We expect 2Q25 revenue to grow 13-14% YoY to RMB10.7-10.8bn, and gross margin to expand by over 1ppt from 35.4% in 1Q25, driven by better scale effect, somewhat relieved OEM rebate pressure, and greater cost savings from raw material & shipping cost deflation. Combined with FX gains of over RMB300m primarily from strong rally of EURO against RMB, we anticipate Fuyao’s 2Q25 reported net income to reach RMB2.5bn-2.6bn as another quarterly high. Meanwhile, we anticipate US manufacturing operating margin to sequentially improve from 1Q25, with full-year OPM set to exceed prior target of 13%. In Europe, SAM is expected to continue narrow its operating losses in 2Q25 from 1Q25’s EUR2.9m, on track towards its breakeven target. Among the Chinese auto parts suppliers, we believe Fuyao takes the lead to expand global footprint by leveraging the flexibility of local capacity and export supply, which implies stronger operational resilience and risk resistance capability amid escalated geopolitical tensions. Maintain BUY with higher TP of HK$72.00 (20x 2025E P/E). We deem its upcoming solid 2Q25 results may serve as a catalyst to reverse its laggard position in share price performance YTD.

Key Factors for Rating

Revenue YoY growth likely to pick up from 1Q25 with solid earnings growth expected in 2Q25. Despite China PV production YoY growth slightly pulled back to 11.7% in 2Q25 vs. 16.1% in 1Q25, we project Fuyao’s domestic automotive glass revenue to rose by over 15% YoY in 2Q25, bolstered by improved product structure. Beyond that, we expect a double-digit YoY growth for overseas auto glass sales, supported by the production capacity ramp-up at US second-phase plant backed by robust order backlog, as well as the steady growth in export demand to European customers. Based on that, we expect 2Q25 revenue to grow by 13%-14% YoY to RMB10.7-10.8bn. Taking into account better scale effect, somewhat relieved additional OEM rebate pressure, and greater cost savings from raw material & shipping cost deflation from prior quarter, we project 2Q25 gross margin to expand by over 1ppt from 1Q25’s 35.4%. All together, we estimate core earnings at above RMB2.2bn in 2Q25.

Strong rally in Euro helps boost bottom line to record high. Despite a moderate depreciation of USD against RMB, we believe Fuyao’s monetary assets exposure to the Euro (over EUR600m) will enjoy a strong rally in FX gains given the appreciation of EUR by 8% against RMB in 2Q25. We estimate the company may score FX gains of more than RMB300m, lifting the attributable net profit to RMB2.5-2.6bn as another quarterly high.

Overseas manufacturing profitability likely to improve continuously in 2Q25. For US bases, the escalated capacity utilisation and enhanced operational efficiency in phase-one plant are likely to improve the overall profitability throughout 2Q25. The second phase factory has not yet reached profitability as the early production run-up counts, but has made significant strides in narrowing the losses compared to 2H24. For the full-year of 2025, we estimate shipment in first-phase plant to reach c.4.7m sets, while second-phase plant to ship c.400k sets of auto glass with utilisation rate close to c.30%. Given the enhanced profitability in phase-one and stronger-than-anticipated financial performance in phase-two, we expect the full-year operating margin of the US bases to surpass the original target set at the beginning of the year (maintaining the annual OPM on par with last year’s 13.1%). As for the SAM operation, the operating losses are expected to further narrow from 1Q25’s EUR2.9m, on track towards the breakeven target.

Valuation

We leave our revenue forecasts unchanged, while raising our 2025-26 net income forecasts by 5%-11% to RMB8.75bn/9.21bn to reflect the stronger-than- anticipated cost deflation benefits, additional contributions from FX gains, and improvements in overseas profitability. Our current 2025 projection incorporates our assumption of RMB600m FX gains, almost all of which are expected to be recognised in 1H25.

Heading into 2H25, the recent new capacity release in domestic Fuqing manufacturing hubs is expected to temporarily disturb margin stemming from upfront labour costs and other initial operation expenses, a similar dynamic unfolded during US phase two’s ramp up in 2H24. Yet, we expect the operational performance to stay solid as the new capacity swiftly reaches optimal utilisation and the operation costs normalise with intensive new product launch and well- digested order backlog.

Compared to other Chinese auto parts companies, Fuyao takes the lead to expand global footprint by strategically leveraging local capacity and export supply, with a particular emphasis in US market as a cornerstone of international growth. On the one hand, the forward-thinking approach by establishing production facilities effectively ensures agility in meeting regional demand and optimising supply chains for North America customers. On the other hand, the company remains highly flexible in capacity allocation amid tariff uncertainties by leveraging the complementary strengths of its manufacturing hubs in China and the US. This implies stronger operational resilience and risk-resistance capability amid escalated geopolitical tensions.

YTD, Fuyao’s stock price underperformed the broader market and significantly lagged behind HK-listed auto parts peers Nexteer and Minth, both experienced a notable valuation recovery driven by a combination of market sentiment and liquidity improvements. Currently, its H-shares are trading at 16x 2025 P/E and 15.2x 2026 P/E, which is undemanding in our view. We expect the company’s solid 2Q25 operating performance to offer a compelling catalyst to reverse its stock price laggard position. Maintain BUY with higher TP of HK$72.00, based on 20x 2025E P/E.