GLASS MANUFACTURING INDUSTRY UPDATE:Increasing attention due to new applications and industry recovery

　　OLED related theme. The global display sector, especially OLED-related names, has been attracting market interest recently, giventhe increasing adoption of OLED displays in smartphones and virtual reality (VR) devices and the recovery of TFT-LCD panel pricing.

　　The regional display-related names, including BOE [000725.CH], Huadong Technology [000727.CH], Shenzhen Tianma[000050.CH], Samsung Electronics [005930.KS], Truly [0732.HK], AUO [2409.TT] and CMI [3481.TT], have performed well recentlydue to increasing interest in the sector. Shares of A-share listed glass manufacturers performed well last week as the market is chasingthe 3D glass theme, in our view, and there was rational buying from OLED display names into glass manufacturers. The increasingpenetration of 3D glass in smartphones is expected to draw investor attention to 3D glass products and the related supply chain.

　　The smartphone industry is upgrading front cover glass from 2D to 2.5D and 3D. The market is also speculating that metal back casingswill be replaced by glass casings going forward.

　　2.5D and 3D glass becoming more popular. 2D cover glass is conventional glass, a glass substrate with flat surfaces on both sidesand all four edges, while 2.5D glass refers to a slight curvature at the edge of the glass display, also known as a contoure d edge.

　　2.5D glass is manufactured in much the same way as 2D glass, but with some additional shaping added when it comes to forming theglass to the right size. 2.5D displays can still benefit from hardening and strengthening manufacturing techniques. 2.5D glass has thesame toughness and scratch resistance as 2D, since the same manufacturing technique is used for both. 3D glass is built upon acurved glass substrate with curved edges. 3D glass displays require that the display’s transistor backplane and circuit light elements,such as the OLEDs or LCD pixels, also conform to the curve. 3D glass displays therefore require more complex flexible electroniccircuits. The production process for 2.5D and 3D glass is more sophisticated than that for 2D glass. During the process of glass substratescribing, CNC machines are required for hole drilling, hole deburring, edging trimming and edge refining. This CNC -intenseproduction of 2.5D and 3D glass is similar to metal casing production, which creates an entry barrier to newcomers.

　　New solution for the industry. The cover glass of a smartphone usually covers 80-90% of the area of the front cover. 2.5D and 3Dcover glass will become an important ingredient for enhancing the industrial design of smartphone brands to make them stand o utfrom their peers. 2.5D cover glass is used in the iPhone 6 and 6S, Oppo R7, and Meizu ME5, while 3D glass is used in high-endsmartphones, such as the Samsung Galaxy Note Edge, S6 Edge, S6 Edge Plus, and Xiaomi Mi Note. Smartphone brands have beenexperimenting with other materials for producing casings, as aluminum unibody casings have used for a long time. Alternative materials,including carbon fibre, glass fibre, liquid metal and ceramics, have been tested for use in back casings. 3D glass could be the oneof the popular materials to be adopted as back casings for premium smartphones. Sony's Experia Z series, Galaxy's S6, S6 Edge andNote5, and Xiaomi's Mi Note use 3D glass back casing. The market is expecting 3D glass back casings + 3D cover glass + AMOLEDdisplays to be the best combination for premium smartphones. Market rumours also suggest that Apple is considering using 3D coverglass + AMOLED for the front casing, a metal frame and 3D back casing in the next generation of iPhones, which are likely to belaunched in 2017 at the latest.

　　Currently, Corning dominates the display cover glass market in the 2D, 2.5D and 3D segment. LENS Technology [300433.CH] is theleading 2.5G and 3D glass solutions provider. LENS has strong client base, which includes Apple, Samsung, Sony and XIaomi. LENSTechnology’s share price has performed well recently, given increasing attention to the 3D glass theme. Triumph Science & Tec hnology[600552.CH] owns one 2.5D glass production line and is actively preparing to upgrade to 3D glass production. Apart from LENSTechnology and Triump Science & Technology, the other A-share names in the industry, including Zhuzhou Kibing [601636.CH], CSG[000012.CH], JinJing [600586.CH] and Luoyang Glass [600876.CH], are playing catch up at present owing to the 3D glass theme. Weshare the view that there are no HK-listed 3D glass names, but increasing interest in the 3D glass theme in the A-share market mayboost sentiment on the HK-listed glass manufacturers, including Xinyi Glass [0868.HK], Luoyang Glass [1108.HK] and China Glass[3300.HK]. Xinyi Glass and Luoyang Glass have electronic glass manufacturing capacity and technology, and sentiment on thesenames will improve if the market continues to chase display-related names.

　　Regarding float glass prices, the average selling price of float glass at the national level reached RMB1,211 per tonne last week, upRMB6 per ton WoW. Inventory at the national level was 33.47m weight cases (or 1.67m tonnes), down 0.4% WoW. Float glass pricesmoved up in northern China and manufacturers in southern China followed. The float glass price movement confirms the view that theoperating performance of the leading float glass manufacturers, including Xinyi Glass, should show substantial YoY improvemen t in2016. We maintain the view that with resilient global aftermarket auto glass demand, the wide adoption of Low-E glass, and capacityrationalization in the float glass industry in China, Xinyi Glass will post solid top- and bottom-line growth in 2016-17E. Also, the markethas regained confidence in renewable names after the release of supportive policy by the Chinese government, which is likely toboost sentiment on Xinyi Solar [0968.HK] We also expect the market to turn more positive on Xinyi Glass, given the continued recoveryof the float glass segment, greater clarity in the outlook for Xinyi Solar, and increasing interest in A-share listed glass names.