Description

Zhuzhou Kibing Group Co., Ltd. (SS: 601636) was listed on the Shanghai stock exchange in 2011. Kibing is a leading glass manufacturer with 26 float lines with 8 production bases in Central and Southern China.

Despite only being listed for a decade, Kibing’s stock price has increased 10 fold. Kibing is at an inflection point, and is poised to improve with additional factories built and converted from float glass—lines such as photovoltaic solar glass, electronic flat panel display glass, and borosilicate glass for medical applications have a higher demand and gross margins. This change also aligns with China’s national policy to curb the traditional float glass industry due to overcapacity.

Kibing has an output of 17,600 tons per day, or roughly 6 to 7 million tons annually. Kibing has a high-performance electronic glass production line with a capacity of 65 tons per day, and a neutral borosilicate glass tube for pharmaceutical of 25 tons per day. While these numbers currently are too small to affect the bottom line— in the long term, these production lines will prove beneficial. 

Of the daily melting capacity of 17,600 tons— ultra-white photovoltaic glass production is 2600-3200 tons per day, and is expanding though conversion of old factories or newly built ones. Once PV glass production is up with satisfactory utilization rates— margins and revenue will increase significantly. In the next three years, Kibing will become the third or fourth photovoltaic glass manufacturer in the industry forming an oligopoly with Flat Glass and Xinyi Glass. In that case, Kibing’s market capitalization may exceed 200 billion.

Reasons to invest:

Here are the reasons why Kibing has a durable competitive advantage—

1.     The conversion of float glass production lines to more lucrative glass sectors. Kibing isn’t going to kill Corning’s Gorilla glass anytime soon, but they’ll slowly and surely gain market share.

2.    Kibing makes the most out of a capital and labor intensive of an industry. Their advantage in procurement of raw materials and fuel, and short down-time for cold maintenance of machinery to process glass is due to economies of scale.

3.    The owner eats his own cooking and incentivizes his team correctly. Management and the sales team’s approach to international expansion is a win-win scenario with 12 full-time Country Managers based in strategic countries in 2020.

4.    The Chinese government has restrictions/barriers to entry by prohibiting the registration of a new glass enterprise— this creates an oligopoly (CSG, Fuyao, Xinyi, Flat Glass).

5.    Contracts, joint ventures, and patents protect future prospects.

6.    Glass is a cyclical industry. Management understands this and invests and acquires heavily in down turns and aren’t over leveraged. Kibing has grown into a large enterprise of high-quality float glass over a decade with two major acquisitions at a very satisfactory price—

1.       In 2005, Kibing acquired the Zhuzhou Glass Factory, which suffered a lot of losses, and transformed it into a thriving factory;

2.   In 2013, when the industry's was in a down cycle, Kibing acquired the bankrupt Zhejiang Glass.

Risks:

Before looking at any investment, it is important to focus on the downside first before looking any further.

1.                   While there’s little catastrophic risk— glass is still cyclical. Over expansion during good times may lead to poor utilization rates of certain factories. New factories built and capital expenditure may be negated due to a sharp downturn. Architectural glass is a big part of glass demand, with the real estate industry occupying more than 75% of the downstream demand. The real estate sector in China may go bust due to over-leveraged developers.

2.                   Kibing does not hedge its raw materials— the price of raw materials may rise sharply, and certain costs may exceed expectations. Rise in Soda Ash prices, and OPEC may enter another cycle of production reduction leading to rising oil prices, which in turn pushes up the price for petroleum coke used by Kibing.

3.                   One thing that really bothers me is the accounts receivable turnover. It’s much higher than its peers, and talking to management, they don’t claim to have special deposits; they say they have a business model where products have a way to quickly respond to market demands and they insist on almost full payment on delivery. This really bothers me… A State Owned Enterprise (SOE) in China such as Southern Grid or a customer such as Longi energy would not accept payment on delivery unless Kibing’s product was far superior, or if they got some special license from the government. I personally think it sounds too good to be true, and if a customer could confirm why they pay full on delivery for Kibing not others, I’d still remain skeptical. Their proportion of revenue or even cash flow to receivables is so different from the rest of Kibing’s competitors. If they indeed have a secret sauce, they were gushing in cash then consider the following—

Convertible bonds were issued on May 2021. By Dec 2021 due to Kibing’s low stock price, the redemption clause was in effect, despite it not being exercised by the board of directors. If Kibing was in such a great position, they would not be pushed to issue such convertible bonds and have such a clause that was to their disadvantage…  Until I know what’s going on, I won’t invest with conviction. 

Introduction to glass and its varieties

When lime is heated with silica sand and sodium carbonate— clear and amorphous glass is formed— glass does not crystallize when cooled and hardened. Because it is a mixture and not a pure compound— glass does not have a distinct melting point; it gradually softens as it is heated, which allows it to be molded and blown into shapes.

Raw materials molten together under high temperatures to make glass requires fuel. Kibing uses petroleum predominantly, whereas natural gas comes second. Machinery used to produce glass requires cold maintenance, where over-heated machinery is shut down for repair usually every 3 to 12 years.

Float glass is a generic product sold to many vendors for different uses. Float glass is a sheet of glass made by floating molten glass on a bed of molten metal; typically tin, due to its low melting point. This method gives the sheet uniform thickness and produces a very flat surface. Most float glass is soda-lime glass, but borosilicate and flat panel display glass are also produced using the same process.

Coated glass combines the float glass process using a coating layer of metal on the surface to improve insulation. Low-Emission glass is a type of coated glass used for building insulation.

Ultra-white usually specifies TCO coated glass—transparent conductive oxide— a thin film used in photovoltaics. Because thin-film solar cells use glass as a carrier, the conductive film on the surface of the glass is coated with a semiconductor film and a back electrode— the glass assumes a dual role of light transmission and conduction.

Market and Competitors

The concentration of float glass production of the top 10 producers reach 55-60%. However, four large international glass companies, Asahi Glass, Ban Glass, Saint-Gobain, and Gadian, control nearly 80% of global glass production except for China.

Within China-- there are 375 float glass production lines (annual production capacity of 1.358 billion heavy boxes), of which 235 are in production (annual production capacity of 897 million heavy boxes).

In terms of Chinese domestic producers, for photovoltaic ultra-white glass—Flat glass and Xinyi are the leaders. For Electric glass, CSG has a first mover advantage, and is a big player domestically— but in terms of international market share, the penetration is still weak. The average utilization rate of Chinese production lines are 61%. In which 48 production lines are under cold repair (maintenance), and 92 production lines are active.

In 2020, Kibing produced 117M boxes of float glass and sold 114M boxes. That’s approximately 117M boxes produced out of 1.35B, which means 8-10% of all glass products in China. This output makes Kibing one of the top 5 oligopolies for international glass producers in China.

In particular, glass manufacturing is still an industry with high energy consumption and is polluting to the environment. In the last 10 years, the Chinese government has continuously introduced policies, such as the "dual-carbon" policy— to curb the production capacity of float glass, and promote borosilicate glass for medical uses, photovoltaic glass for solar cells, and electronic glass for handheld devices.

Chinese national policy prevents new glass companies from forming—existing companies work overtime and build additional plants. The lack of supply naturally drives the price of glass to rise sharply—the glass price index has risen close to 300% in the last two years.

Architectural glass accounts for about 75% of the demand for float glass. When the prosperity is high with real estate is developed in China— new companies appear during the euphoric part of the cycle. Once the glass industry enters the recession cycle, technologically backwards and small-scale companies experience serious losses.

With this outline above, let me elaborate some of the previous points about Kibing below—

1.   Transfer into more lucrative glass sectors

Tinted glass, low-emission glass, photovoltaic glass, electronic glass, and processed glass—all provide better prospects than float glass alone. Colored glass does not fluctuate in price as much as white glass. As of 2021, Kibing’s average sales price is RMB 2150 per ton, or USD 338 per ton. The average sales price should increase as more lucrative sectors of glass production lines ramp up in utilization rate.

Despite building and converting old factories to industries with better prospects, as of 2022, certain factories still don’t contribute to the bottom line yet— electronic glass still only produces 65 tons/day, while borosilicate glass for medical equipment and lab testing flasks— is still only at 25tons/day.

Compared with building a new factory, conversion requires less investment and a shorter cycle.

Colored Glass conversion from Float Glass—

In an environment where glass prices continue to fall, at the end of April 2020, Kibing has already converted 6 of its white glass production lines into colored glass, which is more resilient to decline in prices. Colored glass now has a total capacity of 3800t/d, accounting for 23% of the company's total float production capacity (17,000t/d)

Deep Processing profit is expected to continue improve

Zhuzhou Special Glass, a subsidiary of Kibing, has a large glass deep processing base in the central and southern China with a variety of advanced deep processing equipment, using Italian Bottero cutting machines and German Bystonic for automatic hollow lines.

Many deep processing processes are the mostly semi-finished products (commonly known as "brushing large plates"). The process of coating is usually handed over to other companies to make a finish product, which made Kibing previously lose out on this opportunity for profit.

The deep production line has an annual output of 1.85 million square meters of tempered, hollow and laminated glass. Due to cost plus molded pricing, there’s less profit volatility with deep processing. In addition, some of the original glass can be reused internally, which reduces the pressure on exports.

The low utilization rate 60-70% in 2019 of the 8 hollow lines makes Kibing’s operation barely break-even, with a net profit for deep processing in 2019 of 12 million, which is less than 2% relative to a segment revenue of RMB 669M. By 2022, deep processing has already made great strides.

Ultra White Glass for Solar Photovoltaic/ Panels are under Conversion from Float Glass—

The sector that can make the greatest impact for Kibing in the near term is the ultra-white photovoltaic glass /transparent conductive oxide glass production line. At present, Kibing has 3 glass factories with a production of 2500 tons per day already converted into ultra-white factories for photovoltaic glass. 5 new factories with a capacity of 1200 tons per day are being built for 2022.

Kibing invested heavily to build photovoltaic glass production base in Chen Zhou, Ning Bo and Zhang Zhou. By 2023, total output should be near 20,000 tons a day, with roughly a third of the output from photovoltaic glass at 6500-8000 tons per day (Currently 2600-2800 tons per day, or 15% of all output).

Kibing Photovoltaic and its subsidiaries in Hunan have converted a total of 3 ultra-white photovoltaic glass production lines with a capacity of 2500 tons per day (one kiln and two lines).

On October 29, 2020, Kibing’s newly built five lines with 1,200 ton/day high-permeability substrate material production line with a total investment of RMB 2.98B  (RMB 1.35B for Fujian) in Dongshan County, Zhangzhou, Fujian and Ningbo, Zhejiang to expand the layout of the photovoltaic glass field with highly transparent back sheets. The single-line kiln’s large scale exceeds Xinyi Solar, Flat and other companies and ranks first in the industry. The newly-built kiln can meet the requirements of wide-scale production, with no need for modification.

If the projects go as planned, the daily melting volume of ultra-white rolled glass and ultra-white float glass of Kibing Group will account for 32% and 10% of the total volume. Photovoltaic glass will then become substantial part of Kibing’s business. I doubt this will happen in a year or two, but it will definitely happen within 5 years.

Solar energy has become the fastest growing renewable energy which aligns with China’s “carbon dioxide” emission policies— with an aim to strive achieve carbon neutrality by 2060. The imbalance of supply and demand has caused the price of photovoltaic glass to jump up. Assuming price levels stay consistent for production of 2mm thick glass— Kibing may have a net profit of about 4 yuan/m2— bringing a profit of approximately 1.2 billion in the next few years.

Kibing and China Southern Power Grid Integrated Energy signed a strategic cooperation agreement for application of ultra-white float glass in photovoltaic on rooftop modules to jointly develop and distribute products. In addition, Kibing has cooperated with China's Longi Green Energy Technology to expand their PV sales channels.

Competitors Flat Glass and Xinyi Glass were the first to establish photovoltaic glass production lines in China, and formed the current duopoly market by virtue of their first-mover advantages. The market share of both in the photovoltaic glass industry in 2020 has reached about 60%.

If you look at the table above, Xinyi plans to expand consistently for every quarter, where as CSG and Kibing won’t really enter the scene until 2022-2024. In the next three years, Kibing intends to become the third or fourth photovoltaic glass manufacturer by production volume by converting 3 of its existing production lines and building 5 new production lines. This conversion has allowed Kibing Group to accept many orders from photovoltaic module manufacturers, and the overall product gross profit has significantly increased.

With the huge soda ash purchase volume for the float glass business, Kibing's soda ash used in photovoltaic glass will have a cost advantage due to centralized procurement.

As mentioned later in this article, Kibing has ultra-white quartz sand mines in Chenzhou and Zixing to accommodate two photovoltaic glass production lines which brings their self-sufficiency rate of silica sand to 40%.

Electronic (Alkali aluminum) glass— a great benefit in the long term

At present, Chinese domestic companies only account for only 10% of the global alkali-aluminum high-end mobile phone/ touch screen glass market(domestic mainstream companies Rainbow, CSG, Xuhong, CNBM, Kibing, etc.), while the high-end product market is still monopolized by the international giant Corning. Corning accounts for more than 80% of the high end touch screen market.

Corning’s “Gorilla Glass” is already a sixth-generation product—while domestic Chinese alkali-aluminum glass companies have competitive advantages and breakthrough opportunities, it won’t be in the next few years due to patents.

There also still a certain gap in performance of Chinese domestic glass and products by Asahi glass and Corning—for electronic glass to maintain performance at compressive stress greater than 700 MPa in order to improve its anti-fall and anti-drop properties—Corning has focused mainly on optimizing and increasing the ion exchange depth through chemical strengthening. Compared with GG3, Corning 6^th generation glass has increased the ion exchange depth from 40 mm to 120 mm— improving the drop resistance of high-aluminum cover glass. In addition, the international market price is more than RMB 400/m2, while the Chinese domestic price of the original film of the same product quality is only about RMB 140-150/m2.

The electronic glass business for CSG has grown rapidly, net profit has increased by 20 times in three years, and profitability has been steadily improved. With CSG rapidly mass producing electronic glass in 2015, their scale of electronic glass account for more than 50% of domestic manufacturers. Competitor CSG has already dominated the local market in terms of electronic glass— CSG has successfully produced 0.33 mm high-aluminum ultra-thin electronic glass, and to meet market standards.

Kibing's first phase of 65 tons/day of ultra-thin high-aluminum electronic glass was put into production on April 2020 bringing in a revenue of 408 million yuan, a net profit of 160 million yuan, and a net profit margin of 36%.

Contrast this to competitor CSG, which has a total production capacity of 780t/d from 4 production lines and have been in the business of producing electronic glass since 2010— Kibing still has a long way to go.

Kibing has applied for more than 30 patents so far, and has successfully obtained patents for glass compositions, plate preparation methods for alumina-silicate glass and silicon. The two patents were authorized as preparation methods of aluminum-glass. Most electronic glass developed can only be ultra-thin, but lack characteristics of high transmittance and good toughness. With Kibing’s new patent, even if the glass is bent into the shape of a ring, it will not break.

Borosilicate glass for medical bottles

Kibing’s borosilicate production for pharmaceutical glass has a daily capacity of 25 melting tons and was put into production on January of 2021 in the Shaoxing base of Zhejiang.

China’s State Food and Drug Administration wanted greater consistency for packaging materials used for generic drugs. A policy was promulgated in 2017 requiring about 95% of domestic generic drugs to use borosilicate glass. In 2019, the domestic sales of drawn pipes was about 300,000 tons, but only about 10% were medium borosilicate pipes. If the proportion increases to 50% in the future, there will be nearly 150,000 tons of market.

At present, more than 90% of the domestic neutral borosilicate tubes are provided by overseas Schott, Corning, and NEG.

Only Changzhou Four-Star and Kaisheng Junheng are capable of producing in China, but compared with overseas giants, the gap is still too far off.

The price of borosilicate tubes is about RMB 28,000 per ton. Assuming that the replacement demand for 150,000 tons of borosilicate tubes is calculated based on this price, the market is about RMB 4 billion.

2.   Cheaper procurement of raw material and access to energy

Kibing does not hedge its commodities, yet the key to profitability lies in cost control.

In 2021, the price of float glass continued to rise— as of the end of June, float glass exceeded RMB 2,750 per ton, while the gross profit per ton of coal-fired sheet in Shahe area exceeded RMB 1,300 per ton— hitting historical highs.

Fuel

Rapidly rising petroleum and natural gas prices erode returns.

Kibing substantially relies on petroleum coke and only a smidgen on natural gas.

Based on 2019’s fuel price, the cost of producing glass with Petroleum coke (a final carbon-rich solid material that derives from oil refining and cracking process) is 6 yuan (about 1 usd) lower than with natural gas.

Soda Ash

Upstream soda ash and quartz sand are difficult to control in price. Soda ash makes up 30-36% of Kibing’s raw material costs.

While the price of soda ash futures has fallen sharply recently, the spot price is still high due to the supply of soda ash still being tight with low inventory. As a trend, the futures and spot price of soda ash has been inconsistent. The price fluctuation directly affects Kibing’s cost levels and operating performance.

While Kibing has a huge purchase volume of soda ash to gain a cost advantage, it isn’t enough to offset certain risks. Kibing has considered intervening in soda ash futures to hedge risks, and has considered buying shares or participating in upstream companies, to ensure a competitive advantage in the procurement of raw materials for glass, but still hasn’t.

Silica Sourcing

Kibing sources its silica sand from four major mining bases from Fujian, GuangDong, Hunan, with a new production base set up at the end of 2020 in Malaysia. With the new Malaysian factory up and running, Kibing’s silica sand self-sufficiency reaches up to 80% and saves approximately 2 yuan per ton.

The company will have five major silica sand mining bases in the future, with an annual mining volume of 2.95 million tons. Despite annual mining volume being dispersed in a variety of places, most of the reserves are still from Fujian.

The company has ultra-white quartz sand mines in Chenzhou and Zixing City, Hunan Province. Zixing ultra-white quartz sand is expected to meet the supply of ultra-white quartz sand for two photovoltaic glass production lines with an annual output of 576,000 tons. With this completed, Kibing’s self-sufficiency rate of silica sand will reach 40%, which is similar to competitor Xinyi Solar. The total planned investment of the project is RMB 464M (USD73M).

Another reason why Kibing set up a factory in Zhangzhou, where the silica sand resources are rich, is due to the seaport and ease of exports for cost savings. Hunan also has lots of trains for transportation.

3.   Owner eats his own cooking

Founder Yu Kibing & family owns 1.3B shares out of 2.6B shares, which makes him worth USD 3.5B (RMB22B) and he is listed on Forbes China. Yu Qibing promised to donate part of the Kibing Group stocks to top managers to make sure incentives are aligned in two batches, demonstrating his full confidence in Kibing's future operations.

4.  International Expansion with Kibing Malaysia

Kibing Group China established a new float line in Malaysia in 2015 by signing an MOU with Samsung Corning Precision Materials Group to acquire 128-149 acres of land in Negeri Sembilan, Malaysia which formerly housed Samsung’s old television screen manufacturing plant with an investment of USD 200 million (RM900M).

Kibing wants to retain these 500 staff who have already been well trained by Samsung. Key members of the company are primarily local Malaysians— unlike many Chinese companies who staff their overseas companies from China. Less than 5% of employees were sent from China holding technical support roles. 40% of current workers employed had working experiences from the glass industry. Despite expansion, 80% of the operations have been automated to reduce reliance on manual labor.

Kibing Malaysia produces clear float glass from 3-19mm with a 700-900MT melting capacity furnace each for 2 lines.  It is one of the biggest float glass manufacturer in Malaysia with capacity output of 2,200 ton per day. Kibing built two glass float lines with pyrolytic coating (metallic oxides coatings applied while glass is still in a semi-molten state) capability.

For the second phase of development in Malaysia, management decided on November 2021, an additional RM10 billion was to be invested to build another glass factory in Sabah, Malaysia. The plant will include an ultra-thin glass production line as well as a fourth float line with a capacity of 1,000 tons. A sputtering solar control coating line will be added.

Kibing Malaysia’s waste heat regenerator system helps reduce electricity consumption up to 40% (about 4MW). This technology was transferred from its plant in China. Heat from the furnace are channeled through turbines and converted into electricity, and recycled through the entire operation. A monitor was put in place to control Nitrogen oxide and Sulfur oxide below allowable levels near a high chimney. 

Kibing adopts a more pragmatic way of selling its glass through joint ventures with existing players to grow the market. They learn how each particular market works before adopting a specific selling strategy.

Further Scrutinizing Kibing’s financial performance

While Kibing’s turnover was RMB 9billion in 2019 and 2020— accounts receivable was only 157 million for 2019, 271M for 2020, and 465M for 2021.  

From 2016 to 2019, by assessing the balance sheet— cash on hand was 400 to 800 million, which is mainly used to build factories and pay back money. By 2021, cash on hand was 4.26B.

Kibing is a typical asset-heavy industry, with fixed assets accounting for approximately 60% of total assets. With projects under construction considered— this proportion exceeds 70%.

The second largest asset item is inventory, which accounts for only 7-8%. However, in 2021, cash on hand ballooned to 3.7B. How was this possible? Looking at the balance sheet, payables have increased to 1.2B, while receivables are still around 300-400M. Operating income has increased from RMB 1.5B in 2019 to RMB 4.8B in 2021, while operating cash flow has jumped from 2B in 2019 to 5.4B in 2021. Yet capital expenditures has stayed at 1B.

Take short-term loans as an example. From 2012-2016, they were more than 2 billion yuan. Despite debt being repaid, Kibing wanted to stock up a “strategic reserve of raw materials and fuel", so borrowing has increased again. In recent years, a convertible bond was issued also. EBIT/interest is about 13 to 18 times in 2019 to 2020. However, in 2021, EBIT/Interest was 53. With a higher operating earnings, interest payment is not under pressure. Gross margins have also grown from 30% in 2016 to 50% in 2021.

So will Kibing continue to generate the same cash flow and a return on capital at 20% or more? Is this sustainable over the next decade? I believe so.

What worries me is the receivables on their balance sheet. It seems too small—the skeptic in me believes they can’t be collecting money on delivery to generate fast AR turnover. Too good to be true? This warrants further investigation. 

Catalyst

- Utilization rates go up for specialized lines such as PV (ultrawhite glass)

- More factories are built for Electronic Glass, and Borosilicate Glass

- Wise capital allocation from additional cash through cashflow or raised through bonds (acquisitions or expansion)