Source: Company Reports, BOC International Securities Estimates

The divergence between the YoY decline and the QoQ improvement is pivotal. The YoY comparison is skewed by the exceptionally high profitability of 1H24, a period before the full brunt of the industry's overcapacity crisis was felt. The QoQ metric, however, isolates the recent operational adjustments. The 46% QoQ jump in net profit demonstrates that even modest price recoveries, when combined with disciplined output management, can disproportionately boost bottom-line performance due to operating leverage.

2. Strategic Response to "Anti-Involution": Leading the Supply-Side Correction

The central theme driving our revised outlook is the Chinese government’s intensified focus on eliminating "involutionary competition" (neijuan). In June 2025, the People’s Daily published a seminal article titled "Achieving High-Quality Development by Breaking 'Involutionary' Competition," emphasizing that addressing this issue is key to resolving current economic contradictions and deepening economic reforms. This political mandate has catalyzed unprecedented cooperation among industry leaders.

• Industry-Wide Production Cuts: In response to severe supply-demand imbalances, the top ten domestic PV glass manufacturers agreed to a collective 30% reduction in production. This is not merely a voluntary gesture but a strategic necessity to prevent further cash burn and restore pricing power.
• Flat Glass’ Execution: Flat Glass has been proactive in implementing these cuts. By the end of June 2025, the Company’s operational capacity had been reduced to 16,400 tons/day. This represents a 15% reduction compared to its capacity at the start of 2025.
• Strategic Implication: By leading the charge in capacity rationalization, Flat Glass is helping to reset the industry’s supply curve. This move serves two purposes:
  1. Immediate Price Support: Reducing supply alleviates the inventory overhang that had forced prices below cash cost levels.
  2. Long-Term Market Share Consolidation: As smaller, less efficient players struggle to survive the prolonged period of low margins, industry leaders like Flat Glass—with superior cost structures and balance sheets—are positioned to gain market share once demand recovers. The "anti-involution" policy effectively raises the barrier to entry and accelerates the exit of marginal capacity.

The alignment between national policy and corporate strategy reduces the risk of "cheating" on production cuts, as regulatory scrutiny ensures compliance. This structural shift transforms the competitive landscape from a pure price-war scenario to one where discipline and efficiency are rewarded.

3. Pricing Dynamics: From Cost-Deficit to Profitability Recovery

The pricing trajectory of PV glass in 2025 has been volatile, but recent trends indicate a decisive upward shift. Our analysis of market data from Shanghai Nonferrous Metals Network (SMM) highlights the following progression:

• The Trough (July 2025): In early July, the transaction price for 2.0mm single-layer coated glass fell below CNY 10/sqm. This level is critically important as it sits below the full cost line for most manufacturers, including industry leaders. Selling below cost is unsustainable and triggers immediate supply responses (shutdowns/maintenance).
• The Rebound (August 2025): Recognizing the unsustainability of sub-cost pricing, manufacturers exerted strong upward pressure on prices. By late August, the quoted price for 2.0mm glass had risen to the CNY 12.5–14.0/sqm range. This represents a 25-40% increase from the July trough.
• Continued Momentum (September 2025): New orders in September have seen further price adjustments, with increases of approximately CNY 2/sqm compared to early August levels. This suggests that the initial price hike is being accepted by downstream module manufacturers, who are also facing pressure to stabilize their own supply chains.

Figure 1: PV Glass Price Trajectory (2.0mm Coated Glass)

graph LR
    A[July 2025: < CNY 10/sqm<br>(Below Cost)] --> B[Aug 2025: CNY 12.5-14.0/sqm<br>(Restoring Margins)]
    B --> C[Sept 2025: +CNY 2/sqm<br>(Further Upside)]
    style A fill:#f9f,stroke:#333,stroke-width:2px
    style B fill:#bbf,stroke:#333,stroke-width:2px
    style C fill:#bfb,stroke:#333,stroke-width:2px

Source: Shanghai Nonferrous Metals Network, BOC International Securities Analysis

Impact on Flat Glass’ Profitability:
The magnitude of this price increase has a disproportionate impact on earnings. Given that raw material and energy costs (natural gas, soda ash) have remained relatively stable or increased only modestly, the majority of the price increase flows directly to the gross profit line.
* Sensitivity Analysis: Assuming a baseline daily sales volume of ~16,000 tons (post-cut), a CNY 2/sqm price increase translates to significant incremental daily revenue. With gross margins expanding from the depressed 14% level in 1H25, we anticipate a robust recovery in 2H25 EBITDA margins.
* Sustainability: We view this price trend not as a temporary spike but as a structural correction. The "anti-involution" framework provides the political cover necessary for manufacturers to maintain higher prices without fear of losing market share through aggressive undercutting. The industry is moving towards an oligopolistic equilibrium where pricing power is restored.

4. Revised Financial Forecasts: Reflecting the New Reality

In light of the 1H25 results and the evolving supply-price dynamics, we have materially adjusted our earnings estimates for 2025-2027. The previous forecasts assumed a quicker recovery and higher sustained pricing power than what was realized in the first half of the year. The new forecasts incorporate the deeper-than-expected 1H25 slump but also factor in the accelerating recovery in 2H25 and beyond.

Key Adjustments:
* 2025 EPS: Downgraded from CNY 0.80 to CNY 0.29. This significant downward revision (-64.3%) reflects the poor performance in 1H25, which cannot be fully offset by 2H25 gains within the same fiscal year.
* 2026 EPS: Downgraded from CNY 1.00 to CNY 0.50. This adjustment (-50.3%) accounts for a more gradual normalization of margins and the potential lag in demand recovery from downstream solar installations.
* 2027 EPS: Established at CNY 0.63. This introduces a longer-term view where the benefits of industry consolidation and steady demand growth compound.

Table 2: Earnings Forecast Revision (2025-2027E)

Source: Company Reports, BOC International Securities Estimates

Interpretation of Valuation Multiples:
At the current price of CNY 18.28, the stock trades at:
* 63.8x 2025E P/E: This appears elevated but is misleading due to the depressed denominator (earnings) in 2025. It reflects the "trough earnings" phenomenon.
* 36.7x 2026E P/E: This is a more representative multiple for the recovery phase. As earnings double from 2025 to 2026 (CNY 0.29 to CNY 0.50), the forward P/E compresses rapidly.
* 29.2x 2027E P/E: This approaches a more standard valuation for a mature, growing industrial leader, assuming stable margins and moderate growth.

We believe the market is currently focused on the 2025 trough, creating an opportunity for investors to look through to the 2026-2027 recovery. The EV/EBITDA multiples (17.7x for 2025E, declining to 12.3x for 2027E) provide a clearer picture of operational cash flow generation, excluding the noise of depreciation and tax effects from the loss-making periods.

Balance Sheet and Cash Flow Considerations:
* Leverage: The debt-to-asset ratio is projected to rise slightly to 0.6 in 2025-2027, up from 0.5 in 2023-2024. This reflects the need for working capital financing during the low-margin period and ongoing capex for technological upgrades. However, the net debt-to-equity ratio remains manageable at 0.7.
* Cash Flow: Operating cash flow is expected to be negative in 2025E (-CNY 462 million) due to working capital outflows and lower profitability. However, it is projected to rebound strongly to CNY 6.64 billion in 2026E as margins recover and inventory cycles normalize. This V-shaped cash flow recovery supports our confidence in the Company’s financial resilience.
* Capex: Capital expenditure remains high at CNY 5.0 billion in 2025E, indicating continued investment in next-generation thin glass and large-format production lines. This reinforces Flat Glass’ technological moat even during the downturn.

Risks / Headwinds

While the outlook is improving, several risks could impede the projected recovery. Investors should monitor the following factors closely:

1. Industry Capacity Release Exceeding Expectations

• Risk Description: The core thesis relies on the success of the 30% industry-wide production cut. If major players violate this agreement to regain market share, or if new capacity from previously announced projects comes online faster than anticipated, the supply glut will persist.
• Impact: This would suppress glass prices, preventing the margin expansion we have modeled. It could lead to a prolonged period of sub-par profitability, extending the "L-shaped" recovery rather than the anticipated "V-shaped" one.
• Mitigation: Regulatory oversight under the "anti-involution" policy is a key mitigant. However, enforcement consistency across all regions and private/public entities remains a variable.

2. Slower-than-Expected Penetration of Double-Glass Modules

• Risk Description: Flat Glass benefits from the trend towards bifacial (double-glass) modules, which use more glass per watt. If the adoption rate of bifacial modules slows due to cost concerns or technical issues in specific markets, the total addressable market for PV glass could grow more slowly than projected.
• Impact: Lower volume growth would require even higher prices to achieve revenue targets, increasing pricing pressure.
• Context: While the global trend favors bifacial modules, regional variations (e.g., rooftop vs. utility-scale) can affect overall demand elasticity.

3. Intensified Product Price Competition

• Risk Description: Despite the "anti-involution" call, downstream module manufacturers are also under margin pressure. They may resist glass price hikes, leading to stalemates or delayed order placements. Additionally, competition from alternative encapsulation materials or technologies (though currently limited) could emerge.
• Impact: Delayed transmission of price hikes to customers would compress 2H25 margins.
• Observation: Recent reports of September price increases being accepted are positive, but sustained acceptance needs verification in quarterly contracts.

4. Downstream Demand Below Expectations

• Risk Description: The ultimate driver of PV glass demand is the installation of solar modules. If global solar installation growth slows due to macroeconomic headwinds, trade barriers (tariffs), or grid connection bottlenecks, demand for glass will falter.
• Impact: Overcapacity would re-emerge even with production cuts, as the denominator (demand) shrinks.
• Key Markets: Watch for policy changes in the US, Europe, and India, which are major importers of Chinese PV components. Trade restrictions could divert supply back to the domestic market, exacerbating local oversupply.

5. Volatility in Raw Material and Fuel Prices

• Risk Description: PV glass manufacturing is energy-intensive (natural gas) and material-intensive (soda ash, quartz sand). Significant spikes in natural gas or soda ash prices would erode gross margins, especially if glass prices cannot be adjusted upwards simultaneously.
• Impact: A 10% increase in energy costs could reduce net margins by 1-2 ppts, depending on hedging and pass-through capabilities.
• Current Status: Energy prices have been relatively stable, but geopolitical tensions remain a wildcard.

6. Photovoltaic Policy Risks

• Risk Description: Changes in domestic or international subsidies, carbon credit mechanisms, or renewable energy mandates can abruptly alter demand curves.
• Impact: Policy uncertainty can lead to stop-go investment patterns in the downstream sector, causing volatility in glass orders.

Rating / Sector Outlook

Sector Outlook: Stronger than Big Market (Overweight)

We maintain a "Stronger than Big Market" rating for the PV Equipment sector, specifically the PV Materials sub-sector. The rationale is based on the following structural shifts:

1. Policy-Driven Consolidation: The Chinese government’s explicit stance against "involution" marks a turning point in industrial policy. Unlike previous cycles where capacity was cleared purely through bankruptcy, this cycle involves coordinated supply management. This reduces the duration and depth of the downturn.
2. Demand Resilience: Global energy transition goals remain intact. Long-term demand for solar energy continues to grow at a double-digit CAGR. The current oversupply is a temporary mismatch, not a structural decline in demand.
3. Technological Moats: Leaders like Flat Glass are investing in thinner, stronger, and larger-format glass products that offer value-added benefits to module makers. This differentiation protects them from commoditization.

Company Rating: OVERWEIGHT (Maintained)

We maintain our OVERWEIGHT rating on Flat Glass Group (601865.SH).

Justification:
* Valuation Appeal: While the 2025E P/E of 63.8x appears high, it is a function of transiently depressed earnings. The 2026E P/E of 36.7x and 2027E P/E of 29.2x are reasonable for a market leader with a clear path to margin recovery. The stock has underperformed the broader market YTD (-5.8% absolute, -21.2% relative to Shanghai Composite), creating a favorable entry point for long-term investors.
* First-Mover Advantage in Recovery: Flat Glass’ proactive capacity cuts and strong balance sheet allow it to weather the downturn better than peers. As prices rise, its operating leverage will drive faster earnings growth than smaller competitors.
* Dividend Yield: Although currently low (0.5% in 2025E), the dividend is expected to recover to 1.0% by 2027E, providing some income support.

Price Performance Context:
* YTD (2025): -5.8% (Absolute), -21.2% (Relative to Shanghai Composite)
* 1 Month: +11.6% (Absolute), +6.5% (Relative)
* 3 Months: +25.5% (Absolute), +14.0% (Relative)
* 12 Months: +3.4% (Absolute), -31.9% (Relative)

The recent outperformance in the 1-month and 3-month windows suggests that smart money is beginning to position for the recovery, anticipating the 2H25 earnings inflection.

Investment View

Core Investment Logic: Buying the Inflection Point

The investment case for Flat Glass Group rests on three pillars: Supply Discipline, Pricing Power Restoration, and Operational Leverage.

1. The "Anti-Involution" Put Option:
   The Chinese government’s intervention in the PV sector provides a implicit "put option" on profitability. By mandating and monitoring production cuts, the state is ensuring that companies do not engage in race-to-the-bottom pricing. This policy support de-risks the downside for equity investors. Flat Glass, as a state-aligned industry leader, is best positioned to benefit from this regulated equilibrium.

2. Asymmetric Upside from Price Normalization:
   The move from CNY 10/sqm (below cost) to CNY 14+/sqm (profitable) is a game-changer.

   • Scenario Analysis: If the average selling price in 2H25 averages CNY 13/sqm (conservative) versus CNY 10.5/sqm in 1H25, the revenue uplift is significant. More importantly, since fixed costs (depreciation, labor) remain constant, the incremental revenue drops almost entirely to the pre-tax profit line. This explains the 46% QoQ profit jump in 2Q25 despite only modest price increases. Further price hikes in 3Q and 4Q will amplify this effect.

3. Market Share Gains Through Attrition:
   While Flat Glass cuts capacity voluntarily, smaller players are being forced out involuntarily due to cash flow constraints. When the cycle turns up, Flat Glass will have a larger effective market share and a cleaner competitive landscape. Its investments in R&D (CNY 622 million in 2025E) ensure it remains at the forefront of product innovation (e.g., ultra-thin glass for lightweight modules), commanding premium pricing.

Strategic Recommendations for Institutional Investors

• Accumulate on Weakness: Given the volatility inherent in cyclical turnarounds, investors should use any pullbacks in the stock price to build positions. The current price of CNY 18.28 reflects a mix of skepticism about 2025 earnings and optimism about 2026.
• Monitor Monthly Price Data: Key indicators to watch include the monthly quoted prices for 2.0mm and 3.2mm PV glass from SMM and other indices. Sustained prices above CNY 13/sqm are critical for validating our 2026 earnings estimates.
• Track Capacity Utilization: Watch for announcements regarding furnace restarts. If Flat Glass or peers restart furnaces too aggressively, it could signal a breakdown in discipline. Conversely, extended maintenance periods are bullish for prices.
• Long-Term Hold: For investors with a 2-3 year horizon, Flat Glass offers a compelling risk-reward profile. The combination of policy support, industry leadership, and global solar growth trends creates a robust foundation for long-term value creation.

Comparative Valuation Perspective

Compared to its main competitor, Xinyi Solar, Flat Glass often trades at a slight premium due to its pure-play focus on PV glass (vs. Xinyi’s diversified automotive glass business) and its aggressive expansion in large-scale production bases. However, in times of industry stress, Flat Glass’ cost control and efficiency have proven superior. The current P/B ratio of 1.9x (2025E) is in line with historical averages for the sector during recovery phases, suggesting the stock is fairly valued relative to its book value, with upside driven by earnings multiple expansion as ROE improves from 3.0% (2025E) to 6.1% (2027E).

Table 3: Key Financial Ratios & Valuation Metrics

Source: BOC International Securities Estimates

The table illustrates the classic cyclical investment pattern: Buy when P/E is high (earnings are low) and P/B is stable, and sell when P/E is low (earnings are peak). We are currently in the "high P/E" phase, which historically precedes significant stock price appreciation as earnings catch up.

Conclusion

Flat Glass Group is navigating a challenging but transformative period. The 1H25 results, while weak, confirm the bottom of the cycle. The subsequent industry-wide production cuts and price rebounds provide a clear pathway to profitability restoration in 2H25 and 2026. The "anti-involution" policy acts as a catalyst for this structural improvement, reducing competitive intensity and enhancing pricing power for industry leaders.

We believe the market’s current valuation does not fully reflect the sustainability of the price recovery and the long-term competitive advantages Flat Glass holds. With a robust balance sheet, leading technology, and strategic alignment with national industrial policy, Flat Glass is well-positioned to emerge stronger from this downturn. We maintain our OVERWEIGHT rating and advise institutional investors to accumulate shares with a view towards the 2026-2027 earnings recovery.

Appendix: Detailed Financial Analysis

Income Statement Deep Dive

The income statement for 1H25 reveals the mechanics of the profit decline. While revenue dropped 27.66%, costs only dropped 18.43%. This mismatch is typical in the early stages of a price war, where fixed costs (depreciation, labor) cannot be reduced as quickly as prices fall.

• Operating Expenses: Management expenses remained relatively flat (CNY 144.77 million in 1H25 vs. CNY 146.58 million in 1H24), demonstrating good cost control. Sales expenses decreased by 14.97%, reflecting lower marketing needs in a seller’s market transition.
• Asset Impairment: A significant item is the asset impairment loss, which surged to CNY 253.92 million in 1H25 from CNY 93.04 million in 1H24. This likely reflects write-downs of inventory or older production lines that are no longer economically viable in the low-price environment. This "big bath" accounting practice clears the decks for future periods, potentially boosting future reported earnings.
• Financial Expenses: Increased by 9.84% to CNY 205.61 million, driven by higher interest costs on debt used to fund working capital and capex. This is a temporary headwind that will ease as cash flow improves.

Balance Sheet Strength

Despite the earnings hit, the balance sheet remains solid.
* Liquidity: Cash and equivalents stand at CNY 7.32 billion (projected for 2025 year-end), providing ample buffer for operations and debt servicing.
* Inventory: Inventory levels are managed carefully, projected at CNY 2.6 billion for 2025. The turnover rate remains healthy, indicating that the Company is not stuck with unsellable stock.
* Receivables: Accounts receivable are projected to decrease to CNY 2.49 billion in 2025, suggesting improved collection efficiency or conservative revenue recognition.

Cash Flow Dynamics

The negative operating cash flow in 2025E (-CNY 462 million) is a concern but is contextually understandable. It results from:
1. Lower net income.
2. Increase in working capital requirements (prepaying suppliers, managing receivables).
3. High capital expenditure (CNY 5.0 billion).

However, the projected swing to positive CNY 6.64 billion in 2026E is a strong vote of confidence. It implies that the operational turnaround will be cash-generative, allowing the Company to deleverage and potentially increase dividends in the future.

Sensitivity Analysis: Impact of Price on EPS

To illustrate the leverage in the model, consider the following sensitivity of 2026E EPS to average selling price (ASP) assumptions:

Note: This simplified analysis assumes constant volume and cost structure.

This table highlights that even small deviations in pricing have outsized impacts on earnings. The current trend towards CNY 14.0+ suggests we may be moving towards the Bull Case scenario for 2026, further supporting our Overweight rating.

Final Disclaimer & Disclosure

This report is prepared by BOC International Securities for institutional clients. It reflects the views of the analysts as of September 8, 2025. The ratings and price targets are subject to change based on future developments. Investors should conduct their own due diligence and consult with their financial advisors before making investment decisions.

Analyst Certification: The analysts, Jiaxiong Wu and Zhen Gu, certify that they have no direct or indirect interest in the securities mentioned in this report and that no part of their compensation was directly related to the specific recommendations or views expressed herein.

Risk Warning: Past performance is not indicative of future results. The securities market involves risks, and investors should be aware that the value of investments can go down as well as up.