Xinyi Glass: how do you achieve high profits and high dividends in a high-input industry with heavy assets?

As we mentioned earlier, individual stocks with high dividends usually have higher return on equity, return on capital and dividend payout rate, from which a stock pool is selected. In this article, let's take a closer look at a company in the stock pool-Xinyi Glass.

First, the company profile

When it comes to the glass industry, everyone is probably most familiar with Cao Dewang's Fuyao Glass Industry Group. However, in the Hong Kong stock market, Xinyi Glass has caught up head-on in recent years, and its market capitalization is now very close to Fuyao Glass Industry Group.

Xinyi Glass was founded in 1988, first focused on automotive glass, in 1998 began to enter the field of architectural glass, in 2006 to establish the first float glass production line, deep processing glass production to achieve self-supply of the original film. In 2007, Xinyi Glass first cut into the photovoltaic glass industry, and in 2013, the group's solar energy-related assets were split into Xinyi Solar and listed separately.

Xinyi Glass has been listed in Hong Kong since 2005, and its net profit has risen about 30 times in 17 years, and its share price has risen about 20 times, an annualized increase of nearly 20%. It is a rare long-term bull stock.

In addition to the steady rise in share prices in the long run, Xinyi Glass is also very generous in dividend payouts, with dividends paid out every year for 16 years, with a cumulative dividend amount of HK $225 and an average dividend payout rate of 47.3%.

Of course, the past performance can only show the glorious history of Xinyi Glass, and whether the future can be steady growth, whether the dividend is stable, this is what investors are most concerned about. Here, we focus on the competitiveness of Xinyi Glass in the industry and the company's profitability, which is also the root cause of persistently high dividends.

II. The source of competitiveness of glass manufacturers

Glass manufacturers are high-input, heavy-asset industries that produce highly standardized products. From the perspective of technical threshold, there are certain barriers in the glass industry, but it is not difficult to break through the barriers, and the glass industry has the characteristics similar to that of the steel industry, that is, once the production line is ignited, try not to let the production line turn off, otherwise restarting the production line will lead to an increase in production costs. Then the key point of the competitiveness of the glass industry is: how to achieve lower production costs and achieve cost advantages.

When the glass industry is in a high business cycle and the cake is getting bigger and bigger, the cost advantage will not have much impact on performance, but when the demand of the industry begins to shrink, such as the reduction in the use of glass in downstream buildings and the malaise of car sales, the production lines put in large quantities in the early stage will continue to be produced, and the industry capacity will always be in a state of overcapacity. at this time, it is easy to have vicious competition, a price war between companies and a diving gross profit margin. It will eventually lead to the collapse of a group of less competitive small businesses. Therefore, the cost advantage will not only be the foundation of the long-term survival of glass manufacturing enterprises, but also the intuitive embodiment of the leading competitiveness of the industry.

Third, the cost advantage of Xinyi Glass

Xinyi glass's products mainly include float glass, automobile glass and building glass, of which float glass revenue reached 17.9 billion in 2021, accounting for about 70% of the total revenue. We mainly discuss the cost advantage of float glass.

The cost advantage mainly comes from the following three points:

(1) capacity scale advantage

(2) the advantage of industrial chain layout.

(3) rational layout of production base.

In terms of production capacity advantage, Xinyi Glass has the largest float glass production capacity in China. By the end of 20 years, Xinyi Glass's total domestic production capacity market share reached 11.6%, much higher than other competitors. At the same time, Xinyi glass furnace accounts for a high proportion, and the average production capacity of the unit production line is also high. the economies of scale under the large furnace bring about the reduction of unit energy consumption and the improvement of production efficiency.

(source: Tianfeng Securities)

In terms of the layout of the industrial chain, Xinyi Glass has realized the layout of the whole industrial chain from raw materials to glass sheets and downstream applications.

The vertical integration layout around the glass industry chain is of great help to enhance the company's competitive advantage.

First, the layout of more links, on the one hand, can earn more profits of the industrial chain, on the other hand, multi-link coordination, the efficiency of each link is expected to achieve comparative advantage.

Second, under the background that the resource property of silica sand is becoming increasingly prominent, the improvement of self-supply rate of silica sand not only helps to ensure the safety of raw material supply, but also ensures the raw material cost advantage of float glass.

Third, architectural glass and automotive glass are the main downstream of float glass, and Xinyi Glass is one of the leaders in these two fields. On the one hand, it is closer to the end customers of glass and has a better understanding of the dynamic changes of customer demand. On the other hand, the expansion of glass deep processing business helps to reduce the company's performance cycle fluctuations and reduce financial management costs.

In terms of production base, due to the obvious regional attribute of glass production and sales (glass transport radius of about 500 km), Xinyi Glass has established production bases in Sichuan, Guangdong, Guangxi, Tianjin, Liaoning, Jiangsu and Anhui after comprehensively considering the origin of raw materials and downstream demand, which partly overlaps with the main producing areas of quartz sand (Beihai of Guangxi, Heyuan of Guangdong, Lianyungang of Jiangsu, etc.) Located in the center of the surrounding economic area, reasonable production base layout is one of the company's core competitive advantages.

Fourth, the profitability of Xinyi Glass

To say ten thousand words, the cost advantage of glass manufacturing enterprises should ultimately be reflected in profit indicators such as gross profit margin.

Xinyi Glass's gross profit margin has been in the forefront of the industry, and in 2019 began to surpass Fuyao Glass Industry Group, ranking first in the industry. Its gross profit margin in 2021 is as high as 51.8%, the cost advantage is very obvious, and it is also very rare in the heavy asset industry where the capital investment is very large.

(source: Tianfeng Securities)

In addition to gross profit margin, Xinyi Glass's other profitability indicators are also very prominent. In terms of net profit margin, Xinyi Glass has made a net profit margin of more than 25% in each of the last five years, and prices have risen by more than 30% in the last two years due to strong demand in the industry.

In terms of return on equity, Lutheran Glass exceeds 20% every year and more than 30% in 2021.

In terms of return on capital, Lutheran Glass has exceeded 10% in each of the past five years and reached 17% in 2021.

Strong competitive advantage and high profitability have also become the strength for Xinyi Glass to pay high dividends for 10 years in a row. Previously, Xinyi Glass's long-term investment shareholders can benefit from both long-term stock price growth and sustained high dividends, which is indeed a steady happiness.

Summary

Generally speaking, Xinyi Glass currently has a strong competitive advantage in the field of float glass, that is, cost advantage, which is based on a very large investment in fixed assets and long-term operation, which is difficult for new entrants to subvert. Therefore, it is expected that the company's high dividend yield may continue in the short to medium term, but investors also need to be aware of the downside risks brought by the cyclical downside of the stock price.