Performance hitting "bottom," expectations warming up, is XINYI SOLAR (00968) on the eve of a breakthrough in the photovoltaic industry?

Recently, XINYI SOLAR (00968) released its interim performance report for the six months ended June 30. The latest financial report shows that the company achieved revenue of HKD 8.43 billion during the reporting period, a year-on-year decline of 22.9%; profit attributable to equity holders was only HKD 39 million, a decrease of 94.8% compared to HKD 750 million in the same period last year. This profit level is nearly the lowest recorded for the company since its listing. As a leading enterprise in the industry, XINYI SOLAR's performance is not entirely unexpected; it reflects the overall cyclical adjustment within the photovoltaic industry. Since the second half of 2024, prices across various segments of the photovoltaic industry chain have continued to decline, significantly compressing industry profit margins. Even leading enterprises with scale advantages and cost control capabilities find it difficult to remain unscathed in an environment of industry-wide oversupply. However, with the implementation of regulatory measures aimed at "anti-involution," the introduction of mandatory national standards for the industry, and a marginal warming of attitudes toward the photovoltaic sector from certain major international banks, the industry is at a crucial crossroads, transitioning from "scale expansion" to "value reconstruction." As the supply side clears, can industry leaders like XINYI SOLAR take the lead in navigating through the cycle and welcome a breakthrough? The Industry Growing Pains Behind Performance Pressure XINYI SOLAR's "bleak" interim performance directly reflects the severe imbalance between supply and demand in the photovoltaic glass segment. During the reporting period, the gross profit margin of the CECEP Solar Energy glass fell significantly by 8.1 percentage points year-on-year to 3.3%, with profitability nearing the breakeven point. Behind this data is a double blow of declining volume and prices. Notably, the company's photovoltaic glass shipments in the first half of the year decreased by 5.8% year-on-year, while the decline in average selling prices was even more pronounced; since the beginning of the year, CECEP Solar Energy glass prices in China have dropped by about 27%, to RMB 8.8 per square meter. The weakness of demand is the primary cause. Domestically, the newly installed capacity in the first half of the year has significantly decreased year-on-year, and weak demand for modules has directly impacted the upstream glass segment. Internationally, in important markets like India, policy mandates requiring the use of locally produced CECEP Solar Energy batteries have led to bottlenecks in the supply chain, causing a decline in module operating rates and subsequently suppressing demand for photovoltaic glass. While demand falters, industry inventories have continued to rise. Manufacturers' inventory days once surged to a high of 57 days, and the enormous inventory pressure forced companies to cut prices further escalated the price war. Costs have also failed to provide a buffer. Although natural gas prices have retreated, they remain high overall, eating into already thin profit margins. In the context of selling prices falling below many manufacturers' cash costs, even leading enterprises like XINYI SOLAR face severe challenges to their profitability. This earnings report clearly reveals the pain that all industry participants must endure during the sector's downturn. Hope Amid Supply-Side Reform Despite short-term performance pressure, a series of positive signals have emerged at the industry level, indicating that supply-side reforms are accelerating, bringing hope for the sector to emerge from its low point. The most core change comes from the policy side. On July 31, the State Administration for Market Regulation, in conjunction with multiple departments, held a compliance guidance meeting on photovoltaic industry prices, clearly signaling the rectification of "involution-style" competition and guiding companies to transition from "price competition" to "quality competition." Regulatory authorities will comprehensively use mechanisms such as reminders, urging, and compliance discussions to regulate price competition and legally address behaviors that disrupt market order. This series of "countermeasures" has effectively pressed the brakes on disorderly competition within the industry. More substantively, the specific details of three mandatory national standards for the photovoltaic industry have been made public. These standards set rigid access thresholds for the four major segments of silicon materials, wafers, batteries, and modules, especially the restrictions on silicon material energy consumption exceeding market expectations. This means a large amount of outdated, high-energy-consuming low-quality capacity will be forcibly eliminated by 2027, fundamentally alleviating the supply-side pressure. The market's self-adjustment mechanism has also been activated. Since July, widespread supply reductions have occurred within the industry, primarily driven by marginal manufacturers facing liquidity pressures. The management of XINYI SOLAR has also indicated that the company is actively cooperating with industry adjustments by controlling production through measures like cold repairs. With the exit of some smaller manufacturers and leading enterprises' proactive production control, industry inventories have begun to show a downward trend. Data from Zhuochuang shows that inventory days dropped to 45 days by the end of July. Goldman Sachs expects that manufacturers inventories will shrink from 51 days in July to 35 days in September. The marginal improvement in the supply-demand relationship has already been reflected in prices, with the price of 2.0 mm glass rising from RMB 8 per square meter to RMB 8.5, with expectations for further increases in August. These signs collectively depict a picture of the industry bottoming out. Challenges and Opportunities in the Industry Winter In the industry's winter, the resilience and challenges of leading enterprises coexist. XINYI SOLAR's performance affirms this reality. On one hand, while its weak performance is profound, it still surpasses that of some peers. This is attributed to XINYI SOLAR's relatively high proportion of overseas capacity and the buffer provided by CECEP Solar Energy's power plant business. Although the gross profit margin of the power plant business has also declined due to falling electricity prices and other factors, it still contributed over 50% of the gross profit, becoming an important stabilizer for profits. Moreover, the company's net debt ratio stands at 18.6%, and despite a sharp decline in profitability, the balance sheet remains healthy, providing a solid financial foundation for navigating the cycle. Looking ahead, XINYI SOLAR's path to breakthrough will rely on efforts from both internal and external factors. Internally, the company will continue to consolidate and enhance its market share based on its scale and cost advantages during the industry's reshuffling. Management anticipates that after the exit of some small manufacturers, the company's market share may see a slight increase. At the same time, the company continues to optimize its capacity layout, with the second production line of 1,200 tons per day in Indonesias first phase expected to start operations in the second half of the year, potentially increasing the overseas capacity share to 25%. Prices and profitability for glass in overseas markets generally exceed those in the domestic market, which will help improve the overall gross margin level of the company. The improvement in the industry environment is seen as key to restoring the companys performance. With domestic supply reductions driving price recoveries and the extension of the ALMM exemption in India until the end of 2026 spurring overseas demand recovery, the company's shipment volumes and profitability in the second half of the year are expected to improve. Several investment banks hold a cautiously optimistic view on this. Goldman Sachs projects that improvements in supply and demand will support a potential 22% increase in glass prices from the second half of 2026 to the first half of 2027, and raised XINYI SOLAR's target price to HKD 3, maintaining a "buy" rating. Although CICC has lowered its profit forecast, it also believes that the company, as a leading enterprise, is likely to restore profitability first, giving a target price of HKD 3, indicating a 36% upside potential from current stock prices. In summary, XINYI SOLAR's interim performance is a concentrated reflection of the deep adjustments in the photovoltaic industry. While short-term growing pains are inevitable, the ongoing advancement of supply-side reforms and the strengthening of industry self-discipline are leading to a turning point in the supply-demand pattern of the photovoltaic glass segment. As a leading enterprise, XINYI SOLAR is expected to consolidate its advantages at this cycles bottom thanks to its financial resilience and strategic layout while showcasing greater profitability flexibility during the industry's recovery. However, the ultimate restoration of demand remains to be observed, and the path to a full industry rebound may still be bumpy.