Investment Summary

Revenue in Q2 Hits a Record High, Core Profitability Is Robust

Fuyao Glass (hereinafter referred to as the “Company”) released its 2023 Interim Report. In the first half of 2023, the Company recorded the operating revenue of RMB15,031 million, with a year-on-year increase of 16.49%, higher than the overall growth rate of 10% of the downstream automotive industry. The net profit attributable to the parent company stood at RMB2,836 million, up by 19.07% year-on-year. Less non-recurring profit or loss, the figures will become RMB2,793 million and 20.89%. In the first and second quarters this year, the operating revenue was RMB7,052 million and RMB7,979 million, rising by 7.7% and 25.5% year-on-year, respectively, while the net profit attributable to the parent company amounted to RMB915 million and RMB1,922 million, climbing by 4.97% and 27.21% year-on-year, respectively. The earnings hit a record high in the second quarter mainly because of the increased proportion of high-value-added products, which continued to improve the product structure, and decreased ocean freight.During the Reporting Period, the profit before tax grew by 24.36% from the same period of 2022. Additionally, exchange, decreased ocean freight, increased energy prices, and the increased prices of sodium carbonate affected the profit before tax by RMB90 million, RMB153 million, -RMB114million, and -RMB38 million, respectively. Less such influencing factors, the profit before tax would go up by 25.89% from the same period last year. Core earnings showed a rapid growth.

Fuyao Glass` gross margin in the first half of the year was 34.14%, down by 0.08 ppts year-on-year, mainly due to the decrease of the gross margin of float glass by 2.1 ppts. Yet, the gross margin of automobile glass increased by 0.35 ppts year-on-year to 29.37%. The second quarter witnessed good gross margin, up by 2.3 ppts and 1.8 ppts year-on-year and quarter-on-quarter, respectively. We estimate that the main reasons include the continuous improvement in the Company's product structure, the favourable trends of exchange rates, the quarter-on-quarter rally of float glass, and the decreased ocean freight.

The overall expenses in the first half of the year were diluted, as the revenue rose: The marketing expense ratio, the management expense ratio, and the R&D expense ratio were 4.81%, 7.66%, and 4.44%, respectively, wherein the first two indicators dropped by 0.3 ppts and 0.62 ppts year-on-year, while the third one increased by 0.22 ppts year-on-year.

High-value-added Products` Proportion Continue to Rise

The Company maintained high R&D input to push forward the upgrade of product technology and the added value of products. The adoption of new energy and smart solutions in the automotive industry has further raised the glass ratio per vehicle. Therefore, Fuyao Glass` average sales price (ASP) continues rising. In the first half of the year, the proportion of high-value-added products, including ceiling glass, HUD, camera glass, coated glass, and tempered soundproof car door glass, grew by approximately 10.1 ppts to 52.4%. The ASP of automobile glass increased by approximately 10%. The future trend of automobile glass to be safe, comfortable, energy-saving, environmentally friendly, intelligent, and integrated will bring structured opportunities for the Company regarding the sales of automobile glass.

The Company completed the capital expenditure of RMB2.46 billion, with a year-on-year increase of 98.3%, accounting for 38.5% of the planned capital expenditure for the whole year. It is estimated that the capital expenditure concentrated mainly on the capacity expansion of high-value-added products and the production expansion of domestic aluminium trim business. As at the end of the first half of the year, the Company enjoyed a favourable financial profile, had RMB19.4 billion cash&bank deposit in hand, and was in a net cash position.

Investment Thesis

In the short run, the prices of raw materials and energy may decline in the second half of the year. The subsequent loss reduction of SAM and the continuous capacity expansion of the American factory will hopefully bring more potential profitability. In the medium and long run, we expect that, of automobile glass, high-value-added products` proportion will still increase. As a global leader in automobile glass, the Company will probably continue to benefit from industrial advantages. The Company has also raised funds to enter the field of photovoltaic glass, and has been expanding its product scope to open room for long-term sustainable development. We forecast its EPS to be RMB 2.17/2.41/2.92 in 2023/2024/2025E.

Overall, considering the steady leading position, continuous optimization of the product structure and a high dividend rate, we give the "BUY" rating, with a revised target price to be HK$45.7, equivalent to 19.4/17.5/14.4x P/E for 2023/2024/2025E. (Closing price as at 17 October)

Risks

Demand for automobiles keeps sluggish; cost of raw materials increases; RMB appreciates

Catalyst

Success market development of overseas automobile market; rebound of domestic demand for automobile; depreciation of RMB

Financials

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