Fuyao’s 1Q25 revenue rose by 12.2% YoY to RMB9.9bn, slightly missing on lower domestic auto glass revenue whereas overseas posted robust growth against unfavourable macro dynamics.

Attributable net income surged 46.3% YoY to RMB2.0bn, above our expectation on stronger FX gains. If removing the impacts of packaging cost, 1Q25 adj. GPM would be 36.3%, lower than 37.2% of 4Q24 due to new capacity related cost and larger OEM rebates, which more than offset the deflation benefits from raw material costs. Yet, the profitability of overseas hubs recovered stronger than expected in 1Q25. Regardless rising uncertainties amid Trump new tariff fallout, we render Fuyao could be one of the best-offs within Chinese auto parts space given its well established local facilities and proven fundamental resilience. The recent pullback may offer entry-point for long-term investors to accumulate. Reiterate BUY with unchanged TP of HK$65.00 based on 20x 2025E P/E.

Key Factors for Rating

1Q25 revenue slightly missed on weaker domestic sales whereas overseas posted robust growth. 1Q25 revenue rose by 12.2% YoY to RMB9.9bn. By region, domestic auto glass sales increased by 11.7%, underperforming the China PV industry output growth of 16%, primarily due to the time lag between delivering goods and issuing invoices which caused c.RMB260m unearned revenue (adversely impacted domestic auto glass revenue by 5.4%). Overseas auto glass revenue grew by 11.2% YoY alongside a moderate QoQ increase against unfavourable macro climate, better than our initial anticipation. In 1Q25, Fuyao's total auto glass shipments added 7.8% YoY, outstripping the global vehicle production that roughly flattened for the same period. Nonetheless, 1Q25 auto glass ASP growth slowed to 3.4% from last year’s 7.5%, also lower than the company's mid-to-long term ASP growth guidance of 6-7%.

Gross margin dipped on new capacity ramp-up and larger OEM rebates domestically against cost deflation tailwinds. 1Q25 reported gross margin increased by 3.3ppts QoQ to 35.4%. If removing the packaging cost that has been transferred from selling expense to COGS since prior quarter, adj. GPM would be 36.3% in 1Q25, lower than 36.8%/37.2% of 1Q24/4Q24, which we primarily attribute to the continuing production ramp up in US second phase plant, new capacity related cost in domestic facilities (Anhui and Fuqing) as well as greater OEM rebates (1.25% in 1Q25 vs. full-year target of 1%) that more than offset the cost deflation benefits from raw material price reduction.

However, the profitability of overseas business in both SAM and US recovered stronger than expected and gives a solid support to overall gross margin.

Near-term disturbance for GPM expansion may persist as early production in new facilities counts. Following the new capacity release in the US, the company will see additional capacity release in Fuqing and Auhui successively this year, which may bring about higher cost temporarily. On the positive front, the secular decline of raw material prices (i.e. heavy sodium carbonate, freight cost) may offer extra cost savings and benefit the margin improvement this year. Separately, despite the larger-than-expected OEM rebates in 1Q25, the mgmt. aims to control the overall OEM rebates at 1% for the whole year of 2025, which deserves thorough observation given the stiffened price competition in domestic market.

Stronger-than-anticipated overseas profit contribution. For US base, 1Q25 revenue recorded positive growth of 9.2% YoY/14.9% QoQ to US$246m.

The operating profit was slightly down 5% YoY on higher comparative basis, whereas the OPM handsomely recovered to 12.7% from prior two quarters (11.6%/9.2% of 3Q24/4Q24). During the earnings conference, the mgmt. conveyed confidence to continue full-year OPM extension for US base in 2025, from 13.1% of 2024. For SAM, 1Q25 revenue slipped 17.1% YoY to EUR27.7m, falling short of our original forecast. Albeit weaker revenue scale, the operating profit of -EUR2.9m beat our estimate helped by stronger cost disciplines and improving OPEX efficiency. For 2025, SAM aims to narrow the annual losses to below EUR10m or even towards breakeven vs. net loss of EUR29.5m in 2024.

Core earnings excluding FX gains largely in line. 1Q25 attributable net income surged 46.3% to RMB2.0bn, above our initial projection. In 1Q25, though US dollars remained largely stable against RMB, both EUR and Russian Ruble appreciated against RMB, leading to FX gains of RMB236m. If excluding the non-recurring items and FX gains, 1Q25 core earnings rose by 9% YoY and roughly flattened QoQ to RMB1.75bn, largely in line.

Valuation

We nudged up our net income forecasts by 1% for 2025-26 to RMB7.9bn/8.8bn, respectively. Over the past two weeks, the stock price of Fuyao witnessed a pullback amid uncertainties pertaining to Trump tariffs and Fuyao’s US business exposure. Frankly speaking, the Trump new tariff against auto parts will somewhat affect the cost structure and demand dynamics for the entire auto industry, but not to the extent that many have feared over Fuyao’s fundamentals. Firstly, we regard the company is poised to pass through the majority of additional costs, if not all, to downstream OEM clients given its absolute auto glass leadership and pricing prowess. Secondly, the company could stay nimble to re-allocate and leverage the global capacity resources to ensure the continued supply for valued clients. According to the mgmt., roughly 70% of US revenue stem from local-made goods, while the remaining 30% is made in China and imported for US sales. The continued production ramp up in US second phase factory and enhanced supply-chain self-sufficiency will give a buffer for Fuyao to further drive the localisation rate.

Currently, its shares are trading at 15.3x 2025E P/E, which looks undemanding.

In comparison with major Chinese auto parts suppliers, we render Fuyao could be one of the best-offs from Trump’s new tariff threats given its well-established local facilities and proven fundamental resilience over past years. Beyond that, we deem the company’s long-term growth story stays solid and promising aided by continuous product upgrades amid electric migration momentum as well as enhanced leadership in global auto glass marketplace. Reiterate BUY with unchanged TP of HK$65.00 based on 20x 2025E P/E.