We recently visited glass production and deep-processing companies in Shahe, Hebei. Shahe is the most concentrated glass production capacity and production capacity in China. At present, the production capacity of float glass accounts for 14.4% of the country. The change in the prosperity of Shahe Glass can provide a very important reference for judging industry trends.

In our research, we learned that the price of glass in Shahe River has been rapidly declining since September-December 2011, and there has been no sign of recovery. The ex-factory prices of most enterprises are still low in December last year. Individual dealers had lower stocks under more pessimistic expectations, but the total social inventories (including production companies and dealers) in the region totaled about 9.6 million heavy boxes, which is at a historically high level. The recovery of demand after the Spring Festival was significantly weaker than in the same period of previous years. Dealers and deep-processing companies were more cautious about future price expectations and were less willing to purchase, and there was still downward pressure on prices.

The high boom in the glass market from the second half of 2009 to 2010 has generated a large amount of new production capacity. In terms of the Shahe district alone, the new production capacity from 2010 to 2011 accounts for about 50% of the current actual operating capacity. According to our statistics, Shahe has a total of 9 float glass manufacturing enterprises. The current annual production capacity is approximately 106 million heavy boxes. In addition, the total capacity of ready-to-ignite production lines has reached approximately 29.26 million heavy boxes. If all of them are ignited, the capacity increase in the region will be about 28%. The pressure on new production capacity is very significant.

In the short term, we believe that glass prices will continue to be under downward pressure due to the weak recovery of end-user demand following the holiday high inventory. However, when the price falls below the variable cost, it is expected to trigger a large number of production lines for shutting down cold production, and the supply and demand structure will improve. Therefore, the variable cost can be considered as the bottom of the price. However, the country has built more ready-to-ignite production lines (about 16 or so), which will suppress the sharp rise in prices. Therefore, we believe that the glass price will fall within the range of about RMB 10/weight box between the variable cost and the full cost in the first half of this year.

It is still unclear when the trend of the industry's profitability has improved, and the valuation is not yet low enough. We think the current glass industry does not yet have a trend of investment opportunities and maintains a “neutral” rating.

However, given that the fundamentals of the industry are already at the bottom of the economy, recovery is only a matter of time. We believe that medium and long-term investors can start buying.

Risk Warning: A drastic adjustment of real estate control policies may lead to discrepancies between our judgments and facts.