Supply contraction drives solar glass to bottom, with risk-reward turning upward at low valuations

Overview

The report believes the solar glass industry in Greater China is in the “darkness before dawn.” Weak demand, elevated supply, and inventory pressure in the first half of 2026 caused prices to fall below cash costs at one point, but persistent losses have already driven concentrated maintenance among second- and third-tier manufacturers and kiln shutdowns by smaller producers. As effective supply declines significantly, inventories fall, and PV installations improve seasonally in the second half, industry supply and demand are moving toward balance, and prices and profitability are expected to recover from the second-quarter 2026 low.

Core views

First, supply clearance is materializing: second- and third-tier manufacturers have shut down about 13.5kt/d year-to-date, while kiln shutdowns by smaller producers have affected about 6kt/d, reducing effective operating capacity to about 70.0kt/d, with another about 8.4kt/d of capacity potentially entering maintenance recently. Second, demand is expected to improve sequentially: China’s PV installations fell 66% YoY to 72GW in the first half of 2026, but policy has eased reverse-load restrictions on distribution transformers and shortened project approval times, with installations expected to recover to about 120GW in the second half. Third, existing effective capacity can only support about 37–38GW of module production per month, while August production scheduling is up to about 41.6GW, inventories have declined to 45 days, and conditions are in place for a price rebound. Fourth, valuations are at historical lows and industry risk-reward is tilted upward; at the stock level, Xinyi Solar is preferred due to overseas expansion, overseas selling-price premiums, and stronger cost and execution capabilities.

Analysis framework

The report evaluates the industry supply-demand balance based on capacity maintenance, effective operating capacity, module production scheduling, inventory days, and PV installation forecasts, and forms price targets and stock rankings by combining historical P/B, earnings forecast revisions, residual income models, bull-base-bear scenarios, and sensitivity analysis of key variables.

Methodology notes

• Industry supply-demand analysisEffective capacity–module production scheduling balance framework

  Compares practically available solar glass capacity with monthly module production plans to assess industry tightness.

  Existing effective capacity is about 70.0kt/d, which can support about 37–38GW of monthly module production; August production scheduling is up to about 41.6GW, indicating the market is already close to balance. If subsequent maintenance continues and demand recovers, supply may become temporarily tight.

• Valuation methodologyResidual income model

  Estimates intrinsic value based on book value and residual income exceeding the cost of equity.

  The Xinyi Solar model uses a 10.2% cost of equity, 1.09 beta, 2.6% risk-free rate, 7% equity risk premium, and 2% annual revenue growth after the explicit forecast period; the Flat Glass model uses a 9.7% cost of equity, 1.01 beta, 8.0% long-term ROE, and 2% long-term revenue growth.

• Scenario analysisBull-base-bear risk-reward framework

  Sets different operating scenarios around demand, output, selling prices, gross margins, and valuation multiples.

  Scenario analysis is used to assess the impact of changes in installation demand, supply discipline, cost efficiency, and expansion progress on earnings and price targets.

• Sensitivity analysisVolume-price-cost sensitivity

  Measures the marginal impact of changes in sales volume, selling prices, and costs on earnings.

  In Xinyi Solar’s 2026 forecast, a 1% increase in selling prices corresponds to about an 18% increase in EPS, a 1% increase in costs corresponds to about a 16% decrease in EPS, and a 1% increase in sales volume corresponds to about a 1% increase in EPS, indicating that earnings are most sensitive to selling prices and costs.

• Relative valuationHistorical P/B range comparison

  Compares the current forward price-to-book ratio with the company’s long-term historical average to determine valuation position.

  Xinyi Solar and Flat Glass H-shares both trade at about 0.6x one-year forward P/B, below their historical averages of about 2.4x and 3.8x, respectively, supporting the view that risk-reward is skewed upward.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Xinyi Solar Holdings Ltd (0968.HK)

  Preferred solar glass leader, maintained at Overweight, target price HK$3.20.

  Strengths

  Cost advantage and strong expansion execution capability, with overseas products enjoying a price premium; the first 1200t/d production line in Indonesia has commenced operation, and the second 1200t/d production line is planned to start production before end-2026.

  Weaknesses

  Domestic selling-price declines and production-line maintenance are suppressing 2026 sales volume and earnings, leading to a substantial cut in the 2026 EPS forecast.

  Comparison

  Compared with Flat Glass, it benefits more from overseas demand, overseas selling-price premiums, and overseas sales-volume growth, making it the report’s preferred pick.

  Risks

  Domestic installations below expectations, idled capacity resuming production after glass price recovery, delays in overseas expansion, and cost synergies below expectations.

• Flat Glass Group Co Ltd (6865.HK)

  Hong Kong-listed stock benefiting from industry bottoming, target price HK$9.60.

  Strengths

  Relatively more competitive production costs versus peers; domestic and overseas expansion helps increase long-term market share, and current H-share valuation is at a historical low.

  Weaknesses

  Expected to post a loss in 2026, with both solar glass and float glass businesses affected by weak prices; 1800t/d of capacity has already entered maintenance year-to-date.

  Comparison

  Valuation is cheap, but overseas premiums and earnings defensiveness are weaker than Xinyi Solar, so it ranks relatively lower in the report.

  Risks

  Insufficient PV installations, cost reductions falling short of expectations, expansion delays, and supply resumption suppressing selling prices.

• Flat Glass Group Co Ltd (601865.SS)

  Flat Glass A-share stock, target price Rmb13.60.

  Strengths

  Shares the company’s cost competitiveness, scale advantages, and earnings elasticity from industry supply-demand recovery.

  Weaknesses

  About 1.1x one-year forward P/B, higher than the H-share’s about 0.6x, reflecting a clear A-H premium.

  Comparison

  The price target is derived from the H-share target using a HKD/CNY exchange rate of 1.14 and a 63% A-H premium.

  Risks

  Narrowing A-H premium, industry price declines, installation demand below expectations, and expansion delays.

• China solar glass industry

  Industry view is Attractive, with fundamentals shifting from oversupply toward relative balance.

  Strengths

  Losses are driving supply exits, inventories are declining, and policy plus seasonality are expected to support demand in the second half.

  Weaknesses

  Installations declined sharply in the first half, the industry remains loss-making, and profitability is highly sensitive to selling prices and energy costs.

  Comparison

  Compared with the oversupply state in the first half of 2026, current effective capacity has declined significantly and the supply-demand gap has narrowed.

  Risks

  A weaker-than-expected demand recovery and capacity restarts triggered by a price rebound could push the industry back into oversupply.

Key data

• Effective operating capacity year-to-dateDown from about 88.2kt/d to about 70.0kt/dIncludes about 13.5kt/d of maintenance shutdowns and about 6kt/d impact from kiln shutdowns.
• Potential additional maintenanceAbout 8.4kt/dIf fully implemented, the market may experience temporary supply tightness when demand recovers.
• Module production scheduling in August 2026Up to about 41.6GWAbove the roughly 37–38GW monthly module output that existing solar glass capacity can support.
• Industry inventory45 daysPreviously close to two months at one point, inventory pressure has clearly eased.
• China PV installations in 1H 202672GW, down 66% YoYThe decline was jointly caused by weak demand and a high base in the first half of 2025.
• China PV installation forecast for 2H 2026About 120GWSeasonality and improved distributed PV grid-connection policies provide support.
• Low point of solar glass spot pricesRmb8–8.5/square meterBy late May 2026, prices corresponded to widespread industry losses at the cash-cost level.
• Companies’ August price increase targetRmb9–9.5/square meterSupply contraction, inventory decline, and demand improvement are expected to support further recovery in the third quarter.
• Xinyi Solar valuationAbout 0.6x one-year forward P/B, 11x one-year forward P/EP/B is at a historical low, with the long-term historical average at about 2.4x.
• Xinyi Solar earnings forecast revision2026–2028 EPS cut by 74%, 22%, and 6%, respectivelyReflects the rapid decline in glass selling prices in 2026 and maintenance on one 1000t/d production line in Anhui.
• Flat Glass earnings forecast2026 EPS of Rmb-0.24EPS is expected to recover to Rmb0.21 and Rmb0.49 in 2027 and 2028, respectively.
• Flat Glass forward P/BH-shares about 0.6x, A-shares about 1.1xH-share valuation is significantly below its historical average of about 3.8x since 2019.

Impact & implications

If supply discipline continues, solar glass prices may rebound in the third quarter of 2026 and drive producers’ profitability to gradually recover from the second-quarter trough. Industry leaders, supported by cost advantages, financing capabilities, and overseas presence, are better positioned to navigate the downcycle and gain share during the clearance process. Low valuations increase the elasticity of share-price re-rating, but earnings recovery depends on actual shutdowns, continued inventory declines, and the realization of installation demand in the second half. Xinyi Solar has better earnings defensiveness and upside than key peers due to capacity growth in Indonesia and overseas selling-price premiums.

Risks

• New PV installations in China in the second half of 2026 falling below the forecast of about 120GW, weighing on solar glass demand.
• Capacity that has been shut down or whose kilns have been stopped restarting production after prices recover, increasing supply and suppressing prices.
• Execution of industry maintenance plans falling short of expectations, delaying improvement in the supply-demand balance.
• Global economic stagnation, trade frictions, or changes in power policies suppressing investment in PV projects.
• Declines in energy, raw material, and other production costs falling short of expectations, weakening earnings recovery for leaders.
• Delays in overseas or domestic expansion plans, causing sales volume and market share growth to fall below expectations.
• Narrowing Flat Glass A-H premium, creating additional pressure on the valuation of 601865.SS.
• Morgan Stanley has or seeks to establish business relationships with some covered companies; investors should consider this report as only one factor in their decision-making.

What to watch

• Whether about 8.4kt/d of planned maintenance capacity at second- and third-tier manufacturers actually exits.
• The actual completion rate of about 41.6GW of module production scheduled for August 2026 and subsequent monthly production schedules.
• Whether industry inventory can continue to decline from 45 days.
• Whether solar glass prices can rise to Rmb9–9.5/square meter and continue recovering in the third quarter.
• Whether China’s PV installations in the second half of 2026 can reach about 120GW.
• The actual effect of distributed power source hosting-capacity policies and online application systems in promoting project starts.
• Whether Xinyi Solar’s second 1200t/d production line in Indonesia can start production before end-2026.
• The pace at which idled production lines restart after glass prices recover.
• Gross margins, cash flow, and 2027 earnings recovery progress for Xinyi Solar and Flat Glass.